UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT
PURSUANT TO SECTION 13
OR 15(d) OF THE
SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended October 30, 2004
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 Exchange Act). Yes [ ] No [x]
Indicate the number of shares
outstanding of each of the
issuer's classes of common
stock, as of December 14,
2004.
Class of Common Equity Number of Shares
Class A Common Stock, 6,791,283
par value $.01
Class B Common Stock, 1,568,518
par value $.01
HIRSCH INTERNATIONAL CORP. and SUBSIDIARIES
FORM 10-Q
INDEX
Part I. Financial Information Page
----
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - 3-4
October 30, 2004 and January 31, 2004
Condensed Consolidated Statements of Operations 5
for the Three and Nine Months Ended October 30, 2004 and 2003
Condensed Consolidated Statements of Cash Flows 6-7
for the Nine Months Ended October 30, 2004 and 2003
Notes to Condensed Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
Part II. Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K
Signatures 17
Certifications 18-21
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 30, January 31,
2004 2004
-------------------------- --------------------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,475,000 $ 8,963,000
Restricted cash (Note 7) 5,650,000 3,000,000
Accounts receivable, net 5,106,000 6,562,000
Inventories, net (Note 3) 4,978,000 6,922,000
Other current assets 524,000 265,000
Assets of discontinued operations (Note 5) 1,062,000 1,361,000
-------------------------- --------------------------
Total current assets 22,795,000 27,073,000
-------------------------- --------------------------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated 2,063,000 2,397,000
depreciation and amortization
OTHER ASSETS 750,000 877,000
-------------------------- --------------------------
TOTAL ASSETS $ 25,608,000 $30,347,000
========================== ==========================
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 30, January 31,
2004 2004
-------------------------- -------------------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade acceptances payable $ 0 $ 1,324,000
Accounts payable and accrued expenses
(Notes 4 and 5) 6,392,000 8,150,000
Customers deposits and other 864,000 625,000
Liabilities of discontinued operations (Note 5) 1,878,000 2,254,000
-------------------------- -------------------------
Total current liabilities 9,134,000 12,353,000
-------------------------- -------------------------
Capitalized lease obligations, less current portion 1,309,000 1,418,000
Deferred gain on sale of building 638,000 728,000
-------------------------- -------------------------
Total liabilities 11,081,000 14,499,000
-------------------------- -------------------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (Note 8)
Preferred stock, $.01 par value; authorized: 0 0
1,000,000 shares; issued: none
Class A common stock, $.01 par value; authorized:
20,000,000 shares, issued: 7,956,000 and 6,826,000
shares, respectively 80,000 68,000
Class B common stock, $.01 par value; authorized:
3,000,000 shares, outstanding: 1,568,000 shares 16,000 27,000
Additional paid-in capital 41,414,000 41,408,000
Accumulated deficit (24,966,000) (23,638,000)
-------------------------- -------------------------
16,544,000 17,865,000
Less: Treasury Class A Common stock at cost, 1,164,000
shares 2,017,000 2,017,000
-------------------------- -------------------------
Total stockholders' equity 14,527,000 15,848,000
-------------------------- -------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 25,608,000 $30,347,000
========================== =========================
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
October 30, October 31, October 30, October 31,
-------------------- ------------------- ------------------- ------------------
2004 2003 2004 2003
NET SALES $ 11,867,000 $11,892,000 $31,871,000 $34,940,000
COST OF SALES 7,986,000 8,154,000 21,342,000 23,345,000
------------------ ------------------ ------------------ ----------------
GROSS PROFIT 3,881,000 3,738,000 10,529,000 11,595,000
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 3,802,000 4,438,000 12,013,000 13,501,000
Restructuring Costs (Note 6) 0 0 0 (697,000)
------------------ ------------------ ------------------ ----------------
