UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 30, 2005
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 September 1, 2005.
Class of Common Equity Number of Shares
Class A Common Stock, 7,912,010
par value $.01
Class B Common Stock, 550,018
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 - July 30, 2005
and January 29, 2005 3-4
Condensed Consolidated Statements of Operations for
the Three and Six Months Ended July 30, 2005 and July 31, 2004 5
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended July 30, 2005 and July 31, 2004 6
Notes to Condensed Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13-14
Item 4. Controls and Procedures 14
Part II. Other Information
Item 1. Legal Proceedings 14
Item 2. Unregistered sales of Equity securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits 15
Signatures 16
Certifications 17-20
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
July 30, 2005 January 29, 2005
------------- ----------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,320 $ 6,398
Restricted cash (Note 6) 4,900 5,650
Accounts receivable, net of an allowance
for possible losses of $572,000
and 553,000 respectively 4,802 4,914
Inventories, net (Note 3) 8,083 5,776
Other current assets 384 393
Assets of discontinued operations (Note 5) 610 831
------ ------
Total current assets 22,099 23,962
------ ------
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 1,737 1,949
OTHER ASSETS (Note 9) 1,521 715
------ ------
TOTAL ASSETS $25,357 $26,626
======= =======
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATE)
July 30, 2005 January 29, 2005
------------- ----------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued $6,914 $8,346
expenses(Notes 4)
Capitalized lease obligations
- - short term 161 148
Deferred gain on sale of building
- - short term 120 119
Customers deposits and other 334 585
Liabilities of discontinued
operations (Note 5) 1,440 1,495
- ------ ------
Total current liabilities 8,969 10,693
------ ------
Capitalized lease obligations, less
current portion 1,185 1,270
Deferred gain on sale of building 549 608
------ -------
Total liabilities 10,703 12,571
------ -------
COMMITMENTS AND CONTINGENCIES (Note 6)
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: 9,075,000 and 9,002,000
shares, respectively 90 90
Class B common stock, $.01 par value;
authorized: 3,000,000 shares,
outstanding: 550,000 and 600,000
shares, respectively 6 6
Additional paid-in capital 41,471 41,465
Accumulated Deficit (24,896) (25,489)
------- -------
16,671 16,072
Less: Treasury Class A Common
stock at cost, 1,164,000 shares 2,017 2,017
------- -------
Total stockholders' equity 14,654 14,055
------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $25,357 $26,626
======= =======
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
Three Six
Months Ended Months Ended
July 30, July 31, July 30, July 31,
-------- -------- -------- --------
2005 2004 2005 2004
---- ---- ---- ----
NET SALES $ 12,381 $ 10,617 $ 25,890 $ 20,004
COST OF SALES 8,381 7,050 17,679 13,356
-------- -------- -------- --------
GROSS PROFIT 4,000 3,567 8,211 6,648
OPERATING EXPENSES
Selling, General & Administrative expenses 3,845 4,135 7,809 8,210
Severance Costs -- -- 147 --
-------- -------- -------- --------
Total operating expenses 3,845 4,135 7,956 8,210
-------- -------- -------- --------
OPERATING INCOME (LOSS) 155 (568) 255 (1,562)
OTHER EXPENSE (INCOME)
Interest Expense 41 38 78 76
Other Income - net (Note 8) (396) (69) (446) (90)
-------- -------- -------- --------
Total Other Income (355) (31) (368) (14)
-------- -------- -------- --------
INCOME(LOSS)FROM CONTINUTING
OPERATIONS BEFORE INCOME TAX
PROVISION AND DISCONTINUED OPERATIONS 510 (537) 623 (1,548)
INCOME TAX PROVISION 19 3 30 16
-------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING
OPERATIONS 491 (540) 593 (1,564)
LOSS FROM DISCONTINUED
OPERATIONS (NOTE 5) 0 110 0 193
-------- -------- -------- --------
NET INCOME (LOSS) $ 491 $ (650) $ 593 $ (1,757)
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE:
Basic
Earnings (loss)from
continuing operations $ 0.06 ($ 0.07) $ 0.07 ($ 0.19)
Loss from discontinued operations 0 ($ 0.01) 0 ($ 0.02)
-------- -------- -------- --------
