SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 28, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file number 0-23434
HIRSCH INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2230715
- --------------------------------------- ------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 Wireless Boulevard, Hauppauge, NY 11788
- ------------------------------------------------ ------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 436-7100
Securities registered pursuant to Section 12(b) of the Act: NONE
Title of each class Name of each exchange on which registered
------------------------------- -----------------------------------------
(None) (None)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par value
------------------------
(CLASS A)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filers. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates* computed by reference to the closing price on July 29, 2005 (the
last business day of the registrant's most recently completed second fiscal
quarter), was approximately $7,919,000.
The number of shares outstanding of each of the registrant's classes of common
stock, as of April 5, 2006 were:
Class of Common Equity Number of Shares
---------------------- ----------------
Class A Common Stock 7,961,601
Par Value $.01
Class B Common Stock 525,018
Par Value $.01
*For purpose of this report, the number of shares held by non-affiliates was
determined by aggregating the number of shares held by Officers and Directors of
Registrant, and subtracting those shares from the total number of shares
outstanding.
Hirsch International Corp.
Form 10-K
For the Fiscal Year ended January 28, 2006
Table of Contents
Part I Page
Item 1. Business 4-9
Item 1A. Risk Factors 9-11
Item 1B. Unresolved Staff Comments 11
Item 2. Properties 11-12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 12-13
Item 6. Selected Financial Data 14-15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-22
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 22-23
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements on Accounting
And Financial Disclosure 23
Item 9A. Controls and Procedures 23
Item 9B. Other Information 23
Part III
Item 10. Directors and Executive Officers of the Registrant 24-26
Item 11. Executive Compensation 27-34
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder
Matters 34-35
Item 13. Certain Relationships and Related Transactions 35-36
Item 14. Principal Accountant Fees and Services 36-37
Part IV
Item 15. Exhibits, Financial Statement Schedules 37
Exhibit Index 37-39
Signatures and Certifications 40
PART I
ITEM 1. BUSINESS
General
Hirsch International Corp. ("Hirsch" or the "Company"), a Delaware
Corporation, was founded in 1970 and has become a leading single source provider
of electronic computer-controlled embroidery machinery and related value-added
products and services. Through its distribution agreements with Tajima
Industries, Ltd. ("Tajima"), the Company markets itself under the brand "Tajima
USA Sales and Support by Hirsch International Corp." and offers a complete line
of technologically advanced single- and multi-head embroidery machines,
proprietary application software, and a diverse line of embroidery parts,
supplies, accessories and embroidery products. In addition, Hirsch provides a
comprehensive service program, and user training and support. The Company
believes its wide-range of product offerings together with its related
value-added products and services place it in a competitively advantageous
position within its marketplace.
The Company's customer base includes large operators who run numerous
machines (which accounts for a smaller percentage of the Company's business than
in years past) as well as individuals who customize products on a single
machine. Principal customer groups include: (i) contract embroiderers, who serve
manufacturers that outsource their embroidery requirements; (ii) manufacturers,
who use embroidery to embellish their apparel, accessories, towels, linens and
other products with decorative appeal; and (iii) embroidery entrepreneurs, who
produce customized products for individuals, sports leagues, school systems,
fraternal organizations, promotional advertisers and other groups.
Hirsch has certain exclusive United States rights to sell new embroidery
machines manufactured by Tajima and certain non-exclusive rights to distribute
to US based customers who expand their operating facilities into the Caribbean
region. Tajima, located in Nagoya, Japan, is one of the world's leading
manufacturers of embroidery machines, and is regarded as a technological
innovator and producer of high quality, reliable and durable embroidery
equipment.
The Company enjoys a good relationship with Tajima, having spanned 30
years. Hirsch is one of Tajima's largest distributors in the world and
collaborates with Tajima in the development of new embroidery equipment and
enhancements to existing equipment. Until early 1997, all Tajima equipment sold
in the US was assembled in Japan. At that time, in cooperation with Tajima,
Hirsch formed a new subsidiary, Tajima USA, Inc ("TUI"), to assemble two, four,
six and eight-head Tajima machines in the United States. In December 1997,
Hirsch sold a forty-five (45%) percent interest in TUI to Tokai Industrial
Sewing Machine Company, Ltd. ("Tokai"), Tajima's parent company's manufacturing
arm. As of January 31, 2004, the Company sold its remaining interest in TUI to
Tajima Industries, Ltd. The sale has been reflected in the financial statements
as a discontinued operation for all periods presented. (See Note 7 to the
Consolidated Financial Statements).
In addition to offering a complete line of technologically-advanced
embroidery machines and customer training, support and service, Hirsch provides
an array of value-added products to its customers. The Company is now a
distributor in the United States of software developed by its former software
subsidiary, Pulse Microsystems Ltd. ("Pulse"). Pulse develops and supplies
proprietary application software programs which enhances and simplifies the
embroidery process, as well as enables the customization of designs and
reduction of production costs.
Until the fourth quarter of fiscal 2002 the Company's leasing subsidiary,
HAPL Leasing Co., Inc. ("HAPL Leasing"), had provided a wide range of financing
options to customers wishing to finance their purchases of embroidery equipment.
In the fourth quarter of fiscal 2002, the Company determined that its HAPL
Leasing subsidiary was not strategic to its business objectives and discontinued
its operations (See Note 7 to the Consolidated Financial Statements). The
Company has continued to assist its customers in obtaining financing through
independent leasing and financing companies, as an attractive alternative for
purchasers looking to begin or expand operations. Accordingly, the Company has
reported it HAPL Leasing as discontinued operations in accordance with APB 30.
The consolidated financial statements have been reclassified to segregate the
assets and liabilities and operating results of these discontinued operations
for all periods presented. In the fourth quarter of fiscal 2006, the Company
completed the wind down of the remaining assets of HAPL Leasing's portfolio.
Hirsch also sells a broad range of embroidery supplies, machine parts,
accessories and proprietary embroidery products. The Company's equipment and
value-added products are marketed directly by an employee sales force, whose
efforts are augmented by trade journal advertising, informational "open house"
seminars, an e-commerce presence and trade shows. The Company's long-term goal
is to leverage its reputation, knowledge of the marketplace, Tajima distribution
rights, industry expertise and technological innovation to enable it to increase
the overall size of the embroidery equipment market and its market share.
The Embroidery Industry
The embroidery industry today uses electronic computer-controlled machinery
that, on a world-wide basis, benefits from the demand for licensed products
distributed by apparel and other manufacturers. Licensed names, logos and
designs provided by, among other sources, professional and collegiate sports
teams and the entertainment industry appear on caps, shirts, outerwear, luggage
and other softgoods for sale at affordable prices. In addition, the intricacy of
the designs capable of being embroidered have attracted commercial appeal for
special event promotional marketing. Embroidery equipment may contain single or
multiple sewing heads, each sewing head consisting of one to a group of needles
that are fed by spools of thread attached to the equipment. The design and
production capabilities of the sewing heads are enhanced through the application
and integration of computers and specialized software.
During fiscal 2005, Tajima introduced MicroSmart(TM) technology and
launched the all-new M series family of computer-controlled embroidery
equipment. MicroSmart(TM) - a Tajima exclusive - is a groundbreaking proprietary
technology that acts as the "brains" of the machine. MicroSmart(TM) Technology
optimizes microchip integration into the design and operation of the machine and
simultaneously executes each task command in the stitch production process -
thereby producing the world's smartest and easiest machine to operate.
MicroSmart(TM) Technology integrates certain mechanical innovations into the
production process creating the most powerful capabilities available anywhere.
Frame drive is MicroSmart(TM) controlled yielding a more precise stitch length
and higher quality embroidery.