Total Operating Expenses 3,802,000 4,438,000 12,013,000 12,804,000
------------------ ------------------ ------------------ ----------------
OPERATING INCOME (LOSS) 79,000 (700,000) (1,484,000) (1,209,000)
OTHER EXPENSE (INCOME)
Interest Expense (Income) 36,000 52,000 112,000 (70,000)
Other Expense (Income) 100,000 91,000 10,000 (54,000)
------------------ ------------------ ------------------ ----------------
Total Other Expense (Income) 136,000 143,000 122,000 (124,000)
------------------ ------------------ ------------------ ----------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME
TAX PROVISION AND DISCONTINUED OPERATIONS (57,000) (843,000) (1,606,000) (1,085,000)
INCOME TAX PROVISION 4,000 0 20,000 25,000
------------------ ------------------ ------------------ ----------------
LOSS FROM CONTINUING OPERATIONS (61,000) (843,000) (1,626,000) (1,110,000)
GAIN ON SALE OF HOMETOWN THREADS (NOTE 5) 943,000 0 943,000 0
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (NOTE
5) (374,000) 765,000 (567,000) 2,288,000
------------------ ------------------ ------------------ ----------------
NET INCOME (LOSS) $508,000 ($78,000) $ (1,250,000) $1,178,000
================== ================== ================== ================
Income (Loss) Per Share Basic and Diluted:
LOSS FROM CONTINUTING OPERATIONS ($0.01) ($0.07) ($0.20) ($0.09)
GAIN ON SALE OF HOMETOWN THREADS $0.11 $0.00 $0.11 $0.00
INCOME (LOSS) FROM DISCONTINUED OPERATIONS ($0.04) 0.06 ($0.06) 0.23
------------------ ------------------ ------------------ ----------------
NET INCOME (LOSS) PER SHARE $0.06 $(0.01) ($0.15) $0.14
================== ================== ================== ================
Weighted Average Number of Shares
In the Calculation of Income (Loss) per Share
Basic and Diluted 8,348,780 8,480,852 8,342,422 8,654,359
================== ================== ================== ================
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
October 30, October 31,
---------------------- ----------------------
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,250,000) $ 1,178,000
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Gain on sale of fixed assets 0 (50,000)
Depreciation and amortization 583,000 672,000
Recognized Gain on Sale of Building (89,000) (89,000)
Provision for reserves (100,000) 155,000
Reversal of Restructuring Accrual 0 (697,000)
Reversal of Reserve on Discontinued Operations 0 (2,000,000)
Minority interest 0 212,000
Gain on Sale of Subsidiary (943,000) 0
Changes in assets and liabilities:
Accounts receivable 1,497,000 (2,103,000)
Net investment in sales-type leases (60,000) 621,000
Inventories 1,941,000 2,356,000
Prepaid taxes (8,000) 114,000
Other assets (337,000) 577,000
Trade acceptances payable (1,324,000) 1,365,000
Accounts payable and accrued expenses (1,586,000) (2,804,000)
-------------------- ---------------------
Net cash used in operating activities (1,676,000) (493,000)
-------------------- ---------------------
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
October 30, October 31,
----------------------- ----------------------
2004 2003
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (121,000) (457,000)
Site Development Costs for Hometown Threads 0 (21,000)
Proceeds from sale of fixed assets 0 100,000
Proceeds from sale of subsidiary, net of expenses 1,139,000 500,000
--------------------- ---------------------
Net cash provided by investing activities 1,018,000 122,000
--------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long term debt (109,000) (91,000)
Exercise of Stock Options 7,000 10,000
Restricted Cash (2,650,000) (3,088,000)
Purchase of treasury shares 0 (414,000)
Payment of Dividends (78,000) (85,000)
--------------------- ---------------------
Net cash used in financing activities (2,830,000) (3,668,000)
--------------------- ---------------------
DECREASE IN CASH AND
CASH EQUIVALENTS (3,488,000) (4,039,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,963,000 7,707,000
--------------------- ---------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $5,475,000 $ 3,668,000
===================== =====================
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $112,000 $ 161,000
===================== =====================
Income taxes paid $ 27,000 $ 353,000
===================== =====================
See notes to condensed consolidated financial statements.
