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 29, 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 December 5, 2005.
Class of Common Equity Number of Shares
Class A Common Stock, 7,915,695
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
October 29, 2005 and January 29, 2005 3-4
Condensed Consolidated Statements of
Operations for the Three and Nine Months
Ended October 29, 2005 and October 30, 2004 5
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended October 29, 2005 and
October 30, 2004 6
Notes to Condensed Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 14
Item 4. Controls and Procedures 15
Part II. Other Information
Item 1. Legal Proceedings 16
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 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 17
Signatures 18
Certifications 19-22
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
October 29, 2005 January 29, 2005
---------------------- ----------------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,534 $ 6,398
Restricted cash (Note 6) 510 5,650
Accounts receivable, net 4,478 4,914
Inventories, net (Note 3) 4,318 5,776
Other current assets 304 393
Assets of discontinued
operations (Note 5) 434 831
---------------------- ----------------------
Total current assets 19,578 23,962
---------------------- ----------------------
PROPERTY, PLANT AND EQUIPMENT,
net of accumulated
depreciation and amortization 1,616 1,949
OTHER ASSETS (Note 9) 2,124 715
---------------------- ----------------------
TOTAL ASSETS $23,318 $26,626
====================== ======================
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
October 29, 2005 January 29, 2005
--------------------- ---------------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses
(Note 4) $ 4,872 $ 8,346
Capitalized lease obligation - short term 169 148
Deferred gain on sale of building - short term 119 119
Customers deposits and other 349 585
Liabilities of discontinued operations (Note 5) 1,259 1,495
--------------------- ---------------------
Total current liabilities 6,768 10,693
--------------------- ---------------------
Capitalized lease obligations, less current portion 1,141 1,270
Deferred gain on sale of building 519 608
--------------------- ---------------------
Total liabilities 8,428 12,571
--------------------- ---------------------
COMMITMENTS AND CONTINGENCIES (Notes 4, 6)
STOCKHOLDERS' EQUITY (Note 7)
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: 9,079,000 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 41,472 41,465
Accumulated deficit (24,661) (25,489)
--------------------- ---------------------
16,907 16,072
Less: Treasury Class A Common stock at cost, 2,017 2,017
1,164,000 shares --------------------- ---------------------
Total stockholders' equity 14,890 14,055
--------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $23,318 $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 Months Ended Nine Months Ended
October 29, October 30, October 29, October 30,
--------------- --------------- ---------------- ---------------
2005 2004 2005 2004
NET SALES $ 12,626 $ 11,867 $38,515 $31,871
COST OF SALES 8,537 7,986 26,215 21,342
-------------- -------------- -------------- -------------
GROSS PROFIT 4,089 3,881 12,300 10,529
OPERATING EXPENSES 3,965 3,802 11,774 12,013
Selling, General & Administrative Expenses
Severance Costs - - 147 -
-------------- -------------- -------------- -------------
Total Operating Expenses 3,965 3,802 11,921 12,013
-------------- -------------- -------------- -------------
OPERATING INCOME (LOSS) 124 79 379 (1,484)
OTHER EXPENSE (INCOME)
Interest Expense (Income) 27 36 105 112
Other Expense (Income) (146) 100 (592) 10
-------------- -------------- -------------- -------------
Total Other Expense (Income) (119) 136 (487) 122
-------------- -------------- -------------- -------------
INCOME/(LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAX PROVISION AND DISCONTINUED OPERATIONS 243 (57) 866 (1,606)
INCOME TAX PROVISION 8 4 37 20
-------------- -------------- -------------- -------------