NET INCOME (LOSS)PER SHARE $ 0.06 ($ 0.08) $ 0.07 ($ 0.21)
======== ======== ======== ========
Diluted
Earnings (loss) from
continuing operations $ 0.05 ($ 0.07) $ 0.06 ($ 0.19)
Loss from discontinued operations 0 ($ 0.01) 0 ($ 0.02)
-------- -------- -------- --------
NET INCOME (LOSS) PER SHARE $ 0.05 ($ 0.08) $ 0.06 ($ 0.21)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF
SHARES IN THE CALCULATION
OF INCOME (LOSS) PER SHARE
Basic 8,462 8,344 8,455 8,339
Diluted 9,408 8,344 9,401 8,339
======== ======== ======== ========
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
Six Months Ended
July 30, 2005 July 31, 2004
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 593 ($1,757)
Depreciation and amortization 334 390
Recognized Gain on Sale of Building (59) (60)
Provision (credit) for reserves 205 (100)
Changes in assets and liabilities:
Accounts receivable 114 2,035
Net investment in sales-type leases 80 (21)
Inventories (2,462) 607
Prepaid taxes 0 (8)
Other assets (250) (209)
Trade acceptances payable 0 (1,324)
Accounts payable and accrued expenses (1,771) 294
------- -------
Net cash used in operating activities (3,216) (153)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (34) (116)
Investment in Sheridan Square Entertainment, Inc. (500) (116)
------- -------
Net cash used in investing activities (534) 0
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (84) (71)
Restricted Cash 750 (2,650)
Exercise of stock options 6 4
Payment of dividends 0 (78)
------- -------
Net cash provided by (used in)financing activities 672 (2,795)
------- -------
Decrease in cash and cash equivalents (3,078) (3,064)
Cash and cash equivalents, beginning of period 6,398 8,963
------- -------
Cash and cash equivalents, end of period $ 3,320 $ 5,899
======= =======
Supplemental disclosure of cash flow information:
Interest paid $ 87 $ 96
Income taxes paid $ 32 $ 23
======= =======
See notes to condensed consolidated financial statements
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JULY 30, 2005 AND JULY 31, 2004
1. Organization and Basis of Presentation
The accompanying Condensed Consolidated financial statements as of and for
the three and six month periods ended July 30, 2005 and July 31, 2004 include
the accounts of Hirsch International Corp.("Hirsch"), HAPL Leasing Co., Inc.
("HAPL"), 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 six month periods ended July 30, 2005 and July 31, 2004, the
financial position at July 30, 2005 and cash flows for the six month periods
ended July 30, 2005 and July 31, 2004, 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 29, 2005 as filed with the
Securities and Exchange Commission.
The 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, 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 ended For the six months ended
-------------------------------------- -----------------------------------
July 30, 2005 July 31, 2004 July 30, 2005 July 31, 2004
(in thousands, except for per share amounts)
-----------------------------------------------------------------------------
Net income (loss), as reported $ 491 ($ 650) $ 593 ($ 1,757)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method
24 9 48 17
------- ------- ------- ---------
Pro-forma net income (loss) $ 467 ($ 659) $ 545 ($ 1,774)
======= ======= ======= =========
Income (loss) per share:
Basic - as reported $0.06 ($ 0.08) $0.07 ($0.21)
Basic - pro forma $0.06 ($ 0.08) $0.06 ($0.21)
Diluted - as reported $0.05 ($ 0.08) $0.06 ($0.21)
Diluted - pro-forma $0.05 ($ 0.08) $0.06 ($0.21)
There were 34,400 stock options granted during
the second quarter ended July 30, 2005.
The following weighted average assumptions were used in the Black-Scholes
option-pricing model for grants in Fiscal 2006: dividend yield of 0.0%,
volatility of 74%, risk-free interest rate of 4.13% for grants on 4/1/2005,
dividend yield of 0.0%, volatility of 70.7%, risk free interest rate of 3.84%
for grants on 6/10/05, Fiscal 2005: dividend yield of 0.0%, volatility of 67%
and risk free interest rate of 3.72% for grants on 12/1/2004, 77% volatility and
3.4% risk free interest rate for grants on 9/8/2004 and 77% volatility and 3.35%
risk free rate for grants on 9/17/2004; and an expected life of 5 years.