Business Strategy
The Company's objective is to establish and maintain long-term
relationships with its customers by providing them with a single source solution
for their embroidery equipment, software and related services. To achieve this
goal, the Company has developed a comprehensive approach under which it (i)
sells a broad range of Tajima embroidery machines, (ii) distributes Pulse's
proprietary application software programs for embroidery machines, (iii) sells a
broad range of embroidery supplies, accessories and products, (iv) sells used
embroidery machinery, and (v) provides comprehensive customer training, support
and service for these embroidery machines. The Company believes that this
comprehensive approach positions it to become its customers' preferred vendor
for their embroidery equipment and related services. To complement its
comprehensive approach effectively and efficiently, the Company's business
strategy includes the following:
Embroidery Machines. The Company believes that offering Tajima embroidery
equipment provides it with a competitive advantage because Tajima produces
technologically advanced embroidery machines that are of high quality, reliable
and durable and possess an excellent reputation in the market. The Company
markets and distributes over 80 models of Tajima embroidery machines, ranging in
size from 1 head per machine, suitable for sampling and small production runs,
to 30 heads per machine, suitable for high production runs for embroidered
patches and small piece goods which become parts of garments and other soft
goods. Embroidery equipment may contain single or multiple sewing heads. The
selling prices of these machines range from approximately $10,000 (for a single
head machine) to $150,000 (for a 30 head machine). Each sewing head consists of
a group of needles that are fed by spools of thread attached to the equipment.
The needles operate in conjunction with each other to embroider the thread into
the cloth or other surface in such configuration as to produce the intended
design. Thread flowing to each needle can be of the same or varying colors. Each
head creates a design and heads operating at the same time create the same size
and shape designs, although designs created at the same time can differ in
color. Thus, a 30-head machine with all heads operating simultaneously creates
an identical design on thirty surfaces. The design and production capabilities
are enhanced through the integration of computers and specialized software
applications.
Former Assembly Operations. The Company's former TUI subsidiary maintains a
facility located in Rancho Dominguez, California. Assembly of Tajima machines of
up to eight heads are completed at this location, using both Tajima supplied
sub-assembly kits and locally supplied components. Shorter lead times required
for the Company's orders coupled with Tajima's production flexibility enables
the Company to be responsive to changing needs of the market.
Pulse Software. Pulse, a former subsidiary of the Company, offers a wide
range of proprietary application software products to enhance and simplify the
embroidery process. Pulse's computer-aided design software packages target the
different functions performed by embroiderers, and are contained in an
integrated product line. A majority of Pulse's proprietary application software
products are designed to operate in the Microsoft(R), Windows(R) 98 and
Windows(R) XP environments that the Company believes will enhance creativity,
ease of use and user flexibility. All Tajima machines, as well as other
manufacturers' embroidery machines, can be networked through Pulse software. It
is the Company's established practice to aggressively market this software with
embroidery equipment and as an upgrade to its installed base of over 21,000
embroidery machines. The Company believes that these products have broad appeal
to purchasers of single-head and multi-head embroidery machines and present
opportunities for the Company to increase sales of embroidery equipment and
software as the Company continues to emphasize marketing activities.
Embroidery Supplies, Accessories, Machine Parts and Products. The Company's
parts, supplies and accessories division offers a broad range of embroidery
supplies, accessories and proprietary products, which is an integral part of the
Company's single source strategy. Moreover, the expansion of the Company's
marketing efforts is directed toward trade publications, advertising as well as
both industry and trade show participation. During fiscal 2005, the Company
launched an on-line embroidery store allowing customers to order parts and
supplies 24 hours a day, 7 days a week. The Company offers a full line of
consumable supplies, parts and materials utilized in the embroidery process and
continues to market special purpose embroidery replacement parts and products
which act to simplify the embroidery process.
Used Embroidery Machinery. The Company, on a case by case basis, accepts
used embroidery machines from customers on a trade-in basis as a condition to
the sale of a new machine. The Company's ability to accept used machines is an
important sales tool and necessary element in the Company's sales strategy. On
occasion, the Company will also purchase used machines from customers and
third-party leasing companies. The Company believes that the market for used
embroidery machines represents an established share of the machine market.
Customer Support. The Company provides comprehensive customer training,
support and service for the embroidery machines and software that it sells. The
Company's service department includes field service technicians throughout the
US who are directed by two centrally located regional technicians. After the
Company delivers an embroidery machine to a customer, the Company's trained
personnel may assist in the installation, setup and operation of the machine.
The Company employs or contracts with a staff of technical service
representatives who provide assistance to its customers by telephone. While many
customer problems or inquiries can be handled by telephone, where necessary the
Company dispatches one of its field service technicians to the customer.
Pulse provides telephone-based software support for the Pulse software
distributed by the Company. In addition, the Company provides introductory and
advanced training programs to assist customers in the use, operation and
maintenance of the embroidery machines and software it sells.
Discontinued Operations
In the fourth quarter of fiscal 2002, the Company determined that its HAPL
Leasing subsidiary was not strategic to its ongoing objectives and discontinued
HAPL's Leasing's operations. Accordingly, the Company has reported HAPL Leasing
as discontinued operations. The consolidated financial statements have
segregated the assets, liabilities and operating results of these discontinued
operations for all periods presented. In the fourth quarter of fiscal 2006, the
Company completed the wind down of the remaining net assets of the lease
portfolio. In conjunction with the termination of the portfolio, the Company
reversed as part of discontinued operations, $270,000 of reserves previously
recorded in fiscal 2002.
Effective October 31, 2002, the Company completed the sale of all of the
outstanding equity interests in its Pulse subsidiary, pursuant to the terms of
the purchase agreement by and between Hirsch and 2017146 Ontario Limited. All
periods presented have been restated to reflect the discontinue operations of
Pulse.
During the quarter ended April 30, 2004, the Company determined that its
Hometown Threads, LLC ("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 its Hometown Threads subsidiary to Embroidery
Acquisition LLC, a wholly owned subsidiary of PCA, LLC pursuant to the terms of
a certain Asset Purchase Agreement. Hometown Threads was accounted for as
discontinued operations in the consolidated financial statements for all periods
presented (See Note 7 to the Consolidated Financial Statements). During the
fourth quarter of fiscal 2006, the Company resolved the remaining open
contingencies related to the sale and recognized income from discontinued
operations of approximately $177,000.
Effective January 31, 2004 , the Company executed an Agreement with Tajima
pursuant to which the Company sold all of the common stock (the "Shares")
constituting a 55% equity interest of its TUI subsidiary owned by it to Tajima.
The Company's Consolidated Financial Statements have been restated to reflect
the discontinued operations of TUI (See Note 7 to the Consolidated Financial
Statements).
Marketing and Customer Support
The Company has been selling embroidery equipment since 1976 and is one of
the leading distributors of Tajima equipment in the world and, through its
distribution agreements with Tajima, markets its products under the name "Tajima
USA Sales and Support by Hirsch International Corp." The Company reinforces
recognition of its name through trade magazine advertising and participation in
seminars and over 20 trade shows annually. The Company's sales and marketing
staff is headed by Kris Janowski, Executive Vice-President Sales and Marketing
for the Company, and currently consists of salespeople who maintain frequent
contact with customers in order to understand and satisfy each customer's needs.
The Company's products are generally considered by the industry to consist of
the highest quality embroidery equipment available, and consequently the Company
does not attempt to compete exclusively on a price basis but rather a
value-added basis, through its reputation, knowledge of the marketplace,
investment in infrastructure and experience in the industry. In a climate of
intense price competition with lower cost manufacturers, the Company attempts,
to the best degree possible, to maintain a balance between market share and
profit margin.
The Company believes that a key element in its business is its focus on
service, and investment in sales support and training, infrastructure and
technology to support operations. The Company provides comprehensive one to five
day training programs to assist customers in the use, operation and servicing of
the embroidery machines and software it sells. Customers are trained in the
operation of embroidery machines as well as in embroidery techniques and the
embroidery industry in general. The Company provides its customers with manuals
as training tools. Company personnel also provide technical support by
telephone, field maintenance services and quality control testing, as well as
advice with respect to matters generally affecting embroidery operations.
Telephone software support is provided by Pulse.
The Company maintains a training center at its Hauppauge, New York
headquarters for the training of service technicians. Senior service technicians
also receive formal training from Tajima in addition to technical updates
throughout the year. The Company will continue to dedicate resources to
education and training as the foundation for providing the highest level of
service.
The Company provides its customers with a limited warranty of up to five
years against malfunctions from defects in material or workmanship on the Tajima
machines it distributes. The warranty covers specific classes of parts and
labor. Tajima provides the Company with a limited two year warranty. As a
consequence, the Company absorbs a portion of the cost of providing warranty
service on Tajima products.
Supplier Relationships with Tajima
On August 30, 2004, the Company entered into new consolidated distribution
agreements (the "Consolidated Agreements" with Tajima Industries Ltd. ("Tajima")
granting the Company certain rights to distribute the full line of Tajima
commercial embroidery machines and products.