INCOME/(LOSS) FROM CONTINUING OPERATIONS 235 (61) 829 (1,626)
GAIN ON SALE OF HOMETOWN THREADS (NOTE 5) - 943 - 943
LOSS FROM DISCONTINUED OPERATIONS (NOTE 5) - (374) - (567)
-------------- -------------- -------------- -------------
NET INCOME (LOSS) $235 $508 $829 $ (1,250)
============== ============== ============== =============
EARNINGS (LOSS) PER SHARE:
BASIC
Income (Loss) from continuing operations $0.03 ($0.01) $0.10 ($0.20)
Gain on sale of Hometown Threads - $0.11 - $0.11
Loss from discontinued operations - ($0.04) - ($0.06)
-------------- -------------- -------------- -------------
NET INCOME (LOSS) PER SHARE $0.03 $0.06 $0.10 ($0.15)
============== ============== ============== =============
DILUTED
Income (Loss) from continuing operations $0.02 ($0.01) $0.09 ($0.20)
Gain on sale of Hometown Threads - $0.11 - $0.11
Loss from discontinued operations - ($0.04) - ($0.06)
-------------- -------------- -------------- -------------
NET INCOME (LOSS) PER SHARE $0.02 $0.06 $0.09 ($0.15)
============== ============== ============== =============
Weighted Average Number of Shares In the
Calculation of Income (Loss) per Share
Basic 8,464 8,349 8,458 8,342
Diluted 9,510 8,349 9,505 8,342
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)
Nine Months Ended
October 29, October 30,
--------------------- -------------------
2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 829 $ (1,250)
Depreciation and amortization 514 583
Recognized Gain on Sale of Building (89) (89)
Provision (credit) for reserves 390 (100)
Gain on Sale of Subsidiary - (943)
Changes in assets and liabilities:
Accounts receivable 436 1,497
Net investment in sales-type leases 61 (60)
Inventories 1,169 1,941
Prepaid taxes - (8)
Other assets (361) (337)
Trade acceptances payable - (1,324)
Accounts payable and accrued expenses (3,790) (1,586)
------------------ ---------------------
Net cash used in operating activities (841) (1,676)
------------------ ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (40) (121)
Investment in Sheridan Square Entertainment, Inc. (1,000) -
Proceeds from sale of subsidiary, net of expenses - 1,139
------------------- ---------------------
Net cash (used in) provided by investing activities (1,040) 1,018
------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long term debt (129) (109)
Exercise of Stock Options 6 7
Restricted Cash 5,140 (2,650)
Payment of Dividends - (78)
------------------- ---------------------
Net cash provided by (used in) financing activities 5,017 (2,830)
----------------- ---------------------
Increase (Decrease) in cash and cash equivalents 3,136 (3,488)
Cash and cash equivalents, beginning of period 6,398 8,963
------------------- ---------------------
Cash and cash equivalents, end of period $9,534 $5,475
=================== =====================
Supplemental disclosure of cash flow information:
Interest paid $105 $112
=================== =====================
Income taxes paid $ 8 $27
=================== =====================
See notes to condensed consolidated financial statements.
Hirsch International Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three and Nine Months Ended October 29, 2005 and October 30, 2004
1. Organization and Basis of Presentation
The accompanying Condensed Consolidated financial statements as of and for
the three and nine month periods ended October 29, 2005 and October 30, 2004
include the accounts of Hirsch International Corp. ("Hirsch"), HAPL Leasing Co.,
Inc. ("HAPL"), Hometown Threads, LLC through October 22, 2004 ("Hometown"), and
Hirsch Business Concepts, LLC ("HBC") (collectively, the "Company").
In the opinion of management, the accompanying unaudited Condensed
Consolidated financial statements contain all the adjustments, consisting of
normal accruals, necessary to present fairly the results of operations for each
of the three and nine month periods ended October 29, 2005 and October 30, 2004,
the financial position at October 29, 2005 and cash flows for the nine month
periods ended October 29, 2005 and October 30, 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.