Hirsch International Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three and Nine Months Ended October 30, 2004 and October 31, 2003
1. Organization and Basis of Presentation
The accompanying Condensed Consolidated financial statements
as of and for the three and nine month periods ended October 30, 2004
and October 31, 2003 include the accounts of Hirsch International Corp.
("Hirsch"), HAPL Leasing Co., Inc. ("HAPL"), Tajima USA, Inc.
("TUI")through January 31, 2004, Hometown Threads, LLC ("Hometown")
through October 22, 2004, 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 nine month periods
ended October 30, 2004 and October 31, 2003, the financial position at
October 30, 2004 and cash flows for the nine month periods ended
October 30, 2004 and October 31, 2003, 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, 2004 as filed with the Securities and Exchange Commission.
Our accompanying unaudited consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnote
disclosures required by accounting principles generally accepted in the
United States for complete financial statements.
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States requires
us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
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 (loss), 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 (loss) per share
if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148, to
stock-based employee compensation.
For the three months ended For the nine months ended
October 30, October 31, October 30, October 31,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands, except for per share amounts)
Net Income (Loss), as reported $508 ($78) ($1,250) $1,178
Deduct: Total stock-based employee
compensation expense determined under fair
value based method 12 17 29 52
------------- --------------- -------------- --------------
Pro-forma net income (loss) $496 ($95) ($1,279) $1,126
============= =============== ============== ==============
Earnings (loss) per share:
Basic and Diluted - as reported $0.06 ($.01) ($0.15) ($.14)
Basic and Diluted- pro-forma $0.06 ($.01) ($0.16) ($0.13)
The following weighted average assumptions were used in the Black-Scholes
option-pricing model for grants in Fiscal 2005: expected dividend yield of 0%,
expected volatility of 77%, risk-free interest rate of 3.35% for grants on
09/17/04 and for Fiscal 2004: expected dividend yield of 4.00%, expected
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.
3. Inventories
October 30, 2004 January 31, 2004
-------------------------- -----------------------
New Machines $3,011,000 $5,194,000
Used Machines 345,000 344,000
Parts 3,261,000 2,967,000
-------------------------- -----------------------
6,617,000 8,505,000
Less Reserve for (1,639,000) (1,583,000)
slow moving inventory
-------------------------- -----------------------
Inventories, net $4,978,000 $6,922,000
========================== =======================
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 nine months ended
October 30, 2004.
5. Discontinued Operations
In the fourth quarter of Fiscal 2002, the Company
determined that its HAPL 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
(in thousands) are as follows:
For the three months ended For the nine months ended
October 30, October 31, October 30, October 31,
2004 2003 2004 2003
---- ---- ---- ----
Revenue 15 87 97 588
Gross profit 15 32 75 247
Income from 0 500 0 2,000
discontinued Operations.
The operating loss during the nine months ended October 31,
2002 included 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
transaction closed in September 2003. During the three months
ended October 31, 2003, the Company reversed the remaining $0.5
million of reserves associated with the UNL lease portfolio. The
Company plans to wind down the remaining assets by January 2005.