The Consolidated Agreements grant the Company distribution rights on an
exclusive basis in 39 states for the period February 21, 2004 through February
21, 2011 (the "Main Agreement"). In addition, the Company was also granted
certain non-exclusive distribution rights in the remaining 11 western states
(the "West Coast Distribution Agreement") for the period February 21, 2004
through February 21, 2005. The Company is currently negotiating an extension of
the West Coast Agreement. The Consolidated Agreements supercede all of the other
distribution agreements between the Company and Tajima.
Each agreement may be terminated upon the failure by the Company to achieve
certain minimum sales quotas. For fiscal 2006 the minimum sales quotas were met.
During fiscal 2005, the Company failed to meet these minimum sales quotas;
however, Tajima waived the Company's failure for fiscal 2005. Furthermore, the
agreements may be terminated if (a) Henry Arnberg is no longer Chairman and/or
CEO of the Company or (b) if Tajima determines that a change in control of the
Company has occurred.
Although there can be no assurance that the Company will be able to
maintain its relationship with Tajima, management of the Company believes it is
unlikely that the Company would lose Tajima as a source of supply because: (i)
the Company has maintained a relationship with Tajima for 30 years and is one of
Tajima's largest distributors; (ii) Tajima's success in the United States is, in
large part, attributable to the Company's knowledge of the marketplace as well
as the Company's reputation for customer support; and (iii) the Company supports
Tajima's development activities.
Other Supplier Relationships
The Company obtains its inventory for its embroidery supplies and
accessories business from many different sources. The Company believes that
alternate sources of supply are readily available.
Customers
The Company's customers range from large operators utilizing numerous
machines to individuals who customize products on a single machine. Principal
customer groups include: (i) contract embroiderers, who serve manufacturers that
outsource their embroidery requirements; (ii) manufacturers, who use embroidery
to embellish their apparel, accessories, towels, linens and other products with
decorative appeal; and (iii) embroidery entrepreneurs, who produce customized
products for individuals, sports leagues, school systems, fraternal
organizations, promotional advertisers and other groups. There are no major
customers who exceed 10% of revenues.
Competition
The Company competes with original equipment manufacturers, such as
Barudan, Brother International, Happy, Melco Industries and SWF, all of whom
distribute products directly into the Company's markets. The Company believes it
competes against these competitors on the basis of its knowledge and experience
in the marketplace, name recognition, customer service and the quality of the
embroidery equipment it distributes. Due to the recent decline in overall demand
for the embroidery industry, potential customers may emphasize price over
technology when selecting a machine. Although the Company attempts to compete on
the basis of price to the best degree possible and to maintain its profit
margins, there can be no assurance that the Company will be able to do so, the
failure of which would have a material adverse effect on the Company.
Further, the Company's customers are subject to competition from importers
of embroidered products, which could materially and adversely affect the
Company's customers, and consequently could have a material adverse effect on
the Company's business, financial conditions and results of operations.
The Company's success is dependent, in part, on the ability of Tajima to
continue producing products that are technologically superior and price
competitive with those of other manufacturers. The failure of Tajima to produce
technologically superior products at a competitive price could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's embroidery supplies and accessories business competes with
ARC, a division of Melco Industries, MIM, a division of Brother Industries, and
other vendors of embroidery supplies. The Company believes that the market for
embroidery supplies is fragmented and that the Company will benefit from the
breadth of its product line and the fact that the Company is a single source
provider.
Employees
As of January 28, 2006, the Company employed approximately 98 persons who
are engaged in sales, service, customer care, finance, administration and
management for the Company. None of the Company's employees are represented by
unions. The Company believes its relationship with its employees is good.
Item 1A. RISK FACTORS
Dependence on Tajima
For the fiscal year ended January 28, 2006, approximately 75.5% of the
Company's revenues resulted from the sale of embroidery equipment supplied by
Tajima. Two separate distributorship agreements (collectively, the "Tajima
Agreements") govern the Company's rights to distribute Tajima embroidery
equipment in the United States and the Caribbean. The distributorship agreements
with Tajima collectively provide the Company with the exclusive rights to
distribute Tajima's complete line of standard embroidery, chenille embroidery
and certain specialty embroidery machines in 50 states. The Main Agreement,
which now covers 39 states, is effective from February 21, 2004 through February
21, 2011. The Main Agreement may be terminated by Tajima and/or the Company on
not less than two years' prior notice. Under the non-exclusive West Coast
Agreement which covers nine western continental states, Alaska and Hawaii, the
Company is a distributor of Tajima's complete line of standard embroidery,
chenille embroidery and certain specialty embroidery. The West Coast Agreement
expired February 20, 2005. The Company is in the process of negotiating an
extension of the West Coast Agreement, however, there can be no assurance that
an agreement can be reached on terms acceptable to the Company. The failure of
the Company to obtain an extension of the West Coast Agreement on terms
acceptable to the Company could result in a loss of the Company's right to
distribute embroidery machines in the territories covered by the West Coast
Agreement which would have a material adverse effect on the Company's business,
operations and financial condition. Each of the agreements contains language
that permits termination if the Company fails to achieve certain minimum sales
quotas or annual targets. In fiscal 2006, the Company met its sales quotas and
in fiscal 2005, the Company obtained a waiver from Tajima for failure to meet
its sales quotas. Furthermore, the agreements may be terminated for, among other
reasons, if (a) Henry Arnberg is no longer Chairman and/or CEO of the Company or
(b) if Tajima determines that a change in control of the Company has occurred.
The termination of the Tajima agreements would have a material adverse effect on
the Company's business, financial condition and results of operations.
Importing Tajima's equipment from Japan subjects the Company to risks of
engaging in business overseas, including international political and economic
conditions, changes in the exchange rates between currencies, tariffs, foreign
regulation of trade with the United States, and work stoppages. The interruption
of supply or a significant increase in the cost of Tajima equipment for any
reason could have a material adverse effect on the Company's business, financial
condition and results of operation. In addition, Tajima manufactures its
embroidery machines in several locations in Japan. The Company could be
materially and adversely affected should any of these facilities be seriously
damaged as a result of a fire, natural disaster or otherwise. Further, the
Company could be materially and adversely affected should Tajima be subject to
adverse market, business or financial conditions.
Embroidery machines produced by Tajima are subject to competition from the
introduction by other manufacturers of technological advances and new products.
Current competitors or new market entrants could introduce products with
features that render products sold by the Company and products developed by
Tajima less marketable. The Company relies on Tajima's embroidery equipment to
be of the highest quality and state of the art. The Company's future success
will depend, to a certain extent, on the ability of Tajima to adapt to
technological change and address market needs, including price competition.
There can be no assurance that Tajima will be able to keep pace with
technological change in the embroidery industry, the current demands of the
marketplace or compete favorably on price. The failure of Tajima to do so could
have a material adverse effect on the Company's business, financial conditions
and results of operations.
Decline in Domestic Embroidery Industry
Beginning in fiscal 1999 and continuing to present day, the embroidery
industry experienced; (i) a decline in demand for large embroidery machines,
and; (ii) a trend toward the relocation of manufacturing facilities to Mexico,
the Caribbean, Far East and South America (which is outside of the geographic
area the Company is authorized to distribute embroidery machines pursuant to the
distribution agreements with Tajima), all of which have had a material adverse
effect on the operations of the Company, its business and financial condition. A
decrease in consumer preferences for embroidered products, a general economic
downturn or other events having an adverse effect on the embroidery industry as
a whole would also have an adverse effect on the Company.
Foreign Currency Risks
The Company pays for its Tajima embroidery machinery in Japanese Yen. Any
change in the valuation of the U.S. Dollar compared to the Japanese Yen can
change the cost to the Company of its embroidery machine inventory and can
result in competitive pressures for reduced US dollar pricing among Yen-based
equipment distributors and manufacturers. The Company has generally been able to
recover increased costs through price increases to its customers or, in limited
circumstances, price reductions from Tajima; however, dollar price reductions do
reduce dollar contribution margins and as a result create overhead coverage
pressure. There can be no assurance that the Company will be able to recover
such increased costs in the future or reduce overheads to the necessary degree
to obtain profitability. The failure on the part of the Company to do so could
have a material adverse effect on the business, operations and financial
condition. These transactions are not currently hedged through any derivative
currency product. Currency gains and losses in foreign exchange transactions are
recorded in the statement of operations.