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 29, October 30, October 29, October 30,
2005 2004 2005 2004
---- ---- ---- ----
(in thousands, except for per share amounts)
Net Income (loss), as reported $235 $508 $829 ($1,250)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method 24 12 72 29
------------- --------------- -------------- --------------
Pro-forma net income (loss) $211 $496 $757 ($1,279)
============= =============== ============== ==============
Earnings (loss) per share:
Basic - as reported $0.03 $0.06 $0.10 ($0.15)
Basic - pro-forma $0.02 $0.06 $0.09 ($0.15)
Diluted - as reported $0.02 $0.06 $0.09 ($0.15)
Diluted - pro-forma $0.02 $0.06 $0.08 ($0.15)
There were no stock options granted during the third quarter ended October
29, 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 3.72% 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
October 29, 2005 January 29, 2005
---------------- ----------------
New Machines $2,272 $3,824
Used Machines 317 566
Parts 3,628 2,979
---------------- ----------------
Gross Inventory 6,217 7,369
Less Reserve for slow moving inventory (1,899) (1,593)
---------------- ----------------
Inventories, net $4,318 $5,776
================ ================
4. Warranty Reserve
The warranty reserve included in Accounts Payable and Accrued Expenses was
$593,000 for the third quarter ended October 29, 2005. Additional warranty
expense of $50,000 was recorded during the nine months ended October 29, 2005.
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 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 February 2006.
Assets and Liabilities of discontinued operations from HAPL are as follows
(in thousands):
October 29, 2005 January 29, 2005
---------------- ----------------
Assets:
Accounts Receivable $0 $ 92
MLPR and residuals 424 583
Prepaid Taxes and other assets 10 8
---------------- ----------------
Total Assets $434 $683
================ ================
Liabilities:
Accounts Payable & Accruals $822 $1,009
Income Taxes Payable 87 87
---------------- ----------------
Total Liabilities $909 $1,096
================ ================
Summary operating results of the discontinued operations of HAPL (in
thousands):
For the three months ended For the nine months ended
October 29, October 30, October 29, October 30,
2005 2004 2005 2004
---- ---- ---- ----
Revenue 9 15 17 97
Gross profit 9 15 17 75
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").
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.
Assets and liabilities of the discontinued operations of Hometown Threads,
LLC are as follows (in thousands):
October 29, January 29,
2005 2005
-------------- ---------------
Assets:
Accounts receivable $0 $148
-------------- ---------------
Total Assets $0 $148
============== ===============
Liabilities:
Accounts payable and accrued expenses $350 $399
-------------- ---------------
Total Liabilities $350 $399
============== ===============
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 29, October 30, October 29, October 30,
2005 2004 2005 2004
----------------- -------------- -------------- ----------------
Revenue - $321 - $1,425
Gross profit - 18 - 646
Gain on Sale - 943 - 943
Income (Loss)from Discontinued Operations - ($374) - $(567)
6. Contingencies
As of October 29, 2005, the Company had $0.5 million in restricted cash
which is used to collateralize a $0.5 million standby letter of credit backing
the lease on the Company's facility in Hauppauge.
7. Earnings Per Share
A reconciliation of shares used in calculating basic and diluted earnings
per common share for the three and nine months ended October 29, 2005 follows:
Three Months Nine Months
------------ -----------
Basic 8,463,581 8,458,055
Effect of assumed conversion of
employee stock options 1,046,734 1,046,734
------------ -----------
Diluted 9,510,315 9,504,789
============ ============
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 nine months ended October 29, 2005 were
$492,000 and for the three months ended October 29, 2005 were $105,000. For the
nine months ended October 30, 2004, foreign currency losses amounted to $118,000
and for the three months ended October 30, 2004 foreign currency losses were
$149,000.
9. Investment in Sheridan Square Entertainment, Inc.
On July 20, 2005, we entered into a definitive merger agreement with
Sheridan Square Entertainment, Inc. ("Sheridan Square"), 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
stockholders of Hirsch and is expected to be completed in the early part of
fiscal 2007.