Assets and Liabilities of discontinued operations (in thousands)
are as follows:
October 30, 2004 January 31, 2004
--------------------- --------------------
Assets:
MLPR and residuals $ 908 $1,103
Inventory 0 23
Prepaid Taxes and other assets 5 11
--------------------- --------------------
Total Assets $913 $ 1,137
===================== ====================
Liabilities:
Accounts Payable & Accruals $1,264 $ 1,548
Income Taxes Payable 87 87
--------------------- --------------------
Total Liabilities $1,351 $ 1,635
===================== ====================
During the quarter ended April 30, 2004, the Company
determined that its Hometown Threads, LLC subsidiary was not
strategic to the Company's long-term objectives. On October 22,
2004, the Company sold substantially all of the assets of Hometown
to Embroidery Acquisition LLC ("Buyer"), a wholly owned subsidiary
of PCA, LLC ("PCA") pursuant to the terms of a certain Asset
Purchase Agreement ("Agreement") entered into between the Company,
Hometown, Buyer and PCA. Prior to the transaction, Hometown had
been engaged in the business of operating and franchising retail
embroidery service centers in Wal-Mart stores and other retail
locations (the "Business"). The purchase price for the assets
acquired by Buyer was $1,500,000. In addition, Buyer agreed to
assume certain enumerated liabilities of Hometown. Pursuant to the
Agreement, PCA guaranteed the obligations of the Buyer. The
Company and Hometown entered a Non-Competition, Non-Disclosure and
Non-Solicitation Agreement, the Company and Hometown are precluded
from directly and indirectly competing with Buyer for seven (7)
years in the United States. The Company and Hometown are also
required to keep confidential certain Confidential Information (as
defined therein) for a period of ten (10) years. Pursuant to the
Agreement, The Company, Hometown and Buyer have entered into a
certain Supply Agreement having a term of five (5) years. Under
the terms of the Supply Agreement, the Company agreed to supply to
Buyer and Buyer is required to purchase from the Company all
products previously purchased by Hometown from the Company and
utilized in the Business upon the prices, terms and conditions
contained therein.
As a result of the sale of the Hometown Threads subsidiary,
the Company recognized a gain of approximately $943,000.
The Buyer has withheld $200,000 from the selling price
primarily associated with a note receivable on the books of
Hometown Threads and $142,000 in deferred income from deposits
received for stores not yet opened. The Company deferred the
recognition of income on these items until the contingencies are
resolved during the six month hold-back period.
Hometown Threads, LLC was accounted for as discontinued
operations in the consolidated financial statements for all
periods presented.
Assets and liabilities of the discontinued operations of Hometown
Threads, LLC are as follows (in thousands):
October 30, January 31,
2004 2004
------------------- -------------
Assets:
Accounts receivable $ 149 26
Property, plant and equipment, net 0 22
Prepaid taxes and other assets 0 176
------------------- --------------
Total Assets $ 149 $ 224
=================== ==============
Liabilities:
Accounts payable and accrued expenses $ 527 $ 619
------------------- --------------
Total Liabilities $ 527 $ 619
=================== ==============
Summary operating results of the discontinued operations of
Hometown Threads, LLC (in thousands) are as follows:
For the three months ended For the nine months ended
October 30, October 31, October 30, October 31,
2004 2003 2004 2003
------------ ------------ ------------- ----------
Revenue $321 $644 $1,425 $1,667
Gross profit 18 300 646 962
Gain on Sale 943 0 943 0
Income (Loss) from ($374) $ 51 $(567) $ (254)
Discontinued Operations.
Effective January 31, 2004, the Company executed an agreement
with Tajima Industries, Ltd. ("Tajima") pursuant to which the
Company sold all of the common stock (the "Shares") constituting a
55% equity interest of its TUI subsidiary owned by it to Tajima,
upon the terms and conditions set forth in a certain Purchase and
Sale Agreement by and among the Company, Tajima and TUI (the
"Agreement"). Upon the consummation of the sale, Tajima owned 100%
of TUI and the Company no longer had an influence over the
operations of TUI. The Consolidated Financial Statements for all
periods presented reflect the discontinued operations of TUI
through January 31, 2004.
Summary operating results of the discontinued operations of TUI
(in thousands) are as follows:
For the three For the nine
months ended months ended
October 31, 2003 October 31, 2003
--------------------- --------------------
Revenue $ 3,386 $ 8,975
Gross profit 471 1,022
Income from discontinued operations $ 214 $ 542
6. Reversal of Restructuring Costs
During the nine months ended October 31, 2003, the Company
reversed, as a reduction of operating expenses, $697,000 of
restructuring costs associated with the completion of the
restructuring plan.
7. Commitments and Contingencies
As of October 30, 2004, the Company had $5.7 million in
restricted cash which is used to collateralize standby letters of
credit in the amount of $4.7 million opened against the credit
line at Congress Financial.