3. Inventories
July 30, 2005 January 29, 2005
------------- ----------------
New Machines $5,597 $3,824
Used Machines 277 566
Parts 3,977 2,979
9,851 7,369
----- -----
Less: Reserve for slow
moving inventory (1,768) (1,593)
----- -----
Inventories, net $8,083 $5,776
====== ======
4. Warranty Reserve
The warranty reserve included in Accounts Payable and Accrued Expenses was
$593,000 for the second quarter ended July 30, 2005. Additional warranty expense
of $50,000 was recorded during the six months ended July 30, 2005.
5. 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 SFAS 144. 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 wind down or sell the assets by January 2006.
Assets and liabilities of discontinued operations of HAPL Leasing are as follows
(in thousands):
July 30, January 29,
2005 2005
------------- ----------------
Assets:
Accounts receivable................ $ 0 $ 92
MLPR and residuals................. 552 583
Prepaid taxes and other assets..... 9 8
----- -----
Total Assets....................... $ 561 $ 683
Liabilities:
Accounts payable and accrued expenses $ 966 $1,009
Income taxes payable................ 87 87
----- -----
Total Liabilities................... $1,053 $1,096
====== ======
Summary operating results of the discontinued operations of HAPL Leasing (in
thousands) are as follows:
For the three months ended For the six months ended
July 30, July 31, July 30, July 31,
2005 2004 2005 2004
---- ---- ---- ----
Revenue 4 15 8 82
Gross profit 4 15 8 60
Income from
discontinued Operations 0 0 0 0
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 its Hometown subsidiary 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 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. The Company expects to resolve the
contingencies in the early part of fiscal 2006, however, the Company is unable
to predict the outcome at this time.
Assets and liabilities of the discontinued operations of Hometown Threads, LLC
are as follows (in thousands):
July 30, 2005 January 29, 2005
------------- ----------------
Assets:
Accounts receivable................ $ 49 $148
----- -----
Total Assets....................... $ 49 $148
===== =====
Liabilities:
Accounts payable and accrued expenses $ 387 $399
----- ----
Total Liabilities................... $ 387 $ 399
===== =====
Summary operating results of the discontinued operations of Hometown Threads,
LLC (in thousands) are as follows:
For the For the
three months ended six months ended
July 30, July 31, July 30, July 31,
2005 2004 2005 2004
---- ---- ---- ----
Revenue $ - $724 $ - $1,331
Gross profit - 505 - 854
Loss from discontinued
Operations. $ - $(110) $ - $(193)
6. Contingencies
As of July 30, 2005, the Company had $4.9 million in restricted cash which
is used to collateralize outstanding standby letters of credit opened against
the credit line at Congress Financial.
7. Earnings per Share
A reconciliation of shares used in calculating basic and diluted earnings
per common share for the three and six months ended July 30, 2005 follows:
Three Months Six Months
------------ ----------
Basic 8,462,249 8,455,355
Effect of assumed conversion
of employee stock options 946,069 946,069
--------- ---------
Diluted 9,408,318 9,401,424
========= =========
Options to purchase approximately 95,000 shares of common stock at prices
ranging from $1.12 to $2.72 that were outstanding during the six and three
months ended July 30, 2005 were excluded from the computation of diluted
earnings per share because the options' exercise prices exceeded the average
fair market value of the Company's common stock.
8. Currency Translation
The Company records the purchase of embroidery machinery and related
liabilities in yen. The Company marks its yen-denominated payables to market,
recognizing any resulting gains or losses in its statement of operations under
other income. In addition, any variance between the value of the yen on the date
of receipt and the value of the yen on date of payment is recorded as a realized
currency gain and is also included in our statement of operations under other
income. Foreign currency gains for the six months ended July 30, 2005 were
$387,000 and for the six months ended July 31, 2004 were $30,000.
9. Investment in Sheridan Square Entertainment, Inc.
On July 20, 2005, we entered into a definitive merger agreement with
Sheridan Square Entertainment, Inc., a privately held producer and distributor
of recorded music, and SSE Acquisition Corp, our wholly-owned subsidiary. The
transaction has been approved by the board of directors of both companies and by
the shareholders of Sheridan Square. The transaction is subject to customary
conditions of closing and a vote of the shareholders of Hirsch and is expected
to be completed in the third quarter of this year.