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 stockholders and holders of vested, "in the
money" options and warrants of Hirsch will beneficially own approximately 38% of
the combined entity with the current shareholders with the holders of vested,
"in the money" options and warrants of Sheridan Square beneficially owning the
remaining 62%. Concurrent with the execution of the Merger Agreement, Hirsch and
Sheridan also entered into a transaction in which Hirsch purchased Series B
Convertible Preferred Stock of Sheridan for an aggregate purchase price of
$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 our CEO; Hirsch's President and CEO,
Paul Gallagher, will become our President and COO; and Beverly Eichel will
remain our Executive VP and CFO. Henry Arnberg will continue as Chairman of the
Board and Sheridan's Co-CEO Anil Narang will become our Vice-Chairman.
Post-merger, Hirsch's embroidery business and Sheridan's recorded music business
will operate as independent divisions maintaining their existing individual
executive and management structures.
Post-merger, our board will increase to nine directors and will include
Sheridan's current Chairman, Robert 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 for $500,000. On September 19, 2005, the Company
purchased an additional 20 shares of the Series B Preferred Stock 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 October 29, 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 28 of the
applicable calendar year.
Results of Operations for the three and nine months ended October 29, 2005
as compared to the three and nine months ended October 30, 2004.
Net sales. Net sales for the three months ended October 29, 2005 and the
three months ended October 30, 2004 were $12.6 million and $11.9 million,
respectively, and $38.5 million for the nine months ended October 29, 2005, an
increase of $6.6 million or 20.7%, compared to $31.9 million for the nine months
ended October 30, 2004. The increase is primarily attributable to increases in
small (2 through 8 head) and large machine (12 heads and larger) sales compared
to the prior year. The market for small and multi-head machines has demonstrated
some growth during the first nine months of fiscal 2006 versus the first nine
months of the prior year.
Cost of sales. For the three months ended October 29, 2005, cost of sales
increased $0.6 million, or 6.9%, to $8.5 million from $7.9 million for the three
months ended October 30, 2004, and for the nine months ended October 29, 2005
increased $4.9 million, or 23.0%, to $26.2 million from $21.3 million for the
nine months ended October 30, 2004. The increase is directly related to the
increase in sales volume over the same period. The Company's gross margin
decreased to 31.9% for the nine months ended October 29, 2005 as compared to 33%
for the nine months ended October 30, 2004 and decreased from 32.7% for the
three months ended October 30, 2004 to 32.4% for the three months ended October
29, 2005. The recent 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 October 29, 2005, operating
expenses increased by $0.2 million to $4.0 million, from $3.8 million for the
three months ended October 30, 2004 and for the nine months ended October 29,
2005, decreased by $0.1 million to $11.9 million from $12.0 million for the nine
months ended October 30, 2004. The decrease in operating expenses for the nine
months ended October 29, 2005 is directly related to the Company's continuing
efforts to control operating costs in relation to the sales decline and the
increase in operating expenses for the three months ended October 29, 2005 are
primarily attributable to the increase in sales. Operating expenses for the nine
months ended October 30, 2004 included a reversal of the provision for doubtful
account for $100,000, and for the nine months ended October 29, 2005 included
$147,000 in severance costs.
Interest Expense (Income). For the three months ended October 29, 2005,
interest expense was $27,000 as compared to interest expense of $36,000 for the
three months ended October 30, 2004. For the nine months ended October 29, 2005
interest expense was $105,000 as compared to interest income of $112,000 for the
nine months ended October 30, 2004. 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 30, 2004.
Other Income (Expense). For the three months ended October 29, 2005, other
income increased $246,000 to $146,000 from other expense of $100,000 for the
three months ended October 30, 2004. For the nine months ended October 29, 2005
other income was $592,000 as compared to other expense of $10,000 for the nine
months ended October 30, 2004. The change in other expense/other income is due
to currency translation fluctuations for yen.
Income Tax Provision. The income tax expense recorded for the three and
nine months ended October 29, 2005 and October 30, 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 October 29, 2005 was $0.2 million, an increase of
$0.3 million from a loss of $0.1 for the three months ended October 30, 2004.
For the nine months ended October 29, 2005 the income from Continuing Operations
was $0.8 million, an increase of $2.4 million from a loss of $1.6 million for
the nine months ended October 30, 2004.