On September 20, 2004, the Company received notice from the
NASDAQ Stock Market, Inc. that due to the appointment of
Christopher J. Davino to its Board of Directors and Audit
Committee, the Company regained compliance with the independent
director and Audit Committee requirements for continued inclusion
set forth in Marketplace Rule 4350-1 (the "Rule"), and
consequently, the Company's Class A Common Stock would not be
subject to delisting because of non-compliance with the Rule as
was previously reported on the Company's Report on Form 8-K filed
with the Commission on September 17, 2004.
On November 24, 2004, the Company received notice from the
Nasdaq Stock Market, Inc. ("Nasdaq") that the closing bid price of
its Class A common stock had been at $1.00 or greater for at least
10 consecutive business days and, consequently the Company would
not be subject to delisting due to non-compliance with the Nasdaq
Marketplace Rule 4310(c)(4) as was previously reported on the
Company's Report on Form 8-K filed with the Commission on August
25, 2004. Accordingly, the Company has regained compliance with
Marketplace Rule 4310(c)(4) and Nasdaq considers the matter
closed.
8. Stockholders' Equity
On October 18, 2004, Paul Levine, a Class B Shareholder,
converted 1,099,621 of Class B shares for 1,099,621 Class A
shares in a non-cash share for share transaction.
9. Subsequent Events
On December 1, 2004, Paul Gallagher, the Company's President
and Chief Operating Officer, assumed the additional responsibility
of Chief Executive Officer. He succeeds Henry Arnberg, a founder
of the Company, who will continue to serve as Chairman of the
Board of Directors.
On December 1, 2004, Mr. Gallagher also entered into a new
two year employment agreement effective September 11, 2004. The
contract provides for a grant to the executive of an option to
purchase 150,000 shares of its Class A Common Stock pursuant to
the Company's 2003 Employee Stock Option Plan. This option was
issued at Market on December 1, 2004 and shall be exercisable on
or after December 31, 2004 with respect to one half of the
underlying shares and on or after December 21, 2005 with respect
to the remaining half.
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. These factors include, without limitation,
on-going competition from other distributors and manufacturers of
embroidery equipment, fluctuations in currency, the effectiveness of
new advertising and promotion strategies, availability of adequate
supplies of inventory, the ability to attract and maintain employees,
legal and regulatory matters, potential new business opportunities, the
Company's ability to assume and maintain a competitive position in the
embroidery machine market, volatility in sales, fluctuations in working
capital and general economic conditions. 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 nine months ended
October 30, 2004 as compared to the three and nine months ended October
31, 2003.
Net sales. Net sales for the three months ended October 30,
2004 and the three months ended October 31, 2003 were $11.9 million,
respectively, and $31.9 million for the nine months ended October 30,
2004, a decrease of $3.1 million or 8.9%, compared to $35.0 million
for the nine months ended October 31, 2003. The Company believes that
the reduction in the sales level for the nine months ended October 30,
2004 is mainly attributable to an on-going decrease in demand for
large head embroidery machines and greater competition in the small
machine market which resulted in lower prices for embroidery machines.
Net sales for the three months ended October 30, 2004 remained
consistent for the three months ended October 31, 2003.
Cost of sales. For the three months ended October 30, 2004,
cost of sales decreased $0.2 million, or 2.4%, to $8.0 million from
$8.2 million for the three months ended October 31, 2003, and for the
nine months ended October 30, 2004 decreased $2.0 million, or 8.6%, to
$21.3 million from $23.3 million for the nine months ended October 31,
2003. The decrease is directly related to the decrease in sales volume
over the same period. The Company's gross margin remained relatively
constant at 33.0% for the nine months ended October 30, 2004 compared
to 33.2% for the nine months ended October 31, 2003 and increased from
31.4% for the three months ended October 31, 2003 compared to 32.4%
for the three months ended October 30, 2004. The recent fluctuation of
the dollar against the yen, which is the currency the Company's
embroidery machines are priced in, has adversely affected and is
likely to continue to adversely affect the Company's machine sales
pricing competitiveness. Embroidery machinery prices have either been
maintained or risen in US dollars due to these exchange rate
fluctuations. As a result, in order for the Company to maintain
various product margins for its imported embroidery machines, its
competitiveness has been adversely affected. Some but not all of the
Company's competitors face similar circumstances.
