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, 2001
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 1, 2001.
Class of Number of
Common Equity Shares
Class A Common Stock, 6,185,000
par value $.01
Class B Common Stock, 2,668,000
par value $.01
HIRSCH INTERNATIONAL CORP. and SUBSIDIARIES
FORM 10-Q
INDEX
Page No.
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - July 31, 2001
and January 31, 2001
Consolidated Statements of Operations for the
Six and Three Months Ended July 31, 2001 and 2000
Consolidated Statements of Cash Flows for the
Six Months Ended July 31, 2001 and 2000
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II. Other Information
Signatures
Part I - Financial Information
Item 1. Consolidated Financial Statements
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, January 31,
2001 2001
--------- ---------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $3,384,000 $7,544,000
Accounts receivable, net 9,368,000 9,840,000
Net investment in sales-type leases,
current portion (Note 3) 5,087,000 2,576,000
Inventories, net (Note 2) 12,735,000 15,154,000
Prepaid income taxes 1,067,000 1,762,000
Other current assets 632,000 274,000
----------- ----------
Total current assets 32,273,000 37,150,000
----------- ----------
NET INVESTMENT IN SALES-TYPE LEASES,
non-current portion (Note 3) 9,201,000 6,110,000
EXCESS OF COST OVER NET ASSETS ACQUIRED,
net of accumulated amortization of
approximately $13,146,000 and $12,656,000,
respectively 3,679,000 4,169,000
PURCHASED TECHNOLOGIES, net of accumulated
amortization of approximately $1,339,000
and $1,323,000, respectively -- 16,000
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 3,962,000 5,447,000
OTHER ASSETS 1,110,000 1,138,000
----------- -----------
TOTAL ASSETS $50,225,000 $54,030,000
=========== ===========
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, January 31,
2001 2001
---------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade acceptances payable $2,343,000 $3,974,000
Accounts payable and accrued expenses 6,856,000 7,924,000
Current maturities of long-term debt 235,000 38,000
---------- ----------
Total current liabilities 9,434,000 11,936,000
Capitalized lease obligations, less
current portion (Note 4) 1,730,000 79,000
Deferred gain on sale of building 1,026,000 --
---------- ----------
Total liabilities 12,190,000 12,015,000
---------- ----------
MINORITY INTEREST 1,760,000 1,737,000
---------- ----------
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, outstanding: 6,248,000
shares 68,000 68,000
Class B common stock, $.01 par value; authorized:
3,000,000 shares, outstanding: 2,668,000 shares 27,000 27,000
Additional paid-in capital 41,397,000 41,397,000
Retained earnings (deficit) (3,734,000) 50,000
Accumulated other comprehensive income (loss) (8,000) 88,000
---------- ----------
37,750,000 41,630,000
Less: Treasury stock, at cost; 566,000 shares
and 461,000 shares, respectively 1,475,000 1,352,000
---------- ----------
Total stockholders' equity 36,275,000 40,278,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $50,225,000 $54,030,000
=========== ===========
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
SIX MONTHS ENDED THREE MONTHS ENDED
July 31, July 31,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
REVENUES
Net Sales $ 29,315,000 $ 36,121,000 $ 13,801,000 $ 18,027,000
Income related to sales-type leases 704,000 1,149,000 857,000 517,000
------------ ------------ ------------ ------------
Total revenue 30,019,000 37,270,000 14,658,000 18,544,000
------------ ------------ ------------ ------------
COST OF SALES 19,111,000 23,092,000 9,660,000 11,569,000
------------ ------------ ------------ ------------
GROSS PROFIT 10,908,000 14,178,000 4,998,000 6,975,000
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 16,147,000 16,949,000 8,076,000 8,831,000
------------ ------------ ------------ ------------
OPERATING LOSS (5,239,000) (2,771,000) (3,078,000) (1,856,000)
OTHER EXPENSE (INCOME)
Interest expense 210,000 239,000 67,000 159,000
Other expense (income) (626,000) 24,000 (203,000) 4,000
------------ ------------ ------------ ------------
Total other expense (income) (416,000) 263,000 (136,000) 163,000
------------ ------------ ------------ ------------
(LOSS) BEFORE INCOME TAX BENEFIT
AND MINORITY INTEREST IN NET
EARNINGS OF CONSOLIDATED SUBSIDIARY (4,823,000) (3,034,000) (2,942,000) (2,019,000)
INCOME TAX BENEFIT (1,062,000) (241,000) (114,000) (238,000)
MINORITY INTEREST IN NET EARNINGS (LOSSES)
OF CONSOLIDATED SUBSIDIARY 24,000 (119,000) 7,000 (76,000)
------------ ------------ ------------ ------------
NET LOSS ($ 3,785,000) ($ 2,674,000) ($ 2,821,000) ($ 1,705,000)
============ ============ ============ ============
LOSS PER SHARE
Basic ($ 0.42) ($ 0.29) ($ 0.32) ($ 0.19)
============ ============ ============ ============
Diluted ($ 0.42) ($ 0.29) ($ 0.32) ($ 0.19)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