Income (Loss) from Discontinued Operations. During the quarter ended April
30, 2004, the Company determined that its Hometown Threads 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 Threads to Embroidery
Acquisition LLC ("Buyer"), a wholly owned subsidiary of PCA, LLC ("PCA"). As a
result, Hometown Threads was accounted for as discontinued operations in the
consolidated financial statements for all periods presented. As a result of the
sale of Hometown Threads, the Company recognized a gain of approximately
$943,000, for 2004.
Net Income (Loss). The net income for the three months ended October 29,
2005 was $0.2 million, a decrease of $0.3 million from a net income of $0.5
million for the three months ended October 30, 2004. Net income for the nine
months ended October 29, 2005 was $0.8 million, an increase of $2.1 million from
the net loss of $1.3 million for the nine months ended October 30, 2004.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $12.8 at October 29, 2005, decreasing
$0.5 million, or 3.8% from $13.3 million at January 29, 2005, respectively.
During the nine months ended October 29, 2005, the Company's cash and cash
equivalents increased by $3.1 million to $9.5 million primarily due to the
decrease in accounts payable. Net cash of $0.8 million was used by the Company's
operating activities and $5.0 million was provided by financing activities which
was primarily the unrestricting the cash collateral used to secure our letters
of credit. Investing activities of $1.0 million was the result of the Company's
investment in Sheridan's Series B preferred stock.
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 29, 2005 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 $ 1,310 $ 169 $ 707 $ 434 $ 0
Operating Lease obligations 1,621 582 529 431 79
Purchase Commitments 3,600 1,200 2,400 0 0
----------- ----------- ---------- -------- ------------
Total $ 6,531 $ 1,951 $ 3,636 $ 865 $ 79
=========== =========== ========== ======== ============
Revolving Credit Facility and Borrowings
The Company has a Loan and Security Agreement ("the Congress Agreement")
with Congress Financial Corporation ("Congress") for three years initially
expiring on November 26, 2005 (subsequently extended until February 28, 2006).
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 29, 2005. The Company
has placed $0.5 million in restricted cash to support a $0.5 million standby
letter of credit backing the lease on the Company's facilities in Hauppauge.
As of October 29, 2005 and October 30, 2004, the Company did not have any
borrowings under the Revolving Credit Facility.
On October 21, 2005, the Company signed Amendment No. 5 to the Loan and
Security Agreement. This amendment provides for, among other things, an
extension of the maturity date of our existing credit agreement from November
26, 2005 until and including February 28, 2006.
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.
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 are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention of overriding of controls and
procedures. Accordingly, each effective controls and procedures can only provide
a reasonable assurance of achieving their control objectives.
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
None.
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 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 form 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: ------------------------------------
Paul E. Gallagher, President, and
Chief Executive Officer
By:-------------------------------------
Beverly Eichel, Executive Vice President-Finance,
Secretary and Chief Financial Officer
Dated: December 13, 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 E. Gallagher, Chief Executive Officer of Hirsch International Corp.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hirsch International
Corp. for the three months ended October 29, 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: December 13, 2005
By: /s/ Paul E. Gallagher
---------------------------------
Paul E. Gallagher, President, and
Chief Executive 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, Chief Financial Officer of Hirsch International Corp.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hirsch International
Corp. for the three months ended October 29, 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: December 13, 2005
By: /s/ Beverly Eichel
--------------------------------
Beverly Eichel, Executive Vice
President-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 October 29, 2005, as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Paul E. Gallagher, President, and Chief Executive 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.
By: /s/ Paul E. Gallagher
------------------------
Paul Gallagher
President and Chief Executive Officer
December 13, 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 October 29, 2005, as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Beverly Eichel, Executive 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.
By: /s/ Beverly Eichel
----------------------------------------
Beverly Eichel
Executive Vice President - Finance,
Chief Financial Officer and Secretary
December 13, 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.