Operating Expenses. For the three months ended October 30,
2004, operating expenses decreased by $0.6 million to $3.8 million,
from $4.4 million for the three months ended October 31, 2003 and for
the nine months ended October 30, 2004, decreased by $1.5 million to
$12.0 million from $13.5 million for the nine months ended October 31,
2003. The decrease in operating expenses for the three and nine months
ended October 30, 2004 is directly related to the Company's continuing
efforts to control operating costs in relation to the sales decline.
Operating expenses for the nine months ended October 30, 2004 included
a reversal of the provision for doubtful account of $100,000.
Operating expenses for the nine months ended October 31, 2003 were
further decreased by $697,000, as a result of the reversal of
restructuring costs associated with the completion of the
restructuring plan.
Interest Expense (Income). For the three months ended October
30, 2004, interest expense was $36,000 as compared to interest expense
of $52,000 for the three months ended October 31, 2003. For the nine
months ended October 30, 2004 interest expense was $112,000 as
compared to interest income of $70,000 for the nine months ended
October 31, 2003. 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 nine months ended October 31, 2003.
Other Income (Expense). For the three months ended October 30,
2004, other expense increased $9,000 to $100,000 from $91,000 in other
expense for the three months ended October 31, 2003. For the nine
months ended October 30, 2004 other expense was $10,000 as compared to
other income of $54,000 for the nine months ended October 31, 2003.
The change in other expense is due to currency translation
fluctuations for yen.
Income Tax Provision. The income tax expense recorded for the
three and nine months ended October 30, 2004 and October 31, 2003
represents taxes due on year end income for various state and local
income taxes, for which the Net Operating Loss carry-forwards from
prior years do not apply.
Loss from Continuing Operations. The loss from Continuing
Operations for the three months ended October 30, 2004 was $0.06
million, a decrease of $0.74 million from $0.8 for the three months
ended October 31, 2003. For the nine months ended October 30, 2004 the
loss from Continuing Operations was $1.6 million, an increase of $0.5
million from $1.1 million for the nine months ended October 31, 2003.
Income (Loss) from Discontinued Operations. Income from
Discontinued Operations decreased $0.2 million to $0.6 million for the
three months ended October 30, 2004, from $0.8 million for the three
months ended October 31, 2003. Income from Discontinued Operations
decreased $1.9 million to $0.4 million for the nine months ended
October 30, 2004, from $2.3 million for the nine months ended October
31, 2003. The income on discontinued operations for the three and nine
months ended October 30, 2004 is solely attributable to the Hometown
Threads operations. During the quarter ended April 30, 2004, the
Company determined that Hometown was not strategic to the Company's
long-term objectives. On October 22, 2004, the Company sold
substantially all of the assets of Hometown to Embroidery Acquisition
LLC ("Buyer"), a wholly owned subsidiary of PCA, LLC ("PCA") pursuant
to the terms of a certain Asset Purchase Agreement ("Agreement")
entered into between the Company, Hometown, Buyer and PCA. The
purchase price for the assets acquired by Buyer was $1,500,000. As a
result of the sale of Hometown, the Company recognized a gain of
approximately $943,000. The income from discontinued operations for
the three months ended October 31, 2003 is the net result of a $0.5
million dollar HAPL discontinued operations reserve reversal in
connection with a transaction whereby the Company assigned its
interest in the UNL lease portfolio from CIT to Beacon Funding
Corporation plus net income of $214,000 from the operations of TUI and
$51,000 in income from the operations of Hometown. The income from
discontinued operations for the nine months ended October 31, 2003 is
the net result of the $2.0 million dollar HAPL discontinued operations
reserve reversal plus net income of $542,000 from the operations of
TUI offset by a $254,000 loss from the operations of Hometown.