IN THE CALCULATION OF (LOSS)
PER SHARE
Basic 8,967,000 9,139,000 8,939,000 9,148,000
============ ============ ============ ============
Diluted 8,967,000 9,139,000 8,939,000 9,148,000
============ ============ ============ ============
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
July 31,
--------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($3,785,000) ($2,674,000)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,294,000 1,834,000
Recognized Gain on Sale of Building (50,000) --
Provision for reserves 715,000 --
Bad Debt Expense -- 987,000
Minority interest 24,000 (119,000)
Changes in assets and liabilities:
Accounts receivable (177,000) 4,141,000
Net investment in sales-type leases (5,667,000) 2,648,000
Inventories 2,596,000 7,892,000
Prepaid taxes 695,000 2,715,000
Other assets (440,000) 495,000
Trade acceptances payable (1,630,000) (5,468,000)
Accounts payable and accrued expenses (1,068,000) (4,848,000)
------------ -----------
Net cash (used in)
provided by operating activities (7,493,000) 7,603,000
------------ -----------
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
July 31,
--------------------------
2001 2000
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (389,000) (822,000)
Proceeds from the Sale of the Building 3,998,000 --
----------- -----------
Net cash (used in) provided
by investing activities 3,609,000 (822,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayments) of bank financing -- (2,294,000)
Repayments of long-term debt (57,000) (861,000)
Purchase of treasury shares (123,000) (25,000)
----------- -----------
Net cash used in financing activities (180,000) (3,180,000)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (96,000) (79,000)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,160,000) 3,522,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,544,000 1,290,000
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,384,000 $ 4,812,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 210,000 $ 239,000
=========== ===========
Income taxes paid $ 7,000 $ 228,000
=========== ===========
See notes to consolidated financial statements.
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Three Months and Six months ended July 31, 2001 and 2000
1. Organization and Basis of Presentation
The accompanying consolidated financial statements as of and for the three
month and six month periods ended July 31, 2001 and 2000 include the accounts of
Hirsch International Corp. ("Hirsch"), HAPL Leasing Co., Inc. ("HAPL"), Pulse
Microsystems Ltd. ("Pulse"), Tajima USA, Inc. ("TUI"), Hometown Threads, LLC
("Hometown"), and Hirsch Business Concepts, LLC ("HBC")(collectively, the
"Company").
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all the adjustments and normal accruals necessary
to present fairly the results of operations for each of the three month and six
month periods ended July 31, 2001 and 2000, the financial position at July 31,
2001 and cash flows for the six month periods ended July 31, 2001 and 2000. The
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
ending January 31, 2001 as filed with the Securities and Exchange Commission.
Certain reclassifications have been made to the prior period amounts to conform
to current period presentation.
The interim financial results are not necessarily indicative of the results
to be expected for the full year.
2. Inventories
July 31, 2001 January 31, 2001
--------------- ---------------
New Machines .......................................... $ 7,906,000 $ 9,732,000
Used Machines ......................................... 2,277,000 2,567,000
Parts ................................................. 5,002,000 5,305,000
--------------- ---------------
15,185,000 17,604,000
Less: Reserve ........................................ (2,450,000) (2,450,000)
--------------- ---------------
Inventories, net ...................................... $ 12,735,000 $ 15,154,000
=============== ===============
3. Net Investment in Sales-Type Leases
July 31, 2001 January 31, 2001
-------------- ----------------
Total minimum lease payments
receivable...................................... $12,316,000 $6,267,000
Estimated residual value of leased
property (unguaranteed)......................... 5,953,000 5,251,000
Reserve for estimated uncollectible
lease payments.................................. (1,165,000) (1,100,000)
Less: Unearned income............................. (2,816,000) (1,732,000)
----------- -----------
Net investment.................................... 14,288,000 8,686,000
Less: Current portion............................. (5,087,000) (2,576,000)
---------- -----------
Non-current portion............................... $ 9,201,000 $ 6,110,000
============ ===========
4. Capitalized Lease Obligations
The following is a schedule, by year, of future minimum lease payments
under capitalized leases, together with the present value of the net minimum
lease payments at July 31, 2001.
