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 April 30, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the ExchangeAct). Yes [ ] No [x]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of June 01, 2002.
Class of Number of
Common Equity Shares
------------- ------
Class A Common Stock, 6,120,611
par value $.01
Class B Common Stock, 2,668,139
par value $.01
HIRSCH INTERNATIONAL CORP. and SUBSIDIARIES
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - April 30, 2003 and
January 31, 2003
Condensed Consolidated Statements of Operations for the Three
Months Ended April 30, 2003 and 2002
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended April 30, 2003 and 2002
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Certifications
Exhibit Index
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, January 31,
2003 2003
---------- ----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,771,000 $ 7,707,000
Restricted cash 3,200,000 900,000
Short term note receivable (Note 6) - 500,000
Accounts receivable, net 7,608,000 4,354,000
Inventories, net (Note 3) 9,498,000 9,498,000
Prepaid and refundable income taxes 3,348,000 3,319,000
Other current assets 809,000 686,000
Assets of discontinued operations (Note 6) 4,655,000 4,914,000
---------- ----------
Total current assets 32,889,000 31,878,000
----------- ----------
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 2,737,000 2,868,000
OTHER ASSETS 1,238,000 1,256,000
---------- ----------
TOTAL ASSETS $36,864,000 $36,002,000
========== ==========
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, January 31,
2003 2003
---------- ----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade acceptances payable $ 2,490,000 $ 969,000
Accounts payable and accrued expenses (Notes 4 and 5) 5,847,000 6,924,000
Customers deposits and other 1,562,000 865,000
Liabilities of discontinued operations
(Note 6) 6,475,000 6,859,000
---------- ----------
Total current liabilities 16,374,000 15,617,000
Capitalized lease obligations, less
current portion 1,530,000 1,541,000
Deferred gain on sale of building 817,000 847,000
---------- ----------
Total liabilities 18,721,000 18,005,000
---------- ----------
MINORITY INTEREST 1,972,000 1,932,000
---------- ----------
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 : 6,815,000
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) (23,719,000) (23,825,000)
---------- ----------
17,773,000 17,667,000
Less: Treasury stock, at cost; 695,000 shares 1,602,000 1,602,000
---------- ----------
Total stockholders' equity 16,171,000 16,065,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $36,864,000 $36,002,000
========== ==========
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
April 30,
-----------------------
2003 2002
---------- ----------
NET SALES $12,274,000 $12,421,000
COST OF SALES 7,786,000 7,960,000
---------- ----------
GROSS PROFIT 4,488,000 4,461,000
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 4,768,000 4,934,000
RESTRUCTURING COSTS (Note 5) (497,000) -
---------- ----------
Total Operating Expenses 4,271,000 4,934,000
--------- ---------
OPERATING INCOME (LOSS) 217,000 (473,000)
---------- ---------
OTHER EXPENSE (INCOME)
Interest expense 54,000 60,000
Other (income) expense (65,000) 8,000
---------- ----------
Total other expense (income) (11,000) 68,000
---------- ----------
INCOME (LOSS) BEFORE INCOME TAX PROVISION,
MINORITY INTEREST IN NET
EARNINGS OF CONSOLIDATED SUBSIDIARY
AND DISCONTINUED OPERATIONS 228,000 (541,000)
INCOME TAX PROVISION 83,000 109,000
MINORITY INTEREST IN NET EARNINGS
OF CONSOLIDATED SUBSIDIARY (Note 1) 40,000 74,000
---------- ----------
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS 105,000 (724,000)
LOSS FROM DISCONTINUED OPERATIONS - (3,793,000)
---------- ----------
NET INCOME (LOSS) $105,000 ($ 4,517,000)
========== ==========
EARNINGS (LOSS) PER SHARE
Basic and Diluted
Earnings (Loss) before discontinued operations $0.01 ($0.08)
Loss from discontinued operations - (0.43)
---------- ----------
EARNINGS (L0SS) PER SHARE $ 0.01 ($0.51)
========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
IN THE CALCULATION OF EARNINGS
(LOSS) PER SHARE
Basic 8,788,750 8,788,750
========== ==========
Diluted 9,796,750 8,788,750