Under the terms of the agreement, the holders of Sheridan's capital stock
will receive approximately 15 million shares of Hirsch stock in exchange for
their shares of Sheridan common stock or common stock equivalents. Upon the
closing of the merger, the present shareholders and holders of vested, "in the
money" options and warrants of Hirsch will own approximately 38% of the combined
entity with the current shareholders and holders of vested, "in the money"
options and warrants of Sheridan Square owning the remaining 62%. Concurrent
with the execution of the Merger Agreement, Hirsch and Sheridan also entered
into a transaction in which Hirsch may purchase Series B Convertible Preferred
Stock of Sheridan for an aggregate purchase price of up to $1,000,000.
After the closing of the merger, the key officers of the merged companies
will be Sheridan's Co-CEO, Joe Bianco, as CEO; Hirsch's President and CEO, Paul
Gallagher, as President and COO; and Hirsch's Beverly Eichel will remain
Executive VP and CFO. Henry Arnberg will continue as Chairman of the Board and
Sheridan's Co-CEO Anil Narang will become Vice-Chairman. Post merger, Hirsch and
Sheridan will operate as independent divisions maintaining their existing
individual executive and management structures.
The combined Company's board will increase to nine directors and will
include Sheridan's current Chairman, Rob Michalik, Henry Arnberg, Joe Bianco and
Paul Gallagher. Five independent directors will be mutually agreed upon. As of
the date of this Report on Form 10-Q, the merger is pending.
On July 21, 2005, the Company purchased 20 shares of the Series B Preferred
Stock of Sheridan Square Entertainment, Inc. for $500,000. The Series B
Preferred Stock is senior to all other equity securities of Sheridan in terms of
dividends, distributions and liquidation preference. Dividends, whether or not
declared, accrue at the rate of 8% per annum of the sum of the stated value of
each share ($25,000) commencing January 1, 2006, provided that in the event a
"Disposition Transaction" (as defined in the Certificate of Designations of the
Series B Preferred Stock) has not occurred by April 1, 2006, the dividend rate
shall increase to 14% per annum and provided further that if a Disposition
Transaction does not occur by July 1, 2006, the dividend rate shall increase to
18% per annum. Upon consummation of the merger, the Series B Preferred Stock
will be cancelled and of no further force and effect. The investment in the
Series B Preferred stock is included in other assets as of July 30, 2005.
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 29, 2005 of the
applicable calendar year.
Results of Operations for the three and six months ended July 30, 2005 as
compared to the three and six months ended July 31, 2004.
Net sales. Net sales for the three months ended July 30, 2005 were $12.4
million, an increase of $1.8 million, or 17.0%, compared to $10.6 million for
the three months ended July 31, 2004, and $25.9 million for the six months ended
July 30, 2005, an increase of $5.9 million or 29.5%, compared to $20.0 million
for the six months ended July 31, 2004. The increase in sales for the three and
six months ended July 30, 2005 is attributable to increased sales of small (2
through 8 head) and mutli-head (12 and larger) machines versus sales of
single-head machines. The market for small and multi-head machines has
demonstrated some growth during the first six months of fiscal 2006.
Cost of sales. For the three months ended July 30, 2005, cost of sales
increased $1.3 million, or 18.3%, to $8.4 million from $7.1 million for the
three months ended July 31, 2004, and for the six months ended July 30, 2005
increased $4.3 million, or 32.1%, to $17.7 million from $13.4 million for the
six months ended July 31, 2004. The Company's gross margin decreased to 31.7%
for the six months ended July 30, 2005 as compared to 33.2% for the six months
ended July 31, 2004 and decreased to 32.3% for the three months ended July 30,
2005 compared to 33.6% for the three months ended July 31, 2004. Gross margin as
a percentage of sales decreased during the three and six months ended July 30,
2005 primarily as the result of continued pricing pressures in what remains an
extremely competitive market and changes in product mix to lower margin
multi-head machines. The recent adverse fluctuation in the yen, which is the
currency the Company's embroidery machines are priced in, has affected and is
likely to continue to affect and exert pressure on the Company's machine sales
pricing competitiveness.
Operating Expenses. For the three months ended July 30, 2005, operating
expenses decreased by $0.3 million to $3.8 million, from $4.1 million for the
three months ended July 31, 2004 and for the six months ended July 30, 2005,
decreased by $0.2 million to $8.0 million from $8.2 million for the six months
ended July 31, 2004. The decrease in SG & A expenses for the three and six
months ended July 30, 2005 is directly related to the Company's continuing
efforts to control operating costs. Included in operating expenses for the six
months ended July 31, 2005 was $147,000 in severance costs associated with the
Company's continuing reorganization. Operating expense for the three months
ended July 31, 2004 included a reversal of the provision for doubtful accounts
of $100,000.