Inventory
The Company's ordering cycle for new embroidery machines is approximately
three to eight months prior to delivery to the Company. Since the Company
generally delivers new Tajima embroidery machines to its customers within one
week of receiving orders, it orders inventory based on past experience and
forecasted demand. Due to the relatively long lead times of the ordering cycle,
any significant unanticipated downturn or upturn in equipment sales could result
in an increase in inventory levels or shortage of product, respectively, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Competition
The Company competes with distributors of embroidery machines produced by
manufacturers other than Tajima and with manufacturers who distribute their
embroidery machines directly as well as with other providers of embroidery
products and services. The Company believes that competition in the embroidery
industry is based on technological capability and quality of embroidery
machines, price and service. If other manufacturers develop embroidery machines
which are more technologically advanced than Tajima's or if the quality of
Tajima embroidery machines diminishes, the Company would not be able to compete
as effectively which could have a material adverse effect on its business,
financial condition and results of operations. The Company also faces
competition in selling software, embroidery supplies, accessories and
proprietary products as well as providing customer training, support and
services. Due to the decline in overall demand in the industry which occurred
during the last several years, potential customers may emphasize price
differences over value-added services and support in purchasing new embroidery
machines. Severe price competition may impair the Company's ability to provide
its customers with value-added services and support. Although the Company
attempts to compete on the basis of price, to the best degree possible, and to
maintain profit margins, there can be no assurance that the Company will be able
to do so. The Company's failure to compete effectively in these areas could have
a material adverse effect on its business, financial condition and results of
operations.
Dependence on Existing Management
Changes in the embroidery industry and recent restructuring of the
Company's business have resulted in increased responsibilities for management
and have placed increased demands upon the Company's operating, financial and
technical resources. The Company's continued success will depend to a
significant extent upon the abilities and continued efforts of Henry Arnberg,
Chairman of the Board of the Company, and Paul Gallagher, its Chief Executive
Officer. Mr. Gallagher is bound by a 2 year agreement that commenced on
September 11, 2004. It should also be noted that the Distribution Agreements
with Tajima provide that Tajima may terminate each agreement for, among other
reasons, if (a) Henry Arnberg is no longer Chairman and/or CEO of the Company or
(b) if Tajima determines that a change in control of the Company has occurred.
The loss of the services of Messrs. Arnberg or Gallagher, or the services of
other key management personnel, could have a material adverse effect upon the
Company's business, financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
The Company's corporate headquarters is in Hauppauge, New York in a 50,000
square foot facility. During fiscal 2002, this facility was sold to M3GH
Properties, LLC. and approximately 24,500 square feet was leased back in a
concurrent transaction (See Note 10(B) to the Consolidated Financial
Statements). During fiscal year 2003 the Company leased back the 25,500 square
feet of the building that had remained empty since March 2001 in order to
consolidate certain operations in Hauppauge, NY. This property houses the
Company's executive offices, the Northeast sales office, technical services,
machine and parts warehousing, and order fulfillment. On February 23, 2006, the
Company surrendered this lease and concurrently signed a new lease for
approximately 15,000 square feet in a facility also located in Hauppauge, New
York which will become the Company's new headquarters facility. (See Note 16 to
the Consolidated Financial Statements). In conjunction with the lease surrender,
the Company terminated the $0.5 million standby letter of credit (shown as
restricted cash at year-end) which was backing the lease of the Company's
Hauppauge facility.
In addition to the Company's headquarters, the Company leases 22 regional
satellite offices under non-cancelable operating leases. These offices consist
of regional sales offices and training centers. All leased space is considered
adequate for the operation of our business, and no difficulties are foreseen in
meeting any future space requirements.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 2006 Annual Meeting of Stockholders was held January 25,
2006. At the meeting, the Company's stockholders voted upon (1) the election of
directors; (2) the approval of an amendment to the Company's 2003 Stock Option
Plan; and the approval of BDO Seidman, LLP as the Company's independent
registered public accounting firm for the year ended January 28, 2006. The
following is a tabulation of the votes:
(1) Election of Directors
For Against
--- -------
Marvin Broitman (Class A) 6,780,993 52,666
Mary Ann Domuracki (Class A) 6,780,993 53,166
Henry Arnberg (Class B) 400,018 -0-
Paul Gallagher (Class B) 400,018 -0-
Christopher J. Davino (Class B) 400,018 -0-
(2) Approval of amendment to 2003
Stock Option Plan
For Against Abstain Broker non-votes
--- ------- ------- ----------------
979,708 186,180 24,986 6,041,803
(3) Approval of BDO Seidman, LLP as the
Company's Independent Registered
Public Accounting Firm
For Against Abstain
--- ------- -------
7,208,239 17,206 8,232
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's outstanding Common Stock consists of two classes, Class A
Common Stock and Class B Common Stock. The Class A Common Stock, par value
$.01 per share, trades on the NASDAQ Small Cap Market under the symbol
"HRSH". The following table sets forth for each period indicated the high
and low closing bid prices for the Class A Common Stock as reported by the
NASDAQ Stock Market. Trading began in the Class A Common Stock on February
17, 1994. Class B stock is not publicly traded.
Fiscal 2006 High Low
- ----------- ---- ---
Fourth Quarter ended January 28, 2006................ $1.54 $1.06
Third Quarter ended October 29, 2005................. $1.93 $1.00
Second Quarter ended July 30, 2005................... $1.61 $0.98
First Quarter ended April 30, 2005................... $1.48 $0.85
Fiscal 2005 High Low
- ----------- ---- ---
Fourth Quarter ended January 29, 2005................ $1.63 $0.96
Third Quarter ended October 30, 2004................. $1.13 $0.81
Second Quarter ended July 31, 2004................... $1.75 $0.81
First Quarter ended April 30, 2004................... $2.48 $1.35
The foregoing over-the-counter market quotations represent inter-dealer
prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
(b) As of April 07, 2006, the Company believes that there were approximately
116 record holders of its Class A Common Stock.
(c) During the first quarter of fiscal 2005, the Company declared and paid a
quarterly dividend of $.01 per share on its Common Stock. There were no
dividends declared for the remaining quarters of fiscal 2005. The Class A
Common Stock and Class B Common Stock share ratably in any dividends
declared by the Company on its Common Stock. Any stock dividends on the
Class A Common Stock and the Class B Common Stock will be paid in shares of
Class A Common Stock. No dividends were declared for Fiscal 2006.
(d) Equity Compensation Plan Information
(a) Number of (b) Weighted- (c) Number of securities
securities to be average exercise remaining available for
issued upon exercise price of future issuance under equity
of outstanding outstanding compensatin plans
options, warrants options, warrants [excluding securities
Plan Category and righhts and rights reflected in column (a)]
- ----------------------------------- ---------------------- ------------------- ------------------------------
Equity compensation plans approved 1,346,000 $0.68 1,424,000
by security holders
Equity compensation plans not 100,000 $0.50 0
approved by security holders
---------------------- -------------------- ------------------------------
TOTAL 1,446,000 $0.67 1,424,000
---------------------- ------------------- ------------------------------
One independent Board member and one past Board member were granted warrants to
purchase 50,000 shares each of Class A Common Stock at $0.50 per share for their
past and ongoing services to the Company. The Board of Directors approved these
grants on January 25, 2002. These individuals were also granted certain
registration rights for the shares of Class A Common Stock issuable upon the
exercise of the warrants pursuant to the terms of a registration rights
agreement between the Company and such non-affiliated Board members.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere herein. The consolidated financial statement data as of
January 28, 2006 and January 29, 2005 and for the fiscal years ended January 28,
2006, January 29, 2005 and January 31, 2004 are derived from, and qualified by
reference to, the audited Consolidated Financial Statements included elsewhere
herein and should be read in conjunction with those Consolidated Financial
Statements and the Notes thereto. The consolidated financial statement data as
of January 31, 2004, 2003 and 2002 and for the fiscal years ended January 31,
2003 and 2002 are derived from audited Consolidated Financial Statements not
included herein.
