UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 2)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission file number 00-23434
HIRSCH INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2230715
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
200 Wireless Boulevard
Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
(631) 436-7100
(Registrant's telephone number including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Explanatory Note
Hirsch International Corp. (the "Company") is filing this Amendment No. 2 to its
Quarterly Report on Form 10-Q in response to comments received from the Staff of
the Securities and Exchange Commission. Unless otherwise stated, all information
contained in this Amendment is as of September 15, 2003, the filing date of the
Company's original Report on Form 10-Q for the fiscal quarter ended July 31,
2003. This amendment does not change the Company's previously reported financial
statements.
HIRSCH INTERNATIONAL CORP. and SUBSIDIARIES
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - July 31, 2003 and
January 31, 2003
Condensed Consolidated Statements of
Operations for the Three and Six Months
Ended July 31, 2003 and 2002
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended July 31, 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 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, January 31,
2003 2003
---------- ----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,165,000 $ 7,707,000
Restricted cash 3,188,000 900,000
Short term note receivable (Note 6) - 500,000
Accounts receivable, net 7,379,000 4,354,000
Inventories, net (Note 3) 8,225,000 9,498,000
Prepaid and refundable income taxes 3,251,000 3,319,000
Other current assets 1,126,000 686,000
Assets of discontinued operations (Note 6) 2,690,000 4,914,000
---------- ----------
Total current assets 29,024,000 31,878,000
----------- ----------
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 2,620,000 2,868,000
OTHER ASSETS 1,175,000 1,256,000
---------- ----------
TOTAL ASSETS $32,819,000 $36,002,000
========== ==========
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, January 31,
2003 2003
---------- ----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade acceptances payable $ 1,238,000 $ 969,000
Accounts payable and accrued expenses (Notes 4 and 5) 5,371,000 6,924,000
Customers deposits and other 1,400,000 865,000
Liabilities of discontinued operations
(Note 6) 3,476,000 6,859,000
---------- ----------
Total current liabilities 11,485,000 15,617,000
Capitalized lease obligations, less
current portion 1,499,000 1,541,000
Deferred gain on sale of building 787,000 847,000
---------- ----------
Total liabilities 13,771,000 18,005,000
---------- ----------
MINORITY INTEREST 2,045,000 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) (22,656,000) (23,825,000)
---------- ----------
18,836,000 17,667,000
Less: Treasury Class A Common stock
at cost, 995,000 shares 1,833,000 1,602,000
---------- ----------
Total stockholders' equity 17,003,000 16,065,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $32,819,000 $36,002,000
========== ==========
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
July 31, July 31,
------------------------------------ ----------------------------------
2003 2002 2003 2002
------------- ------------- ------------ -------------
NET SALES $12,266,000 $12,718,000 $ 24,540,000 $ 25,139,000
COST OF SALES 7,849,000 8,201,000 15,635,000 16,161,000
------------ ------------ ------------- -------------
GROSS PROFIT 4,417,000 4,517,000 8,905,000 8,978,000
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 5,064,000 4,606,000 9,832,000 9,540,000
RESTRUCTURING COSTS (Note 5) (200,000) 0 (697,000) 0
------------ ------------ ------------- -------------
TOTAL OPERATING EXPENSES 4,864,000 4,606,000 9,135,000 9,540,000
------------ ------------ ------------- -------------
OPERATING LOSS (447,000) (89,000) (230,000) (562,000)
OTHER EXPENSE (INCOME)
INTEREST EXPENSE (INCOME) (171,000) 68,000 (117,000) 129,000
OTHER EXPENSE (INCOME) (109,000) 60,000 (174,000) 67,000
------------ ------------ ------------- -------------
TOTAL OTHER EXPENSE (INCOME) (280,000) 128,000 (291,000) 196,000