Interest Expense (Income). For the three months ended July 30, 2005,
interest expense was $41,000 as compared to interest expense of $38,000 for the
three months ended July 31, 2004. For the six months ended July 30, 2005
interest expense was $78,000 as compared to interest expense of $76,000 for the
six months ended July 31, 2004. Interest expense is primarily associated with
the sale/leaseback transaction of the corporate headquarters.
Other Income - net. For the three months ended July 30, 2005, other income
increased $465,000, to $396,000 from $69,000 in other income for the three
months ended July 31, 2004. For the six months ended July 30, 2005 other income
was $446,000 as compared to other income of $90,000 for the six months ended
July 31, 2004. The majority of the increase in other income is related to
favorable currency translations during the first six months of fiscal 2006.
Income tax provision. The income tax expense recorded for the three and six
months ended July 30, 2005 and July 31, 2004 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.
Income (Loss) from Continuing Operations. Income from Continuing Operations
for the three months ended July 30, 2005 was $0.5 million, an increase of $1.0
million from a $0.5 million loss for the three months ended July 31, 2004. For
the six months ended July 30, 2005 income from Continuing Operations was $0.6
million, an increase of $2.2 million from a $1.6 million loss for the six months
ended July 31, 2004. The increase in sales volume and the maintenance of
operating costs directly contributed to the net income for the first six months
of fiscal 2006.
Loss from Discontinued Operations. 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 its Hometown subsidiary to
Embroidery Acquisition LLC, a wholly owned subsidiary of PCA, LLC. As a result,
Hometown Threads, LLC was accounted for as discontinued operations in the
consolidated financial statements for all periods presented. There was no
activity for the discontinued operations of Hometown Threads for the three and
six months ended July 30, 2005. The loss from the discontinued operations of
Hometown Threads for the three months ended July 31, 2004 was $110,000 and was
$193,000 for the six months ended of July 31, 2004.
Net Income (Loss). Net income for the three months ended July 30, 2005 was
$0.5 million, an increase of $1.2 million from a net loss of $0.7 million for
the three months ended July 31, 2004. Net income for the six months ended July
30, 2005 was $0.6 million, an increase of $2.4 million from the net loss of $1.8
million for the six months ended July 31, 2004.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $13.1 million at July 30, 2005,
decreasing $0.2 million, or 0.2%, from $13.3 million at January 29, 2005.
During the six months ended July 30, 2005, the Company's cash and cash
equivalents decreased by $3.1 million to $3.3 million. Net cash of $3.2 million
was used by the Company's operating activities primarily used to increase
inventory, $0.7 million was provided by financing activities primarily related
to the reduction of restricted cash during the six months and cash of $0.5
million was used for investing activities primarily related to the investment in
Sheridan's Series B Preferred stock.
The Company's strategy is to mitigate its exposure to foreign currency 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 30, 2005 the Company did not own any foreign
currency futures contracts.
Future Commitments
The following table shows the Company's contractual 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
Principal $1,347 $161 $ 679 $507 $0
Interest 512 150 311 51 0
Operating Lease obligations 1,915 580 567 417 351
Purchase Commitments 3,900 1,200 2,400 300 0
------ ------ ------ ---- ---
Total $ 7,674 $ 2,091 $ 3,957 $1,275 $ 351
======= ======= ======= ====== =====
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 July 30, 2005.
The Company has placed $4.9 million in restricted cash to support standby
letters of credit of approximately 3.8 million at July 30, 2005 and a $0.6
million standby letter of credit backing the lease on the Company's facilities
in Hauppauge.
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 29, 2005.
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 in the near
future. The Company has not completed its evaluation on the effect the merger
will have on the Company's future capital requirements at this time.
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 recent adverse fluctuation in the yen,
which is the currency the company's embroidery machines are priced in, has
affected and is likely to continue to affect the Company's machine sales pricing
competitiveness. Embroidery machinery prices have either been maintained or
risen in US dollars due to these adverse 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. 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 quarter-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
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
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On July 20, 2005, we entered into a definitive merger agreement with
Sheridan Square Entertainment, Inc., a privately held producer and distributor
of recorded music, and SSE Acquisition Corp, our wholly-owned subsidiary. The
transaction has been approved by the board of directors of both companies and by
the shareholders of Sheridan Square. The transaction is subject to customary
conditions of closing and a vote of the shareholders of Hirsch and is expected
to be completed in the third quarter of this year.