Year Ended January
(in thousands of dollars, except per share amounts)
28, 29, 31, 31, 31,
- --------------------------------------------- ----------- ------------- ----------- ------------- -------------
Hirsch International Corp. and Subsidiaries 2006 2005 2004 2003 2002
- --------------------------------------------- ----------- ------------- ----------- ------------- -------------
Statement of Operations Data:
Net sales................................... $51,139 $44,394 $47,116 $42,723 $50,156
Cost of sales (6)........................... 34,033 30,660 32,003 29,435 36,495
Operating expenses (1)(2)................... 16,484 15,874 17,488 16,793 24,925
Income (loss) from continuing operations 122 (2,139) (2,025) (3,451) (16,990)
before income tax provision (benefit) (5)
Income tax provision (benefit).............. 32 9 25 (504) (5,881)
Income (loss) from continuing operations 90 (2,148) (2,050) (2,947) (11,109)
Income (loss) from discontinued operations 447 376 2,494 (2,603) (7,216)
(3)(4) ..................................
Net Income (loss) (1)....................... $537 $(1,772) $ 444 $(5,550) $(18,325)
Net income (loss) per share from continuing
operations...............................
Basic....................................... $0.01 $(0.26) $ (0.24) $(0.34) $ (1.25)
Diluted..................................... $0.01 $(0.26) $ (0.24) $(0.34) $ (1.25)
Net income (loss) per share.................
Basic....................................... $0.06 $(0.21) $ 0.05 $(0.64) $ (0.81)
Diluted..................................... $0.06 $(0.21) $ 0.05 $(0.64) $ (0.81)
Shares used in the calculation of net income
(loss) per share:
Basic...... 8,481 8,351 8,571 8,789 8,894
Diluted..................................... 9,617 8,351 8,571 8,789 8,894
(1) In fiscal year 2004, the Company completed its plan of restructuring and
reversed, as a reduction of operating expenses, $716,000 of restructuring
costs that had been previously provided for facilities and severance costs.
(2) Fiscal year 2002 operating expenses included a write-down of impaired
goodwill of $3.5 million and restructuring costs of $2.7 million.
(3) Fiscal years 2005, 2004, 2003, and 2002 have been restated to reflect the
discontinued operations of HTT, TUI, HAPL and Pulse.
(4) In fiscal year 2004, the Company reversed $2.0 million of reserves
associated with the UNL lease portfolio which was sold to Beacon Funding in
September 2003.
(5) In fiscal 2006, the Company expensed approximately $605,000 of transaction
costs associated with the terminated merger with Sheridan Square
Entertainment, LLC (See Note 16 to the Consolidated Financial Statements).
(6) Fiscal years 2005, 2004, 2003 and 2002 have been restated to include the
gain/(loss) in foreign currency in cost of sales from other income.
Hirsch International Corp. and Subsidiaries (in thousands of dollars)
- --------------------------------------------------
January 28, January 29, January 31,
2006 2005 2004 2003 2002
------------ ------------ ---------- ---------- -----------
Balance Sheet Data:
Working capital........................... $12,118 $13,388 $14,698 $14,616 $16,161
Total assets.................................. 26,354 26,626 30,346 30,796 33,430
Long-term debt, less current maturities....... 0 1,270 1,418 1,559 1,642
Stockholders' equity.......................... $14,618 $14,055 $15,848 $16,065 $21,459
Hirsch International Corp
Summarized Quarterly Data**
$ in thousands, except for per share amounts Fiscal Quarter
------------------------------------------------------------
2006 First Second Third Fourth
------------ ------------ ------------ ------------
Net Sales....................................... $13,723 $12,587 $12,854 $11,975
Gross profit.................................... 4,232 4,366 4,194 4,314
Income (loss) from discontinued operations 0 0 0 447
Net income (loss)............................... 102 491 235 (291)
------------ ------------ ------------ ------------
Basic income (loss) per share................... $0.01 $0.06 $0.03 ($0.04)
============ ============ ============ ============
Diluted income (loss) per share................. $0.01 $0.05 $0.02 ($0.02)
============ ============ ============ ============
2005 First Second Third Fourth
------------ ------------ ------------ ------------
Net Sales....................................... $9,540 $10,796 $12,090 $11,968
Gross profit.................................... 3,073 3,606 3,732 3,323
Gain on sale of Hometown Threads........... 0 0 943 0
Income (loss) from discontinued operations (83) (110) (374) 0
Net income (loss)............................... (1,107) (650) 508 (523)
------------ ------------ ------------ ------------
Basic and diluted income (loss) per share....... ($0.13) ($0.08) $0.06 ($0.06)
============ ============ ============ ============
**Note: The quarterly data has been restated to reflect the reclassification of
currency gains/(losses) into cost of sales from other income.
ITEM 7. 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 are qualified in their
entirety by, the Company's 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 in January of the
applicable calendar year.
Company Overview
The Company is a leading single source supplier of electronic
computer-controlled embroidery machinery and related value-added products and
services to the embroidery industry. The Company offers a complete line of
technologically advanced single- and multi-head embroidery machines, proprietary
application software and a diverse line of embroidery supplies and accessories.
Hirsch believes its comprehensive customer service, user training, software
support through Pulse and broad product offerings combine to place the Company
in a competitive position within its marketplace. The Company sells embroidery
machines manufactured by Tajima and TUI, as well as a wide variety of embroidery
supplies.
In fiscal 1998 Hirsch formed TUI for the purpose of assembling Tajima
embroidery machines in the United States. Production at TUI consists of models
in configurations of up to eight heads per machine. In January 1998 Tokai
Industries (Tajima's manufacturing arm) purchased a 45 percent interest in TUI.
In July 1999 Tajima granted to Hirsch the non-exclusive right to distribute to
its existing US customers who have expanded their operations into the Caribbean
region. As of January 31, 2004, the Company sold its majority interest in TUI to
Tajima.
The Company grew rapidly from the time of its initial public offering
through fiscal 1998. Growth during this period was fueled by rapid technological
advances in software and hardware, the strong demand for embroidered products,
the creation of new embroidery applications and the strength of the "embroidery
entrepreneur" as a growing segment of the marketplace. The Company believes that
the purchasers of smaller embroidery machines are a significant source of repeat
business for the sale of additional embroidery machines as the entrepreneurs'
operations expand.
The market is and has been affected by the fluctuating value in foreign
exchange of the US dollar versus the Yen resulting in dollar price pressure for
machine sales. Most Japanese based equipment competitors in the industry
(including the Company) faced difficulty in meeting these new market demands. In
fiscal 2002 the Company initiated a restructuring program to address the market
shifts in the industry, including closing and consolidating certain divisions,
reducing total employment, and consolidating facilities that were no longer
required to support its new business model. In fiscal 2004, the Company
completed its plan of restructuring and reversed, as a reduction of operating
expenses, $716,000 of restructuring costs that had been accrued for the lease
termination in Solon, Ohio and the remaining severance costs associated with the
restructuring.
Results of Operations
The following table presents certain income statement items expressed as a
percentage of total revenue for the fiscal years ended January 28, 2006, January
29, 2005 and January 31, 2004.
2006 2005 2004
------------ ------------ -------------
Net sales................................................... 100% 100% 100%
Cost of sales............................................... 66.6% 69.1% 67.9%
Operating expenses.......................................... 32.2% 35.8% 37.1%
Interest expense............................................ 0.3% 0.4% 0.5%
Other expense (income), net................................. 0.7% -0.4% -1.2%
------------ ------------ -------------
Income (loss) from continuing operations before
income taxes 0.2% -4.9% -4.3%
Income tax provision........................................ 0.1% 0.0% 0.1%
Income from discontinued operations, net of tax........... 0.9% 0.9% -5.3%
------------ ------------ -------------
Net Income (loss)......................................... 1.0% -4.0% 0.9%
============ ============ =============
Note: The results of operations have been restated to reflect the
reclassification of currency gains/(losses) into cost of sales from other
income.
Use of Estimates and Critical Accounting Policies
The preparation of Hirsch's financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and revenues and
expenses during the period. Future events and their effects cannot be determined
with absolute certainty; therefore, the determination of estimates requires the
exercise of judgment. Actual results inevitably will differ from those
estimates, and such differences may be material to our financial statements.
Management continually evaluates its estimates and assumptions, which are based
on historical experience and other factors that are believed to be reasonable
under the circumstances.