========== ==========
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
April 30,
-----------------------
2003 2002
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 105,000 ($ 4,517,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in)operating activities:
Gain on Sale of fixed assets (94,000) -
Depreciation and amortization 219,000 247,000
Recognized Gain on Sale of Building (30,000) (30,000)
Provision for reserves 230,000 -
Reversal of restructuring accrual (497,000) -
Minority interest 40,000 74,000
Changes in assets and liabilities:
Accounts receivable (3,483,000) (590,000)
Net investment in sales-type leases (125,000) 1,338,000
Inventories - 4,649,000
Prepaid taxes (29,000) 433,000
Other assets (151,000) 102,000
Trade acceptances payable 1,521,000 (1,844,000)
Accounts payable and accrued expenses 117,000 2,701,000
---------- ----------
Net cash provided by (used in)
operating activities (2,177,000) 2,563,000
---------- ----------
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
April 30,
-----------------------
2003 2002
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (188,000) (17,000)
Proceeds from sale of fixed assets 240,000 -
Proceeds from sale of subsidiary 500,000 -
---------- ----------
Net cash provided by (used in)
investing activities 552,000 (17,000)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (11,000) (32,000)
Restricted Cash (2,300,000) -
---------- ----------
Net cash used in financing activities (2,311,000) (32,000)
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - 55,000
---------- ----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (3,936,000) 2,569,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,707,000 3,121,000
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,771,000 $ 5,690,000
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 54,000 $ 63,000
========== ==========
Income taxes paid $ 0 $ 0
========== ==========
See notes to condensed consolidated financial statements.
Hirsch International Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended April 30, 2003 and 2002
1. Organization and Basis of Presentation
The accompanying Condensed Consolidated financial statements as of and for
the three month periods ended April 30, 2003 and 2002 include the accounts of
Hirsch International Corp.("Hirsch"), HAPL Leasing Co., Inc. ("HAPL"), Pulse
Microsystems Ltd. through October 31, 2002 ("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 Condensed
Consolidated financial statements contain all the adjustments, consisting of
normal accruals, necessary to present fairly the results of operations for each
of the three month periods ended April 30, 2003 and 2002, the financial position
at April 30, 2003 and cash flows for the three month periods ended April 30,
2003 and 2002, 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, 2003 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. Certain amounts from prior periods have been
reclassified to conform to the current period's presentation.
2. Stock Based Compensation
The Company accounts for its stock-based employee compensation plans under the
recognition and measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the Common Stock on the date of grant. The following table
details the effect on net income (loss) and earnings per share if the Company
had applied the fair value recognition provisions of Statement of Financial
Accounting Statement ("SFAS") No. 123, Accounting for Stock-Based Compensation,
as amended by SFAS No. 148, to stock-based employee compensation.
Three Months Ended
April 30, 2003 April 30, 2002
-------------- --------------
(in thousands)
Net income (loss), as reported $105 ($4,517)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method 15 21
--- ------
Pro-forma net income (loss) $90 ($4,538)
Earnings (loss) per share:
Basic - as reported $.01 ($.51)
Basic - pro forma $.01 ($.52)
Diluted - as reported $.01 ($.51)
Diluted - pro forma $.01 ($.52)
The following weighted average assumptions were used in the Black-Scholes
option-pricing model for grants in Fiscal 2003: dividend yield of 0%, volatility
of 79%, risk-free interest rate of 4.48% for employees and 4.07% for
non-employees; and an expected life of 5 years.