------------ ------------ ------------- -------------
(INCOME)LOSS BEFORE INCOME TAX PROVISION,
MINORITY INTEREST IN NET EARNINGS
OF CONSOLIDATED SUBSIDIARY
AND DISCONTINUED OPERATIONS (167,000) (217,000) 61,000 (758,000)
INCOME TAX PROVISION 109,000 135,000 192,000 244,000
MINORITY INTEREST IN NET EARNINGS
OF CONSOLIDATED SUBSIDIARY (Note 1) 74,000 91,000 113,000 165,000
------------ ------------ ------------- -------------
LOSS BEFORE DISCONTINUED OPERATIONS (350,000) (443,000) (244,000) (1,167,000)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (NOTE 6) 1,500,000 9,000 1,500,000 (3,785,000)
------------ ------------ ------------- -------------
NET INCOME(LOSS) $ 1,150,000 ($ 434,000) $ 1,256,000 ($ 4,952,000)
============ ============ ============= =============
INCOME (LOSS) PER SHARE BASIC AND DILUTED
LOSS BEFORE DISCONTINUED OPERATIONS ($ 0.04) ($ 0.05) ($ 0.03) ($ 0.13)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 0.17 (0.00) 0.17 (0.43)
------------ ------------ ------------- -------------
NET INCOME (LOSS) PER SHARE $ 0.13 ($ 0.05) $ 0.14 ($ 0.56)
============ ============ ============= =============
WEIGHTED AVERAGE NUMBER OF SHARES
IN THE CALCULATION OF LOSS PER SHARE
BASIC AND DILUTED 8,687,626 8,788,750 8,738,188 8,788,750
============ ============= ============= =============
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
July 31,
----------------------------------------------
2003 2002
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,256,000 ($ 4,952,000)
Adjustments to reconcile net income (loss) to net cash provided by (used
in)operating activities:
Gain on sale of fixed assets (50,000) 0
Depreciation and amortization 444,000 521,000
Recognized Gain on Sale of Building (60,000) (60,000)
Provision for reserves 230,000 (147,000)
Reversal of Restructuring Accrual (697,000) 0
Reversal of Reserve on Discontinued Operations (1,500,000) 0
Minority interest 113,000 165,000
Changes in assets and liabilities:
Accounts receivable (2,714,000) (267,000)
Net investment in sales-type leases 342,000 (1,321,000)
Inventories 1,441,000 6,839,000
Prepaid taxes 0 3,981,000
Other assets (305,000) (338,000)
Trade acceptances payable 269,000 (664,000)
Accounts payable and accrued expenses (951,000) 1,861,000
---------------- ----------------
Net cash provided by (used in)
operating activities (2,182,000) 5,618,000
---------------- ----------------
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
July 31,
----------------------------------------------
2003 2002
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ($ 328,000) ($ 218,000)
Site Development Costs for Hometown Threads (71,000) 0
Proceeds from sale of fixed assets 100,000 0
Proceeds from sale of subsidiary 500,000 0
---------------- ----------------
Net cash provided by (used in)
investing activities 201,000 (218,000)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long term debt (42,000) (60,000)
Restricted Cash (2,288,000) 0
Purchase of treasury shares (231,000) 0
---------------- ----------------
Net cash used in financing activities (2,561,000) (60,000)
---------------- ----------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 0 232,000
---------------- ----------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (4,542,000) 5,572,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,707,000 3,121,000
---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,165,000 $ 8,693,000
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 108,000 $ 129,000
================ ================
Income taxes paid $320,000 $ 8,000
================ ================
See notes to condensed consolidated financial statements. .
Hirsch International Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three and Six Months Ended July 31, 2003 and 2002
1. Organization and Basis of Presentation
The accompanying Condensed Consolidated financial statements as of and for
the three and six month periods ended July 31, 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 and six month periods ended July 31, 2003 and 2002, the financial
position at July 31, 2003 and cash flows for the six month periods ended July
31, 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.