Critical Accounting Policies
Management believes the following critical accounting policies affect its
more significant estimates and assumptions used in the preparation of its
consolidated financial statements:
Revenue Recognition - The Company distributes embroidery equipment that it
offers for sale. Where installation and customer acceptance are a substantive
part of the sale, by its terms, the Company has deferred recognition of the
revenue until such customer acceptance of installation has occurred. In fiscal
years 2006, 2005 and 2004, most sales of new equipment did not require
installation as a substantive part of its sales and accordingly the Company
recorded its sales at the time the machinery was shipped. Service revenues and
costs are recognized when services are provided. Sales of software are
recognized when shipped provided that no significant vendor and post-contract
and support obligations remain and collection is probable. Sales of parts and
supplies are recognized when shipped.
Long lived Assets - The Company reviews its long-lived assets, including
property, plant and equipment, identifiable intangibles and purchased
technologies, for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable. To
determine recoverability of its long-lived assets, the Company evaluates the
probability that future undiscounted net cash flows will be less than the
carrying amount of the assets
Income Taxes - Current income tax expense is the amount of income taxes
expected to be payable for the current year. A deferred income tax asset or
liability is established for the expected future consequences resulting from
temporary differences in the financial reporting and tax bases of assets and
liabilities. The Company provides a valuation allowance for its deferred tax
assets when, in the opinion of management, it is more likely than not that such
assets will not be realized.
Allowance for Doubtful Accounts - The Company maintains an allowance for
estimated losses resulting from the inability of its customers to make required
payments. An estimate of uncollectable amounts is made by management based upon
historical bad debts, current customer receivable balances, age of customer
receivable balances, the customer's financial condition and current economic
trends. If the actual uncollected amounts significantly exceed the estimated
allowance, then the Company's operating results could be significantly adversely
affected.
Inventories - Inventories are valued at the lower of cost or market. Cost
is determined using the "FIFO" weighted average cost for supplies and parts and
specific cost for embroidery machines and peripherals. The inventory balance is
recorded net of an estimated allowance for obsolete or unmarketable inventory.
The estimated allowance for obsolete or unmarketable inventory is based upon
management's understanding of market conditions and forecasts of future product
demand. If the actual amount of obsolete or unmarketable inventory significantly
exceeds the estimated allowance, the Company's cost of sales, gross profit and
net income (loss) could be significantly adversely affected.
Warranty - The Company provides a five-year limited warranty for its
embroidery machines. The Company's policy is to accrue the estimated cost of
satisfying future warranty claims on a quarterly basis. In estimating its future
warranty obligations, the Company considers various relevant factors, including
the Company's stated warranty policies and practices, the historical frequency
of claims, and the cost to replace or repair its products under warranty. If the
number of actual warranty claims or the cost of satisfying warranty claims
significantly exceeds the estimated warranty reserve, the Company's operating
expenses and net income (loss) could be significantly adversely affected.
Fiscal Year 2006 as Compared to Fiscal Year 2005
Net sales. Net sales for fiscal year 2006 were $51.1 million, an increase
of $6.7 million, or 15.1% compared to $44.4 million for fiscal year 2005. The
Company believes that the increase in sales volume for fiscal 2006 is mainly
attributable to increases in all sizes of embroidery machines and better market
penetration compared to the prior year. The market for small and multihead
machines has demonstrated some moderate growth in fiscal year 2006. There are no
major customers who exceed 10% of revenues.
Cost of sales. For fiscal year 2006, cost of sales increased $3.4 million
or 11.0%, to $34.0 million from $30.7 million for fiscal year 2005. The increase
was directly a result of the related increase in net sales for fiscal year 2006
as compared to fiscal year 2005. Included in cost of sales for fiscal 2006 was a
currency gain of $0.5 million and in fiscal 2005 included a currency loss of
$0.3 million. The Company's gross margin increased for fiscal year 2006 to
33.5%, as compared to 30.9% for fiscal year 2005. The fluctuation of the dollar
against 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 changed
in US dollars due to these exchange rate fluctuations. Some, but not, all of the
Company's competitors face similar circumstances.
Operating Expenses. For fiscal year 2006, overall operating expenses
increased $0.6 million or 3.8%, to $16.5 million from $15.9 million for fiscal
year 2005. Selling, general and administrative expenses associated with the
Company's ongoing operations increased $0.4 million or 2.9% primarily related to
selling costs directly associated with the Company's increase in sales revenues
which includes approximately $1.0 million in bonus costs. Included in overall
operating expenses for fiscal 2006 is $147,000 of restructuring costs related to
severance.
Interest Expense. Interest expense for fiscal year 2006 was $166,000 versus
$185,000 for fiscal year 2005. Interest expense is primarily associated with the
sale/leaseback transaction of the corporate headquarters.
Other (Income) Expense. Other income for fiscal 2006 was ($271,000) versus
($186,000) for fiscal 2005. In fiscal 2006, other income included a $119,000
gain on sale of assets, $133,000 in interest income and $18,000 of other income.
In fiscal 2005, other expense included a $119,000 gain on sale of assets,
interest income of $41,000, and other income was $26,000.
Transaction Costs. As of January 28, 2006 the Company expensed
approximately $605,000 of transaction costs associated with the termination of
the merger between Sheridan Square Entertainment and Hirsch. (See Note 16 to the
Consolidated Financial Statements).
Income tax provision. The income tax provision reflected an effective tax
rate of 36.8% for the twelve months ended January 28, 2006 as compared to an
income tax benefit rate of 0% for fiscal year 2004. The difference of the above
rate to the federal statutory rate for 2005 is the valuation allowance
established on deferred tax assets since the Company cannot determine the future
utilization of those assets.
Income from 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 operations. The Company has made
provisions for the cost of winding down the operations as well as the potential
losses that could be incurred in disposing of its minimum lease payments and
residual receivables. The Company's Statements of Operations have been restated
to reflect the results of the HAPL Leasing subsidiary as discontinued operations
(See Note 7 to the Consolidated Financial Statements). In the fourth quarter of
fiscal 2006, the Company completed the wind down of the remaining assets of the
lease portfolio. In conjunction with the termination of the portfolio, the
Company reversed, as part of discontinued operations, $270,000 of reserves
recorded in fiscal 2002.
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, a wholly owned
subsidiary of PCA, LLC. (See Note 7 to the Consolidated Financial Statements.)
As a result of the sale of Hometown Threads, the Company recognized a gain of
approximately $943,000. The Buyer had 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 were resolved. During the fourth quarter of fiscal 2006, the
Company resolved the remaining open contingencies and recognized income from
discontinued operations of $177,000. Hometown Threads was accounted for as
discontinued operations in the consolidated financial statements for all periods
presented.
Net Income (Loss). The net income for fiscal year 2006 was $0.5 million, an
increase of $2.3 million, compared to net loss of $1.8 million for fiscal year
2005.
Fiscal Year 2005 as Compared to Fiscal Year 2004
Net sales. Net sales for fiscal year 2005 were $44.4 million, a decrease of
$2.7 million, or 5.7% compared to $47.1 million for fiscal year 2004. The
Company believes that the reduction in the sales level for fiscal 2005 is mainly
attributable to an on-going decrease in demand for large multi-head embroidery
machines and greater competition in the small machine market which resulted in
lower prices for embroidery machines. There are no major customers who exceed
10% of revenues.
Cost of sales. For fiscal year 2005, cost of sales decreased $1.3 million
or 4.2%, to $30.7 million from $32.0 million for fiscal year 2004. The decrease
was partially a result of the related decrease in net sales for fiscal year 2005
as compared to fiscal year 2004. Included in cost of sales for fiscal 2005 and
2004 were losses on currency of $0.3 million and $0.2 million, respectively. The
Company's gross margin decreased for fiscal year 2005 to 30.9%, as compared to
32.1% for fiscal year 2004. The recent fluctuation of the dollar against the
yen, which is the currency the Company's embroidery machines are priced in, has
adversely affected and is likely to continue to adversely affect the Company's
machine sales pricing competitiveness. Embroidery machinery prices have either
been maintained or risen in US dollars due to these exchange rate fluctuations.
As a result, in order for the Company to maintain various product margins for
its imported embroidery machines, its competitiveness has been adversely
affected. Some, but not, all of the Company's competitors face similar
circumstances.
Operating Expenses. As reported for fiscal year 2005, operating expenses
decreased $1.6 million or 9.2%, to $15.9 million from $17.5 million for fiscal
year 2004. The decrease in operating expenses for the fiscal year ended January
29, 2005 is directly related to the Company's continuing efforts to control
operating costs in relation to the overall decline in sales revenues. During the
year ended January 31, 2004, the Company reversed, as a reduction of operating
expenses, $716,000 of restructuring costs associated with the completion of the
restructuring plan.