Net Income (Loss). The net income for the three months ended
October 30, 2004 was $0.5 million, an increase of $0.6 million from a
net loss of $0.1 million for the three months ended October 31, 2003.
Net loss for the nine months ended October 30, 2004 was $1.3 million,
a decrease of $2.5 million from the net income of $1.2 million for the
nine months ended October 31, 2003.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $13.7 at October 30, 2004,
decreasing $1.0 million, or 6.8% from $14.7 million at January 31,
2004, respectively.
During the nine months ended October 30, 2004, the Company's
cash and cash equivalents decreased by $3.4 million to $5.5 million due
to the increase in restricted cash of $2.7 million in addition to cash
used by the companies operations. Net cash of $1.7 million was used by
the Company's operating activities and $2.8 million was used in
financing activities, $2.7 million of which was used as additional
collateral for the Company's credit line. Investing activities included
capital expenditures of $0.01 million and net proceeds from the sale of
Hometown of $1.1 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 October 31, 2004 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)
Contractual Obligations Total Less than 1 - 3 4-5 More than
1 year years years 5 years
------------------------------------- ----------- ----------- --------- --------- -----------
Capital lease obligations $ 1,450 $ 141 $ 368 $ 508 $ 433
Operating Lease obligations 2,055 617 701 444 293
Purchase Commitments 1,300 1,200 100 0 0
Employment Agreements 1,049 668 381 0 0
----------- ----------- --------- --------- -----------
Total $ 5,854 $ 2,626 $ 1,550 $ 952 $ 726
=========== =========== ========= ========= ===========
Revolving Credit Facility and Borrowings
The Company has 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 October
30, 2004. The Congress Agreement was also used to support standby
Letters of Credit of approximately $4.7 million at October 30, 2004.
On August 31, 2004, the Company signed Amendment No. 4 to the
Loan and Security Agreement. This amendment provides for lower fees on
the credit facility through January 31, 2005 and the suspension of
compliance with financial covenants for the periods July 31, 2004 and
October 31, 2004.
Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting
policies and estimates from those disclosed in Item 7 of our Annual
Report on Form 10-K for the year ended January 31, 2004.
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 foreseeable future.
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 October 30, 2004, 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
Under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and the
Chief Financial Officer, the Company carried out an evaluation of the
effectiveness of the design and operation of the disclosure controls
and procedures, as defined in Rules 13a-15e and 15d-15e of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based
upon that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective, as of the end of the period covered by this
Report, in ensuring that material information relating to the Company
required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commission's rule and forms, including ensuring that such
material information is accumulated and communicated to the Company's
Management, including the Company's Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
There have been no changes in the Company's internal controls
over financial reporting that occurred during the period covered by
this report that have materially affected, or are reasonably likely to
affect, the Company's internal controls over financial reporting.
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
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
10.1 Employment Agreement of Paul Gallagher
10.2 Asset Purchase Agreement dated October 22, 2004, among
the Company, Hometown Threads, Embroidery Acquisition
LLC and PCA, LLC.
10.3 Supply Agreement dated October 22, 2004, among the
Company, Hometown Threads and Embroidery Acquisition, LLC.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
31.2 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 Report on Form 8-K with the Commission on
October 28, 2004 regarding the sale of its Hometown Threads, LLC
subsidiary.
The Registrant filed a Report on form 8-K with the Commission on
December 1, 2004 regarding the satisfaction and compliance with the
minimum bid requirement of the Nasdaq Stock Market.
The Registrant filed a Report on form 8-K with the Commission on
December 7, 2004 regarding the retirement of Henry Arnberg and
appointment of Paul E. Gallagher as Chief Executive Officer.
- --------------------------------------------------------------------------------
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/Paul E. Gallagher
- ------------------------
Paul E. Gallagher, President,
Chief Executive Officer and Chief Operating Officer
By: /s/Beverly Eichel
- ---------------------
Beverly Eichel, Vice President, Finance
and Chief Financial Officer
Dated: December 14, 2004