For the three months For the six months
ended July 31, ended July 31,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands, except for per share amounts)
Net Income (Loss), as reported $1,150 ($434) $1,256 ($4,952)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method 16 21 32 42
Pro-forma net income (loss) $1,134 ($455) $1,224 ($4,994)
Earnings (loss) per share:
Basic and diluted - as reported $.13 ($.05) $.15 ($.56)
Basic and diluted - pro-forma $.13 ($.06) $.14 ($.57)
The following weighted average assumptions were used in the Black-Scholes
option-pricing model for grants in Fiscal 2004: dividend yield of 4.00%,
volatility of 72%, risk-free interest rate of 2.37% for grants on
06/02/2003,2.14% for grants on 06/16/2003 and 2.63% for grants on 07/09/2003;
and an expected life of 5 years and for 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
July 31, 2003 January 31, 2003
-------------- ----------------
New Machines $6,895,000 $8,061,000
Used Machines 339,000 796,000
Parts 2,910,000 2,587,000
---------- ----------
10,144,000 11,444,000
Less: Reserve for slow moving inventory 1,919,000 1,946,000
---------- ----------
Inventories, net $ 8,225,000 $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 July 31, 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. During the
second quarter of Fiscal 2004, the Company completed its plan of restructuring
and reversed, as a reduction of operating expenses, $200,000 of restructuring
costs that had been created for facilities and severance costs, leaving $19,000
remaining in facilities costs.
The following table shows amounts paid against the restructuring accrual
included in accounts payable and accrued expenses during the six months ended
July 31, 2003. (in thousands)
Balance at Reversal Balance at
January 31, of Prior July 31,
2003 Payments Accruals 2003
------------------ ---------------- ------------ --------------
Severance costs $ 100 $(21) (79) $ 0
Facility closing costs 1,267 (631) (617) 19
Other professional and consulting
costs 1 (1)
------------------ ---------------- ------------ --------------
$1,368 $(652) $(697) $19
================== ================ ============ ==============
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.
Summary operating results of the discontinued operations of HAPL Leasing (in
thousands) are as follows:
For the three months For the Six months
ended July 31, ended July 31
2003 2002 2003 2002
---- ---- ---- ----
Revenue . . . . . . . . . . . . . . . . . . 205 1270 500 901
Gross profit . . . . . . . . . . . .. . . . 109 435 215 253
Income(Loss) from discontinued Operations. 1,500 0 1,500 (4,000)
The operating loss during the six months ended July 31, 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. During the three months ended July 31, 2003, the Company entered into
a transaction whereby the Company assigned its interest in the remaining UNL
(Ultimate Net Loss) lease portfolio from CIT to Beacon Funding Corporation. As
part of this transaction, the Company sold to Beacon Funding Corporation the
residual receivables associated with the lease portfolio for $375,000. The
Company has reversed, as part of discontinued operations, $1.5 million of
reserves associated with the UNL lease portfolio. The Company plans to sell the
remaining assets by January 2004.
Assets and Liabilities of discontinued operations (in thousands) are as follows:
July 31 January 31
------- ----------
2003 2003
---- ----
Assets:
Accounts Receivable $0 $16
MLPR and residuals 2,583 4,673
Property, Plant & Equipment 17 33
Inventory 0 113
Prepaid Taxes 90 79
-- --
Total Assets $2,690 $4,914
====== ======
Liabilities:
Accounts Payable & Accruals $3,389 $6,758
Long Term Debt 0 14
Income Taxes Payable 87 87
-- --
Total Liabilities $3,476 $6,859
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, which 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 For the six months
ended July 31, ended July 31,
2003 2002 2003 2002
---- ---- ---- ----
Revenue . . . . . . . . . . . . . . . . . . - 1,053 - 2,393
Gross profit . . . . . . . . . . . .. . . . - 665 - 1,642
(Loss)Income from discontinued Operations . - 9 - 245
7. Contingencies
As of July 31, 2003, the Company had $3.2 million in restricted cash which
is used to collateralize letters of credit in the amount of $2.6 million 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 the
adoption of SFAS No. 149 to have an impact on the consolidated financial
statements of the Company.