Payments for the year ending January 31:
2002 $144,000
2003 303,000
2004 288,000
2005 297,000
2006 306,000
Thereafter 1,729,000
---------
Total minimum lease payments 3,067,000
Less: amount representing interest 1,222,000
---------
Present value of net minimum
lease payments 1,845,000
Less: Current Portion 115,000
---------
Long-term lease obligations $1,730,000
==========
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 the Company's
customers.
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. The "Corporate" Column includes corporate related items not
allocated to reportable segments and the elimination of intercompany
transactions. Identifiable assets are those tangible and intangible assets used
in operations in each reportable segment. Corporate assets are principally the
Company's capitalized lease for its headquarters facility and goodwill.
Three Months Ended July 31, 2001 Embroidery Leasing Corporate Consolidated
- --------------------------------- ------------ ----------- ------------- ------------
Sales to unaffiliated customers $ 13,389,000 $ 1,269,000 -- $ 14,658,000
Transfers between segments 2,683,000 -- (2,683,000) --
------------ ----------- ------------ ------------
Total revenues 16,072,000 1,269,000 (2,683,000) $ 14,658,000
============ =========== ============ ============
Interest expense 65,000 2,000 -- 67,000
============ =========== ============ ============
Depreciation and amortization expense 320,000 37,000 271,000 628,000
============ =========== ============ ============
(Loss) income before income tax
(benefit) provision (2,914,000) (28,000) -- (2,942,000)
============ =========== ============ ============
Income tax (benefit) (114,000) -- -- (114,000)
============ =========== ============ ============
Identifiable assets (excluding intercompany) $ 28,371,000 $16,162,000 $ 5,693,000 $ 50,526,000
============ =========== ============ ============
Three Months Ended July 31, 2000 Embroidery Leasing Corporate Consolidated
- -------------------------------------------- ------------ ----------- ------------ ------------
Sales to unaffiliated customers $ 18,027,000 $ 517,000 -- $ 18,544,000
Transfers between segments 3,283,000 -- (3,283,000) --
------------ ----------- ------------ ------------
Total revenues 21,310,000 517,000 (3,283,000) $ 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) provision (2,113,000) 28,000 66,000 (2,019,000)
============ =========== ============ ============
Income tax (benefit) provision (238,000) -- -- (238,000)
============ =========== ============ ============
Identifiable assets (excluding intercompany) $ 34,363,000 $13,979,000 $ 15,505,000 $ 63,847,000
============ =========== ============ ============
Six Months Ended July 31, 2001 Embroidery Leasing Corporate Consolidated
- -------------------------------------------- ------------ ----------- ------------ ------------
Sales to unaffiliated customers $ 28,338,000 $ 1,681,000 -- $ 30,019,000
Transfers between segments 6,356,000 -- (6,356,000) --
------------ ----------- ------------ ------------
Total revenues 34,694,000 1,681,000 (6,356,000) $ 30,019,000
============ =========== ============ ============
Interest expense 111,000 99,000 -- 210,000
============ =========== ============ ============
Depreciation and amortization expense 611,000 99,000 584,000 1,294,000
============ =========== ============ ============
(Loss) income before income tax
(benefit) provision (4,194,000) (629,000) -- (4,823,000)
============ =========== ============ ============
Income tax (benefit) (198,000) (864,000) -- (1,062,000)
============ =========== ============ ============
Identifiable assets (excluding intercompany) $ 28,371,000 $16,162,000 $ 5,693,000 $ 50,526,000
============ =========== ============ ============
Six Months Ended July 31, 2000 Embroidery Leasing Corporate Consolidated
- -------------------------------------------- ------------ ----------- ------------ ------------
Sales to unaffiliated customers $ 36,121,000 $ 1,149,000 -- $ 37,270,000
Transfers between segments 4,957,000 -- (4,957,000) --
------------ ----------- ------------ ------------
Total revenues 41,078,000 1,149,000 (4,957,000) $ 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) provision (3,264,000) 230,000 -- (3,034,000)
============ =========== ============ ============
Income tax (benefit) provision (241,000) -- -- (241,000)
============ =========== ============ ============
Identifiable assets (excluding intercompany) $ 34,363,000 $13,979,000 $ 15,505,000 $ 63,847,000
============ =========== ============ ============
6. SAB 74 Disclosure
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using the
purchase method. As of July 31, 2001, the net carrying amount of goodwill is
$3,679,000 and other intangible assets is zero. Amortization expense during the
six-month period ended July 31, 2001 was $508,000. Currently, the Company is
assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142
will impact its financial position and results of operations.