3. Inventories
April 30, 2003 January 31, 2003
-------------- ----------------
New Machines $8,142,000 $8,061,000
Used Machines 687,000 796,000
Parts 2,615,000 2,587,000
---------- ----------
11,444,000 11,444,000
Less: Reserve for slow moving inventory 1,946,000 1,946,000
---------- ----------
Inventories, net $ 9,498,000 $9,498,000
========== ==========
4. Warranty Reserve
The warranty reserve included in Accounts Payable and Accrued Expenses was
$543,000 at year end. There has been no change in the warranty reserve during
the three months ended April 30, 2003.
5. Plan of Restructuring
In the fourth quarter of the year ended January 31, 2002, the Company
initiated a restructuring plan in connection with its continuing operations. The
plan was designed to meet the changing needs of the Company's customers, to
reduce its cost structure and improve efficiency. The restructuring initiatives
involve the consolidation of the parts and supplies operations with existing
Hirsch operations, the provision for the downsizing of three of its existing
sales offices and reduction in the overall administrative personnel. The
reduction in personnel represents 25% of its workforce and 56 people. In May
2003, the Company was able to buyout its lease obligations for $545,000 for the
Solon, OH facility that had previously been provided for in its restructuring
accrual. The Company reversed, as a reduction of operating expenses, $497,000 of
restructuring costs during the three months ended April 30, 2003.
The following table shows amounts paid against the restructuring accrual
included in accounts payable and accrued expenses during the three months ended
April 30, 2003. (in thousands)
Balance at Reversal Balance at
January 31, of Prior April 30,
2003 Payments Accruals 2003
------------------ ---------------- ------------ --------------
Severance costs................... $ 100 $(21) $79
Facility closing costs............ 1,267 (631) (497) 139
Other professional and consulting
costs............................. 1 1
------------------ ---------------- ------------ --------------
$1,368 $(652) $(497) $219
================== ================ ============ ==============
6. Discontinued Operations
In the fourth quarter of Fiscal 2002, the Company determined that its HAPL
Leasing subsidiary was not strategic to the Company's ongoing objectives and
discontinued its operations. Accordingly, the Company reported its discontinued
operations in accordance with APB 30. The consolidated financial statements have
been reclassified to segregate the assets, liabilities and operating results of
these discontinued operations for all periods presented. Management intends to
sell the assets by January 2004.
Summary operating results of the discontinued operations of HAPL Leasing (in
thousands) are as follows:
For the three months ended
April 30,
2003 2002
---- ----
Revenue.................................. $ 295 $ 516
Gross Profit............................. 186 138
(Loss) from Discontinued Operations ..... - (4,000)
The operating loss during the three months ended April 30, 2002 includes a
reserve of $4 million as an additional provision for the liquidation of the
lease portfolio. The increase in the MLPR (Minimum Lease Payments Receivable)
provision was to reserve against a probable loss on the sale of the remaining
portfolio.
Effective October 31, 2002, Hirsch International Corp. ("Hirsch") completed
the sale of all of the outstanding equity interests in its wholly-owned
subsidiary, Pulse Microsystems Ltd. ("Pulse"), pursuant to the terms of the
purchase agreement by and between Hirsch and 2017146 Ontario Limited
("Purchaser") dated as of October 31, 2002 (the "Agreement").
Pursuant to the Agreement, Hirsch sold all of its equity interests in Pulse
to the Purchaser for an aggregate consideration of $5.0 million to be paid as
follows: (a) $0.5 million cash, (b) a $0.5 million note payable in 11 quarterly
installments beginning April 30, 2003 including interest accruing on the
principal balance at the rate of US Prime +1% per annum, this note was paid in
full in March 2003, and (c) the assumption of $4.0 million of Hirsch
obligations. The sale price was at Pulse's book value so there was no gain or
loss recorded on the sale. All periods presented have been restated to reflect
the discontinued operations of Pulse.