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 financial
statements and disclosures.
9. Dividends
On July 17, 2003, the Board of Directors declared a quarterly cash dividend
of $.01 per share. The record date for the holders of common stock entitled to
receive payment of such dividend was July 28, 2003. The payment date was August
10, 2003.
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.
Results of Operations for the three and six months ended July 31, 2003 as
compared to the three and six months ended July 31, 2002.
Net sales. Net sales for the three months ended July 31, 2003 were $12.3
million, a decrease of $0.5 million, or 4%, compared to $12.7 million for the
three months ended July 31, 2002, and $24.5 million for the six months ended
July 31, 2003, a decrease of $0.6 million or 2.4%, compared to $25.1 million for
the six months ended July 31, 2002. The Company believes that the reduction in
the sales level for the six months and three months ended July 31, 2003 is
attributable to a decrease in overall demand for new embroidery machines.
Cost of sales. For the three months ended July 31, 2003, cost of sales
decreased $0.4 million, or 4.3%, to $7.8 million from $8.2 million for the three
months ended July 31, 2002, and for the six months ended July 31, 2003 decreased
$0.5 million, or 3.1%, to $15.6 million from $16.1 million for the six months
ended July 31, 2002. The fluctuation of the 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 36.3% for the six months ended July 31, 2003 as compared to
35.7% the six months ended July 31, 2002 and from 35.5% for the three months
ended July 31, 2002 to 36.0% for the three months ended July 31, 2003. The
slight improvement in gross margin is mainly attributable to increased margins
on software sales pursuant to the terms of the purchase agreement with Pulse.
Operating Expenses. For the three months ended July 31, 2003, operating
expenses increased by $0.3 million to $4.9 million from $4.6 million for the
three months ended July 31, 2002 and for the six months ended July 31, 2003,
declined by $0.4 million, to $9.1 million from $9.5 million for the six months
ended July 31, 2002. The reduction of expenses for the six months ended July 31,
2003 is primarily attributable to the restructuring plan that the Company
implemented in the fourth quarter of the last fiscal year to reduce its overall
operating expenses as well as the reversal of $0.7 million in restructuring
costs associated with the completion of the plan. For the three months ended
July 31, 2003, operating expenses increased primarily due to costs the Company
incurred to maintain its listing on the Nasdaq SmallCap Market and costs
associated with the hiring of several new key employees. These costs were offset
by the reversal of restructuring costs of $0.2 million associated with the
completion of the restructuring plan.
Interest Expense (Income). For the three months ended July 31, 2003,
interest income was $171,000 as compared to interest expense of $68,000 for the
three months ended July 31, 2002. For the six months ended July 31, 2003
interest income was $117,000 as compared to interest expense of $129,000 for the
six months ended July 31, 2002. Interest expense is primarily associated with
the sale/leaseback transaction of the Corporate headquarters. Interest income of
$225,000 associated with the income tax refund was recognized during the three
months ended July 31, 2003.
Other Income (Expense). For the three months ended July 31, 2003, other
income increased $169,000, to $109,000 from ($60,000) in other expense for the
three months ended July 31, 2002. For the six months ended July 31, 2003 other
income was $174,000 as compared to other expense of $67,000 for the six months
ended July 31, 2002. The change in other expense is due to the unfavorable
currency translations for the yen compared to favorable currency translations
for the three months ended July 31, 2002.
Income tax provision The income tax provision represents taxes due on
income earned by the TUI subsidiary.
Loss before Discontinued Operations. The loss before Discontinued
Operations for the three months ended July 31, 2003 was $0.4 million, the same
as the loss for the three months ended July 31, 2002 and for the six months
ended July 31, 2003 was $0.2 million, an improvement of $1.0 million, or 83.0%,
from $1.2 million for the six months ended July 31, 2002.