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 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.
Three months and six months ended July 31, 2001 as compared to the three months
and six months ended July 31, 2000.
Net sales. Net sales for the three months ended July 31, 2001 were $13.8
million, a decrease of $4.2 million, or 23.4%, compared to $18.0 million for the
three months ended July 31, 2000, and $29.3 million for the six months ended
July 31, 2001, a decrease of $6.8 million or 18.8%, compared to $36.1 million
for the six months ended July 31, 2000. The Company believes that the reduction
in the sales level for the three months and six months ended July 31, 2001 is
attributable to a decrease in overall demand for new embroidery machines.
The sale of new embroidery machinery represented approximately $ 9.2
million or 65.8%, and $9.7 million, or 53.3%, of net sales for the three months
ended July 31, 2001 and 2000, respectively. For the six month period ended July
31, 2001 versus the six month period ended July 31, 2000, the figures are $19.3
million or 65.8%, and $22.4 million or 61.9%, respectively. Small embroidery
machines (one through six-head "FX" models) and large embroidery machines
(six-head "DC" models through thirty-head models) represented approximately $6.8
million and $2.4 million, respectively of total new embroidery machine sales
during the three months ended July 31, 2001 as compared to approximately $6.9
million and $2.8 million for the three months ended July 31, 2000, respectively.
For the six month period ended July 31, 2001, small machines represented $13.7
million and large machines $5.6 million, compared to $15.1 million and $7.3
million, respectively, for the six month period ended July 31, 2000.
Revenue from the sale of the Company's used machines, computer hardware and
software, parts and service, application software and embroidery supplies for
the three months ended July 31, 2001 aggregated approximately $6.6 million, as
compared to $8.3 million for the three months ended July 31, 2000. For the six
months ended July 31, 2001 and July 31, 2000, the figures were $10.0 million and
$13.7 million, respectively.
Income related to sales-type leases. HAPL's income increased by $0.4
million to $0.9 million for the three months ended July 31, 2001 from income of
$0.5 million for the comparable period of the prior year. This increase is
directly related to the proportion of leases written and funded for new
embroidery machine sales and the timing of funding of lease payment streams to
third party funding sources. For the six months ended July 31, 2001, HAPL lease
income declined from $1.1 million to $0.7 million, reflecting the absolute lower
levels of leases funded as well as leases repurchased during the first quarter.
The percentage of new equipment sales which are leased was 68.9% of total new
equipment sales for the three months ended July 31, 2001 as compared to 19.0%
for the three months ended July 31, 2000. The comparable six month figures are
48.5% and 22.0%, respectively.
Cost of sales. For the three months ended July 31, 2001, cost of sales
declined $1.9 million, or 16.5%, to $9.7 million from $11.6 million for the
three months ended July 31, 2000. For the six month period ended July 31, 2000
compared to July 31, 2001, the figures reflect a decline of $4.0 million, from
$23.1 million to $19.1 million, respectively. The decline was a result of the
related decline in net sales for the three months and six months ended July 31,
2001 as compared to the three months and six months ended July 31, 2000. The
fluctuation of the dollar against the yen has historically had a minimal effect
on Tajima equipment gross margins as currency fluctuations are generally
reflected in pricing adjustments in order to maintain consistent gross margins
on machine revenues. The Company's gross margin declined slightly from 37.6% to
34.1% for the three months ended July 31, 2001 as compared to the three months
ended July 31, 2000, and from 38.0% to 36.3% for the six months ended July 31,
2001 as compared to July 31, 2000, primarily due to aggressive pricing to reduce
inventories of earlier technology machines that will be replaced by newer
technology hardware inventory now being introduced.
Operating Expenses. For the three months ended July 31, 2001, operating
expenses declined by $0.7 million, or 8.0% to $8.1 million versus $8.8 million
for the three months ended July 31, 2000. For the six month period ended July
31, 2001, operating expenses declined by $0.8 million, from $16.9 million to
$16.1 million, or approximately 4.7%. Operating expenses increased as a
percentage of revenues to 55.1% from 47.6% for the three months, and to 53.8%
from 45.5% for the six months ended July 31, 2001 and 2000, respectively, due to
decline in sales revenue occurring at a faster rate than the company was able to
reduce expenses. The Company will continue to reduce costs in its infrastructure
to bring operating expenses in line with revised sales projections.