Summary operating results of the discontinued operations of Pulse Microsystems,
Ltd are as follows:
For the three months ended April 30,
2003 2002
---- ----
Revenue.............................. - $1,340
Gross profit......................... - 977
Income from discontinued Operations.. - $207
Assets and Liabilities of discontinued operations (in thousands) are as follows:
April 30 January 31
-------- ----------
2003 2003
---- ----
Assets:
Accounts Receivable $12 $16
MLPR and residuals 4,530 4,673
Property, Plant & Equipment 19 33
Inventory 16 113
Prepaid Taxes 78 79
--- ---
Total Assets $4,655 $4,914
====== ======
Liabilities:
Accounts Payable & Accruals $6,384 $6,758
Long Term Debt 4 14
Income Taxes Payable 87 87
------ ------
Total Liabilities $6,475 $6,859
====== ======
7. Contingencies
On August 14, 2002 the Company was notified by NASDAQ that since it
satisfied initial listing requirements for the The Nasdaq SmallCap Market under
Marketplace Rule 4310(c)(2)(A) it was provided an additional 180 calendar days
to regain compliance for Rule 4450 (A)(5) which requires that the Company
maintain a $1.00 minimum bid price for 10 consecutive days.
The Company received a Nasdaq Staff Determination letter (the "Staff
Determination") on May 13, 2003 indicating that the Company had failed to comply
with the minimum bid price requirement of $1.00 per share under Nasdaq
Marketplace Rule 4450, and that the shares of its Class A common Stock
securities were subject to delisting from the Nasdaq SmallCap Market, effective
at the opening of business on May 22, 2003.
The Company has been granted an oral hearing before a Nasdaq Listing
Qualifications Panel (the "Panel") to be held on June 26, 2003 to review the
Staff Determination, which stayed the delisting of the Company's Class A Common
Stock, pending a decision by the Panel. At the hearing, the Company intends to
present a plan to Nasdaq for achieving the requirements for continued listing,
but there can be no assurance the Panel will grant the Company's request for the
continued listing of its Class A Common Stock.
As of April 30, 2003, the Company had $3.2 million in restricted cash which
is used to collateralize letters of credit opened against the credit line at
Congress Financial.
8. Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments imbedded in other contracts and for
hedging activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003. The Company does not expect
adoption of SFAS No. 149 to have an impact on the consolidated financial
statements as the Company does not engage in derivative or hedging activity.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity, ("FAS 150"). This statement establishes standards
for how an issuer classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and
equity. In accordance with the standard, financial instruments that embody
obligations for the issuer are required to be classified as liabilities. This
Statement shall be effective for financial instruments entered into or modified
after May 31, 2003, and otherwise shall be effective at the beginning of the
first interim period beginning after June 15, 2003. The Company does not expect
the provision of this statement to have a significant impact on the statement of
financial position.
9. Earnings per Share
A reconciliation of shares used in calculating basic and diluted earnings
per common share for the period ended April 30, 2003 follows:
Basic 8,788,750
Effect of assumed conversion
Of employee stock options 1,008,000
----------
Diluted 9,796,750
Options to purchase approximately 208,000 shares of common stock at prices
ranging from $0.89 to $3.50 that were outstanding during the three months ended
April 30, 2003 were excluded from the computation of diluted earnings per share
because the options' exercise prices exceeded the fair market value of the
Company's common stock.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. When used herein, the words "anticipate",
"believe", "estimate" and "expect" and similar expressions as they relate to 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.
Three months ended April 30, 2003 as compared to the three months ended April
30, 2002.
Net sales. Net sales for the three months ended April 30, 2003 were $12.3
million, a decrease of $.1 million, or 1.2%, compared to $12.4 million for the
three months ended April 30, 2002.
Cost of sales. For the three months ended April 30, 2003, cost of sales
decreased $.2 million, or 2.2%, to $7.8 million from $8.0 million for the three
months ended April 30, 2002. The decrease was partially the result of an
improvement in the purchase price of software. The Company's gross margin
improved to 36.6% for the three months ended April 30, 2003 as compared to 35.9%
for the three months ended April 30, 2002. Gross Margin increased as a result of
a decrease in the purchase price of Pulse software, an increase in the sale of
machines at full gross profit and a decrease of sales of older machines in
inventory at higher cost.