Income(Loss) from Discontinued Operations. During the second quarter of
Fiscal 2004, the Company entered into a transaction whereby it assigned its
interest in the UNL lease portfolio from CIT to Beacon Funding Corporation. In
connection with this transaction, the Company reversed $1.5 million in
discontinued operating reserves that were associated with the UNL lease
portfolio. In the quarter ended April 30, 2002 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.
Net Income(Loss). The net income for the three months ended July 31, 2003
was $1.1 million, an increase of $1.6 million, from a net loss of $0.4 million
for the three months ended July 31, 2002. Net income for the six months ended
July 31, 2003 was $1.0 million, an increase of $6.2 million, from the net loss
of $5.0 million for the six months ended July 31, 2002. The increase in income
from discontinued operations was attributable to the $1.5 million reversal of
the discontinued operating reserves associated with assignment of the CIT UNL
lease portfolio.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $17.5 million at July 31, 2003,
increasing $1.2 million, or 7.4%, from $16.3 million at January 31, 2003.
During the six months ended July 31, 2003, the Company's cash and cash
equivalents decreased by $4.5 million to $3.2 million. Net cash of $2.2 million
was used by the Company's operating activities and $2.5 million was used in
financing activities as additional collateral for the Company's credit line,
offset by $0.5 million received as part of the Pulse Microsystems sale less
capital expenditures of $0.3 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 July 31, 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)
Less More
than 1 1 - 3 4 - 5 than 5
Contractual Obligations Total year years 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.
Outstanding letters of credit at July 31, 2003 were $2.6 million. The Company
was in compliance with its covenants at July 31, 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 the end of the period covered by 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
The Company is, from time to time, involved in litigation, either asserted
or unasserted, which is incidental to the conduct of its business. While the
outcome of these matters cannot be predicted with certainty, management does not
believe that the outcome of these matters will have a material adverse effect on
its results of operations or cash flow.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 2003 Annual Meeting of Stockholders was held July 9, 2003. At
the meeting, the Company's stockholders voted upon (1) the election of
directors; (2) the approval of the Company's 2003 Stock Option Plan; and (3) the
approval of BDO Seidman, LLP as the Company's independent auditors for the
fiscal year ended January 31, 2004. The following is a tabulation of the votes:
(1) Election of Directors
For Against
--- -------
Marvin Broitman (Class A) 4,967,481 280,362
Ronald Krasnitz (Class A) 4,824,361 423,482
Mary Ann Domuracki (Class A) 4,967,199 280,644
Henry Arnberg (Class B) 2,268,139 0
Paul Levine (Class B) 2,268,139 0
Paul Gallagher (Class B) 2,268,139 0
Herbert M. Gardner (Class B) 2,268,139 0
(2) Approval of 2003 Stock Option Plan
For Against Abstain
--- ------- -------
3,244,357 461,736 17,720
(3) Approval of BDO Seidman, LLP as the Company's Independent Auditors
For Against Abstain
--- ------- -------
7,465,430 32,832 17,720
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 had been granted an oral hearing before a Nasdaq Listing
Qualifications Panel (the "Panel") which was 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. On August 12, 2003, the Company was
notified by the Panel that it had complied with the $1.00 minimum bid price
requirement for at least ten consecutive trading days and satisfied all other
requirements for continued listing of its Class A Common Stock on the NASDAQ
SmallCap Market.
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
10.1 Amendment No. 2 to Loan and Security Agreement dated as of July 17, 2003
31.1 Amended Certification of Chief Executive Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
31.2 Amended Certification of Chief Financial Officer pursuant to Section 302 of
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
- -------------------------
*Incorporated by reference from the Registrant's Form 10-Q filed for the quarter ended July 31, 1997.
**Incorporated by reference from the Registrant's Form 10-Q filed for the quarter ended October 31, 1997.
***Incorporated by reference from the Registrant's Registration Statement on Form S-1, Registration Number 33-72618.
(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: March 8, 2004