Interest Expense. Interest expense for fiscal year 2005 and fiscal year
2004 remained constant at $0.2 million. Interest expense is primarily associated
with the sale/leaseback transaction of the corporate headquarters.
Other (Income) Expense. Other income for fiscal 2005 was ($186,000) versus
income of ($565,000) for fiscal 2004. In fiscal 2005, other income included a
$119,000 gain on sale of assets, interest income of $41,000 and other income of
$26,000. In fiscal 2004 other income included a $230,000 gain on sale of fixed
assets, $10,000 in interest income, $3,000 in other income and $322,000 in
interest income on the refund of NOL carryback claims.
Income tax (benefit) provision. The income tax provision reflected an
effective tax rate of 0% for the twelve months ended January 29, 2005 as
compared to an income tax benefit rate of 1.2% for fiscal year 2004. The benefit
rate for the fiscal 2004 year is a direct result of the Job Creation and Worker
Assistance Act temporarily extending the carryback of Net Operating Losses from
two years to five years. This change has enabled the Company to carryback recent
years losses and obtain a refund of approximately $6 million. During fiscal
2004, the Company received the carryback claim refund from the IRS along with
applicable interest through the refund date. The difference of the above rate to
the federal statutory rate for 2005 is the valuation allowance established on
deferred tax assets since the Company cannot determine the future utilization of
those assets.
Income (Loss) from Discontinued Operations. The Company executed an
Agreement with Tajima pursuant to which the Company sold all of the common stock
(the "Shares") constituting a 55% equity interest of its TUI subsidiary owned by
it to Tajima, upon the terms and conditions set forth in a certain Purchase and
Sale Agreement by and among the Company, Tajima and TUI (the "Agreement"). The
sale was effective as of January 31, 2004. Upon the consummation of the sale,
Tajima owned 100% of the issued and outstanding common stock of TUI.
The purchase price (the "Purchase Price") for the Shares was equal to the
Book Value (as defined in the Agreement), calculated in accordance with
generally accepted accounting principles. At the closing, Tajima paid the
Company the sum of $500,000 (the "Initial Payment") in partial payment of the
Purchase Price. The remaining balance due on the Purchase Price of $4,482,000
was paid promptly thereafter in accordance with the terms of the Agreement.
In addition, the Company paid TUI the sum of $7,182,002, representing
amounts owed by the Company to TUI as of January 31, 2004 (the "Net Intercompany
Payable"). The Net Intercompany Payable was paid as follows:
(a) the Initial Payment ($500,000) was paid by Tajima to TUI on behalf of
the Company,
(b) the assignment by the Company to TUI of its right to receive the sum
of $2,200,000 from Tajima upon payment of the balance due on the
Purchase Price, and
(c) the payment by the Company of the sum of $4,482,000 in five (5) equal
monthly installments of $735,167 each and a sixth payment of $806,165,
commencing February 29, 2004 and continuing through and including July
31, 2004.
The Consolidated Financial Statements have been restated to reflect the
discontinued operations of TUI for all periods presented.
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") pursuant to the terms of a certain Asset
Purchase Agreement ("Agreement") entered into between the Company, Hometown
Threads, Buyer and PCA. Prior to the transaction, Hometown Threads had been
engaged in the business of operating and franchising retail embroidery service
centers in Wal-Mart stores and other retail locations (the "Business"). The
purchase price for the assets acquired by Buyer was $1,500,000. In addition,
Buyer agreed to assume certain enumerated liabilities of Hometown Threads.
Pursuant to the Agreement, PCA guaranteed the obligations of the Buyer. The
Company and Hometown Threads entered a Non-Competition, Non-Disclosure and
Non-Solicitation Agreement, the Company and Hometown Threads are precluded from
directly and indirectly competing with Buyer for seven (7) years in the United
States. The Company and Hometown Threads are also required to keep confidential
certain Confidential Information (as defined therein) for a period of ten (10)
years. Pursuant to the Agreement, The Company, Hometown Threads and Buyer have
entered into a certain Supply Agreement having a term of five (5) years. Under
the terms of the Supply Agreement, the Company agreed to supply to Buyer and
Buyer is required to purchase from the Company all products previously purchased
by Hometown Threads from the Company and utilized in the Business upon the
prices, terms and conditions contained therein.
As a result of the sale of Hometown Threads, the Company recognized a gain
of approximately $943,000.
The Buyer has withheld $200,000 from the selling price primarily associated
with a note receivable on the books of Hometown Threads and $142,000 in deferred
income from deposits received for stores not yet opened. The Company deferred
the recognition of income on these items until the contingencies are resolved
during the six month hold-back period. 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.
Hometown Threads was accounted for as discontinued operations in the
consolidated financial statements for all periods presented.
Net Income (Loss). The net loss for fiscal year 2005 was $1,772,000, an
increase of $2.2 million, compared to net income of $444,000 for fiscal year
2004.
Liquidity and Capital Resources
The Company's working capital decreased $1.3 million or 9.7% to $12.1
million at January 28, 2006 from $13.4 million at January 29, 2005. This was
primarily the result of the capitalized lease terminated effective June 30,
2006, which is now classified as a current liability.
During fiscal 2006, the Company's cash (exclusive of restricted cash)
increased $6.8 million or 106% to $13.2 million from $6.4 million at January 29,
2005. The majority of the increase was cash provided by financing activities of
$5.0 million. The cash provided by financing activities of $5.0 million during
fiscal 2006 was primarily the result of the unrestricting of cash previously
used to collateralize a standby letter of credit, which was terminated during
early Fiscal 2006. Additional cash of $2.8 million was provided by operating
activities primarily from the Company having net income of $0.5 million versus a
net loss of $1.7 in fiscal 2005 and $1.0 million was used in investing
activities.
Future Commitments
The following table shows the Company's contractual obligations and
commitments (See Notes 10 and 15 to the Consolidated Financial Statements).
Payments due by period (in thousands)
Total Less than 1-3 4-5 More than
1 year years years 5 years
Contractual Obligations/Commitments
- ---------------------------------------------- ----------- ------------- ------------- ------------ ------------
Capital lease obligations..................... $1,270 $ 1,270 $0 $ 0 $ 0
Operating lease obligations................... 1,584 463 627 491 3
Purchase commitments.......................... 3,300 1,200 2,100 0 0
----------- ------------- ------------- ------------ ------------
Total $6,154 $2,933 $2,727 $491 $3
=========== ============= ============= ============ ============
Revolving Credit Facility and Borrowings
The Company has a Loan and Security Agreement ("the Congress Agreement")
with Congress Financial Corporation ("Congress") for a three year term which
originally expired on November 26, 2005. The Congress Agreement as amended,
August 31, 2004, 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 all financial covenants at January 28, 2006. The Company has
placed $0.5 million in restricted cash to support the standby letter of credit
backing the lease on the Company's facilities in Hauppauge. 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. As of February 28, 2006, the Company signed a Termination
Agreement with Wachovia Bank, National Association (successor by merger to
Congress Financial Corporation). The Company, at this time, does intend to enter
into a new banking agreement.
Future Capital Requirements
Subsequent to the close of fiscal 2002, the Federal Government passed the
Job Creation and Worker Assistance Act temporarily extending the carry back of
Net Operating Losses from two years to five years. This provided approximately
$6.0 million in cash available for operations. Approximately $3.0 million was
received during the fiscal year ended January 31, 2003 and the balance was
received during fiscal 2004, along with applicable interest. The Company
believes these proceeds, with its existing cash and funds generated from
operations will be sufficient to meet its working capital requirements. Capital
expenditures are expected to be immaterial.
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.
Recent Accounting Pronouncements -
See note 2(q) to the consolidated financial statements
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including changes in
foreign currency exchange rates and interest rates. Market risk is the potential
loss arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The Company has a formal policy that
prohibits the use of currency derivatives or other financial instruments for
trading or speculative purposes. The policy permits the use of financial
instruments to manage and reduce the impact of changes in foreign currency
exchange rates that may arise in the normal course of the Company's business.
Currently, the Company does not use interest rate derivatives.
The Company may from time to time 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. The Company did not enter
into any forward contracts during Fiscal 2006.