Operating Expenses. For the three months ended April 30, 2003, S G & A
expenses were $4.8 million as compared to $4.9 million for the three months
ended April 30, 2002. This represents a decrease of $.1 million, or 2.0%.
Operating expenses were further decreased by $497,000 as a result of the
reversal of a restructuring accrual in settling the Solon, OH lease.
Other Income and Expense. Interest (income) expense for the three months
ended April 30, 2003 decreased from $60,000 for the three months ended April 30,
2002 to $54,000 for the three months ended April 30, 2003. The change in other
(income) expense is due to the unfavorable foreign currency transactions on
purchases from Japan for the three months ended April 30, 2003 offset by the
gains on sales of fixed assets.
Income tax provision. The income tax provision represents taxes due on
income earned by the Company for the three months ended April 30, 2003 compared
to last year's taxes on the income earned by the TUI subsidiary.
Income (Loss) before Discontinued Operations. Due to the restructuring of
the Company operations, the cost reductions put into place as well as the
reversal of the restructuring accrual after settling the Solon, OH lease, the
income (loss) before discontinued operations increased from $.7 million loss to
income of .1 million.
Income (Loss) from Discontinued Operations. Last year Management estimated
that there would be additional losses of approximately $4 million in
repurchasing and disposing of the remaining UNL lease portfolio as well as its
existing lease portfolio. Accordingly, during the three months ended April 30,
2002 the provision for possible losses was increased by $4 million. At this time
Management feels that the reserve levels are sufficient to account for all
potential losses from Discontinued Operations.
Net Income (Loss). The net income (loss) for the three months ended April
30, 2003 was $105,000 an improvement of $4,622,000 over the three months ended
April 30, 2002. The (loss) on discontinued operations decreased from a loss of
$3,793,000 for the three months ended April 30, 2002 to no loss for the three
months ended April 30, 2003. In addition, the income (loss) before Discontinued
Operations improved from a loss of $724,000 to income of $105,000, an
improvement of $829,000 which includes the reversal of a prior restructuring
accrual of $497,000 resulting from the settlement of the Solon, OH lease.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $16.5 million at April 30, 2003,
increasing $0.2 million, or 1.2%, from $16.3 million at January 31, 2003.
During the three months ended April 30, 2003, the Company's cash and cash
equivalents decreased by $3.9 million to $3.8 million. Net cash of $2.0 million
was used by the Company's operating activities and $2.3 million was used in
financing activities as additional collateral for the Company's credit line,
offset by $.5 million received as part of the Pulse Microsystems sale less
capital expenditures of $0.1 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 is included
in the cost of inventory. As of April 30, 2003 the Company did not own any
foreign currency futures contracts.
Future Commitments
The following table shows the Company's contractual obligations related
to long-term obligations.
Payments due by period (in thousands)
More
Less than 1 - 3 than 5
Contractual Obligations Total 1 year years 4-5 years years
- ----------------------------- ------------ ----------- ----------- ---------- ----------
Capital lease obligations $ 1,642 $ 101 $ 446 $ 451 $ 644
Operating Lease obligations 3,279 834 1,514 476 455
Purchase Commitments 3,300 1,200 2,100 0 0
Employment Agreements 1,120 820 300 0 0
------------ ----------- ----------- ---------- ----------
Total $ 9,341 $ 2,955 $ 4,360 $927 $1,099
============ =========== =========== ========== ==========
Revolving Credit Facility and Borrowings
On November 26, 2002 the Company satisfied all of its obligations and
exited its Revolving Credit and Security Facility with PNC Bank and replaced it
with a Loan and Security Agreement ("the Congress Agreement") with Congress
Financial Corporation ("Congress") for three years expiring on November 26,
2005. The Congress Agreement provides for a credit facility of $12 million for
Hirsch and all subsidiaries. Advances made pursuant to the Congress Agreement
may be used by the Company and its subsidiaries for working capital loans,
letters of credit and deferred payment letters of credit. The terms of the
Congress Agreement require the Company to maintain certain financial covenants.