Other Income and Expense. Interest expense for the three months ended July
31, 2001 decreased from $159,000 for the three months ended July 31, 2000 to
$67,000 for the three months ended July 31, 2001. For the six month period ended
July 31, 2001 versus July 31, 2000, interest expense declined from $239,000 to
$210,000, respectively. This change in interest income and expense is
substantially the result of interest income earned from short-term investments
during the three months and six months ended July 31, 2001, and elimination of
working capital borrowings outstanding against the Company's Revolving Credit
Facility when compared to the three months and six months ended July 31, 2000,
offset by the reclassification of rent expense to interest expense as relate to
the accounting rules associated with the sale and leaseback of our corporate
facility. The change in other income is substantially the result of the
recognized portion of the gain on the sale of the headquarters facility and the
effect of foreign exchange transactions.
Income tax benefit. The income tax benefit was $114,000 for the three
months ended July 31, 2001 and $1,062,000 for the six months ended July 31,
2001, primarily the result of adjustments to estimated tax liabilities for
research and development credits associated with our Pulse Microsystems Ltd.
software subsidiary and an adjustment to net tax liabilities.
Net Loss. The net loss for the three months ended July 31, 2001 was $2.8
million, an increase of $1.1 million as compared to the loss of $1.7 million for
the three months ended July 31, 2000. The net loss for the six months ended July
31, 2001 was $3.8 million, an increase of $1.1 million, as compared to the net
loss of $2.7 million for the six months ended July 31, 2000. The net margin
declined to (19.2%) for the three months ended July 31, 2001 from (9.2%) for the
three months ended July 31, 2000, and declined to (12.6%) from (7.2%) for the
six month periods ended July 31, 2001 and July 31, 2000, respectively. These
declines are attributable to a more rapid rate of decline in net sales than was
possible to achieve in reduction of operating expenses over the same period.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $22.8 at July 31, 2001, decreasing $2.4
million, or 9.5%, from $25.2 million at January 31, 2001. The Company has
financed its operations from existing cash balances, cash provided by
operations, the sale of its headquarters facility and sales of leases to third
party financing sources.
During the six months ended July 31, 2001, the Company's cash and cash
equivalents decreased by $4.2 million to $3.4 million. Net cash of $7.5 million
was used by the Company's operating activities. Cash was principally consumed by
the operating loss in the first two quarters of $3.8 million, increases in the
balance of net investments in sales-type leases of $5.7 million, a decrease in
trade acceptances by $1.1 million and a reduction of accounts payable of
approximately $1.6 million, and was offset by cash available from a reduction of
inventories and non-cash expenses reported for depreciation and amortization.
Cash flows from investing activities were favorable by $3.6 million, provided
principally by proceeds from the sale of the corporate facility. There were no
material cash flows either consumed or provided by financing activities.
The Company's strategy to mitigate its exposure to foreign currency
fluctuations utilizes several approaches, including purchases of foreign
currency on the current market and adjusting selling prices to maintain margins,
and using a just in time strategy to minimize inventory exposure. The Company
also may purchase 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. As of July 31, 2001 the Company
did not own any foreign currency futures contracts.
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, as
amended, restrict additional borrowings by the Company and require the Company
to maintain an interest coverage ratio, as defined therein. There were no
outstanding working capital borrowings against the Agreement as of July 31,
2001. The Agreement was also used to support trade acceptances payable of
approximately $2.3 million as of that date. The Company was in compliance with
all financial covenants at year-end.
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. The
increased investment of $5.7 million in the first half of FY2002 was largely
driven by the successful marketing of integrated sales packages that included
leasing services, resulting in the increased penetration of leasing in machine
sales from 30.3% in the first quarter to 68.9% in the second quarter. This
increase created a high volume of transactions that are proceeding through the
documentation through funding cycle, and these leases will be sold to
third-party financial institutions through the normal course of business.
Leasing, which was fully activated in May 1993, has closed approximately $240.0
million in lease agreements through July 31, 2001. As of July 31, 2001,
approximately $212.6 million, or 88.6%, 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 for the next year.
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.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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
**** Incorporated by reference from the Registrant's Form 8K filed
with the Commission on March 15, 2001 regarding sale and partial
leaseback of the company's headquarters facility in Hauppauge,
New York.
(b) Reports on Form 8K
The Registrant filed a Form 8K with the Commission on March 15,
2001 regarding sale and partial leaseback of the company's headquarters facility
in Hauppauge, New York.
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: September 14, 2001