Under the terms of the agreement, the holders of Sheridan's capital stock
will receive approximately 15 million shares of Hirsch stock in exchange for
their shares of Sheridan common stock or common stock equivalents. Upon the
closing of the merger, the present shareholders and holders of vested, "in the
money" options and warrants of Hirsch will own approximately 38% of the combined
entity with the current shareholders and holders of vested, "in the money"
options and warrants of Sheridan Square owning the remaining 62%. Concurrent
with the execution of the Merger Agreement, Hirsch and Sheridan also entered
into a transaction in which Hirsch may purchase Series B Convertible Preferred
Stock of Sheridan for an aggregate purchase price of up to $1,000,000.
After the closing of the merger, the key officers of the merged companies
will be Sheridan's Co-CEO, Joe Bianco, as CEO; Hirsch's President and CEO, Paul
Gallagher, as President and COO; and Hirsch's Beverly Eichel will remain
Executive VP and CFO. Henry Arnberg will continue as Chairman of the Board and
Sheridan's Co-CEO Anil Narang will become Vice-Chairman. Post merger, Hirsch and
Sheridan will operate as independent divisions maintaining their existing
individual executive and management structures.
The combined Company's board will increase to nine directors and will
include Sheridan's current Chairman, Rob Michalik, Henry Arnberg, Joe Bianco and
Paul Gallagher. Five independent directors will be mutually agreed upon. As of
the date of this Report on Form 10-Q, the merger is pending.
Item 6. Exhibits
(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
31.1 Certification of Paul Gallagher pursuant to Rule 13a-14(a) or Rule 15d -
14(a).
31.2 Certification of Beverly Eichel pursuant to Section Rule 13a-14(a) or Rule
15d - 14(a).
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
- -------------------------------------------------------------------------------
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 Gallagher
-------------------------------------
Paul Gallagher, CEO, President
and Chief Operating Officer
By: /s/Beverly Eichel
------------------------------------
Beverly Eichel, Vice President of Finance
and Chief Financial Officer
Dated: September 9, 2005
EXHIBIT 31.1
Certification Pursuant to Rule 13A-12(a) or 15D-14(a) of
the Securities Exchange Act of 1934, As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
I, Paul Gallagher, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hirsch International
Corp. for the three months ended July 30, 2005;
2. Based on my knowledge, this 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 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 officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: September 9, 2005
/s/Paul Gallagher
------------------------------
Paul Gallagher, CEO, President
and Chief Operating Officer
EXHIBIT 31.2
Certification Pursuant to Rule 13A-12(a) or 15D-14(a) of
the Securities Exchange Act of 1934, As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
I, Beverly Eichel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hirsch International
Corp. for the three months ended July 30, 2005;
2. Based on my knowledge, this 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 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 officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: September 9, 2005
/s/Beverly Eichel
-----------------------------------------
Beverly Eichel, Vice President of Finance,
Chief Financial Officer and Secretary
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hirsch International Corp. (the
"Company") on Form 10-Q for the quarter ended July 30, 2005, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Paul
Gallagher, CEO, President and Chief Operating Officer, hereby certify, pursuant
to 18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13 (a) or 15 (d)
of the Securities and Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/Paul Gallagher
- ----------------------------
Paul Gallagher
CEO, President and
Chief Operating Officer
September 9, 2005
This certification is made solely for the purposes of 18 U.S.C Section 1350 and
is subject to the knowledge standard contained therein, and not for any other
purpose.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hirsch International Corp. (the
"Company") on Form 10-Q for the quarter ended July 30, 2005, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Beverly
Eichel, Vice President - Finance, Chief Financial Officer and Secretary hereby
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13 (a) or 15 (d)
of the Securities and Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/Beverly Eichel
- ------------------------------
Beverly Eichel
Vice President - Finance,
Chief Financial Officer and Secretary
September 9, 2005
This certification is made solely for the purposes of 18 U.S.C Section 1350 and
is subject to the knowledge standard contained therein, and not for any other
purpose.