The Company was in compliance with its covenants at April 30, 2003.
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.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to various market risks, including changes in
foreign currency exchange rates and interest rates. Market risk is the potential
loss arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The Company has a formal policy that
prohibits the use of currency derivatives or other financial instruments for
trading or speculative purposes. The policy permits the use of financial
instruments to manage and reduce the impact of changes in foreign currency
exchange rates that may arise in the normal course of the Company's business.
Currently, the Company does not use interest rate derivatives.
The Company may enter into forward foreign exchange contracts principally
to hedge the currency fluctuations in transactions denominated in foreign
currencies, thereby limiting the Company's risk that would otherwise result from
changes in exchange rates.
Any Company debt, if utilized, is U.S. dollar denominated and floating
rate-based. At year-end, there was no usage of the revolving credit facility. If
the Company had utilized its credit facility, it would have exposure to rising
and falling rates, and an increase in such rates would have an adverse impact on
net pre-tax expenses. The Company does not use interest rate derivatives to
protect its exposure to interest rate market movements.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and its Chief Financial Officer, after
evaluating the effectiveness of the Company's disclosure controls and procedures
(as defined in the Securities Exchange Act of 1934 Rules 13a-14 (c) and 15d-14
(c) as of a date within 90 days of the filing date of this quarterly report on
Form 10-Q (the "Evaluation Date")), have concluded that, as of the Evaluation
Date, the Company's disclosure controls and procedures were adequate and
effective to ensure that material information relating to the Company and its
consolidated subsidiaries is recorded, processed, summarized and reported by
management of the Company on a timely basis in order to comply with the
Company's disclosure obligations under the Securities Exchange Act of 1934 and
the SEC rules thereunder.
Changes in Internal Controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the Company's disclosure control and
procedures subsequent to the Evaluation Date, nor any significant deficiencies
or material weaknesses in such disclosure controls and procedures requiring
corrective actions.
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
The Company received a Nasdaq Staff Determination letter (the "Staff
Determination") on May 13, 2003 indicating that the Company had failed to comply
with the minimum bid price requirement of $1.00 per share under Nasdaq
Marketplace Rule 4450, and that the shares of its Class A Common Stock were
subject to delisting from the Nasdaq SmallCap Market, effective at the opening
of business on May 22, 2003.
The Company has been granted an oral hearing before a Nasdaq Listing
Qualifications Panel (the "Panel") to be held on June 26, 2003 to review the
Staff Determination, which stayed the delisting of the Company's Class A Common
Stock, pending a decision by the Panel. At the hearing, the Company intends to
present a plan to Nasdaq for achieving the requirements for continued listing,
but there can be no assurance the Panel will grant the Company's request for the
continued listing of its Class A Common Stock.
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
99.1 Certification of Chief Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8K
The Registrant filed a Form 8K with the Commission on May 9, 2003 regarding
the establishment of a stock repurchase program.
- -------------------------------------------------------------------------------
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/ Beverly Eichel
------------------------------
Beverly Eichel,
Chief Financial Officer
Dated: June 16, 2003
Certification Per Section 302 of the Sarbanes-Oxley Act of 2002
I, Henry Arnberg, the Chairman and Chief Executive Officer of Hirsch
International Corp., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hirsch
International Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of , and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrants' other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significantly deficiencies and material weaknesses.
Date: June 13, 2003 /s/ Henry Arnberg
-----------------
Henry Arnberg, Chairman and
Chief Executive Officer
Certification Per Section 302 of the Sarbanes-Oxley Act of 2002
I, Beverly Eichel, the Vice President - Finance, Chief Financial Officer
and Secretary of Hirsch International Corp., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hirsch
International Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of , and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrants' other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significantly deficiencies and material weaknesses.
Date: June 13, 2003 /s/ Beverly Eichel
------------------
Beverly Eichel, Vice President -
Finance, Chief Financial
Officer and Secretary