Any Company debt, if utilized, is U.S. dollar denominated and floating
rate-based. At year-end, there was no usage of the revolving credit facility
that the Company had maintained through February 28, 2006 with Congress
Financial. 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information contained in pages F-1 through F-26 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. 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' 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 fourth quarter that have materially
affected, or are reasonably likely to affect, the Company's internal controls
over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information Regarding Executive Officers and Directors
The following table sets forth the names and ages of the Company's
directors and executive officers and the positions they hold with the Company:
Name Age Position
- ---- --- --------
Henry Arnberg.......... 63 Chairman of the Board of Directors
Paul Gallagher......... 56 Chief Executive Officer, President and Director
Marvin Broitman........ 67 Director
Mary Ann Domuracki .... 51 Director
Christopher Davino .... 40 Director
Beverly Eichel......... 48 Executive Vice President, Finance and
Administration, Chief Financial Officer
and Secretary
Kristof Janowski....... 53 Executive Vice President, Sales and Marketing
Nicholas Paccione...... 51 Vice President, Operations
Henry Arnberg, has held the position of Chairman of the Board of the Board
of Directors since 1980 and served as President of the Company until December
1998 and its Chief Executive Officer until November 2004. Mr. Arnberg received a
Bachelor of Science in Accounting from the University of Bridgeport in 1965 and
an MBA in Finance and Management from the Adelphi University in 1971.
Paul Gallagher, joined the Company as its Chief Operating Officer in
September 2001. In early 2003, Mr. Gallagher was also appointed the Company's
President as well as a director. On December 1, 2004, Mr. Gallagher was
appointed Chief Executive Officer. Prior thereto, Mr. Gallagher was employed by
Cornerstone Group Inc., a consulting firm focused on corporate turnarounds and
restructurings, as well as mergers and acquisitions. Mr. Gallagher received a
Bachelor of Science from the University of Cincinnati in 1976 and an MBA from
Xavier University in 1978.
Marvin Broitman has served as a director of the Company since April 1994,
and is currently Vice President of Uniwave, Inc., a company engaged in the
engineering and manufacturing of automation accessory equipment for textile
machinery since 1968. Mr. Broitman received a Bachelor of Electrical Engineering
degree from City College in 1961 and an MBA from the Harvard Business School in
1968. Mr. Broitman serves on the Audit, Stock Option and Compensation Committees
of the Board of Directors.
Mary Ann Domuracki has served as a director of the Company since September
2001, and is a managing Director of Restructuring at Financo, Inc. since
September 2001. Ms. Domuracki has more than 25 years experience of accounting,
advisory and operating management services. Her industry experience includes,
senior management positions as President of Danskin, Inc., Executive Vice
President of Administration and Finance of Kasper A.S.L., and most recently,
Executive Vice President and Chief Financial Officer of Pegasus Apparel Group,
Inc. Ms. Domuracki is a CPA and a member of the AICPA, and has a Bachelor of
Business Administration from the Pennsylvania State University with a
concentration in Accounting. Ms. Domuracki serves on the Audit, Stock Option and
Compensation Committees of the Board of Directors.
Christopher Davino has served as a director of the Company since October
2004, he was previously Chief Operating Officer of E-Rail Logistics Inc., a
waste management transportation company. Prior to that position, Mr. Davino
worked as a restructuring professional at Financo Inc. Mr. Davino is a seasoned
restructuring professional having provided strategic and financial advice to
Fortune 500 companies, financial sponsors and strategic buyers, commercial banks
and bondholders with respect to corporate restructurings and mergers and
acquisitions over the last 14 years. Prior to joining Financo, Mr. Davino was
Managing Director at Miller Buckfire Lewis Ying, LLC, the former restructuring
group of Wasserstein Perella and subsequently Dresdner Kleinwort Wasserstein. In
that capacity, Mr. Davino advised companies as well as their various creditor
constituencies in a wide range of industries including construction, consumer
products, electronics, energy, financial services, gaming, healthcare,
insurance, manufacturing, metals, minerals, steel, real estate and technology
telecommunications. Prior to Wasserstein Perella, Mr. Davino was a consultant
with Zolfo Cooper & Co., an internationally recognized turnaround consulting and
crisis management firm. Mr. Davino received his Bachelor of Science in Finance
from Lehigh University.
Beverly Eichel, has been Executive Vice President of Finance and
Administration and Chief Financial Officer of the Company since February 1,
2002. Ms. Eichel has also served as the Company's Secretary since October 2002.
Prior thereto, she was Executive Vice President and Chief Financial Officer of
Donnkenny, Inc. from October 1998 to June 2001. From June 1992 to September
1998, Ms. Eichel served as Executive Vice President and Chief Financial Officer
of Danskin, Inc. and had been its Corporate Controller from October 1987 to June
1992. Ms. Eichel is a Certified Public Accountant in the State of New York and a
member of the AICPA. Ms. Eichel received a Bachelor of Science in Accounting
from the University of Maryland in 1980.
Kristof Janowski has worked for the Company since 1987. From 1987 through
1994 he was sales manager for the Midwest Region. In October 1994, he was
promoted to Vice President of Midwest sales. In 1999, he was promoted to Vice
President of National Sales and most recently Mr. Janowski was promoted to
Executive Vice President - Sales and Marketing effective March 1, 2005.
Nicholas Paccione joined the Company in June of 2003 as Director of
Information Technology and was promoted to Vice President of Operations in
February of 2005. Prior to joining the Company, Mr. Paccione owned his own
independent consultancy specializing in computer network design. Prior to
starting his consulting firm, Mr. Paccione was Chief Operating Officer at
Heathology, an online health education company, Senior Vice President of
Operations for Primedia Workplace learning, and Vice President of Systems and
Technology for the Primedia Information Group.
Committees of the Board of Directors
The Board of Directors has an Audit Committee, a Compensation Committee and
a Stock Option Committee. Each member of the Audit Committee is an "independent
director" as defined in Rule 4200(a)(15) of the NASDAQ Capital Market, Inc.
listing standards, as applicable and as may be modified or supplemented. MaryAnn
Domuracki, Chairman of the Audit Committee, is a financial expert within the
meaning of Item 401(h)(2) of Regulation S-K privileged under the Act. The audit
committee has adopted a written Audit Committee charter.
The Company does not have a Nominating Committee. The view of the Board of
Directors is that it is appropriate for the Company not to have such a committee
as each member of the Board participates in the consideration of the nominee. Of
the five current Board members, three are "independent" under the existing
standards of NASDAQ Capital Market issuers and director nominees are required to
be approved by a majority of the entire Board and a majority of the independent
directors. The Board generally relies on its network of industry and
professional contacts in connection with identifying potential Board members.
The Board is also open to presentation of nominees recommended by security
holders provided that sufficient information about the proposed nominees
business, industry and financial background is provided to the Board and such
information is received not less than 120 days prior to the release of the proxy
statement to our shareholders. The Board will only consider nominess that have
the requisite industry or financial experience to be able to advise and direct
senior management in the Company's operations. At a minimum, each nominee: (i)
must be prepared to represent the best interest of all of the Company's
shareholders, (ii) must be an individual who has demonstrated integrity and
ethics in his/her personal and professional field and has established a record
of professional accomplishment in his/her chosen field, (iii) must not have (and
his/her family members must not have) any material personal, financial or
professional interest in any present or potential competitor of the Company; and
(iv) must be prepared to participate fully in Board activities, including
attendance at, and active participation in, meetings of the Board and not have
other personal or professional commitments that would interfere or limit his or
her ability to do so.
Messrs. Broitman and Davino and Ms. Domuracki serve on the Compensation
Committee, the Audit Committee, and on the Stock Option Committee. The function
of the Compensation Committee is to determine and make recommendations to the
Board regarding the compensation of the Company's executives. The Stock Option
Committee administers the Company's stock option plans and awards stock options.
Code of Ethics
The Company has adopted a code of ethics applicable to the Company's
Executive Officer and financial officer, which is a "Code of Ethics" defined by
the applicable rules of the Securities and Exchange Commission. The Company
undertakes to provide to any person with out charge, upon request, a copy of the
Company's Standards of Business Conduct. Requests for such copy should be made
in writing to the Company at its principal office, which is set forth on the
first page of this Form 10-K, attention Chief Financial Officer. If the Company
makes any amendment to its code of ethics, other than technical, administrative
or non-substantive amendments, or grants any waivers, including implicit waivers
from a provision of the code of ethics to the Company's principal executive
officer, principal financial officer or persons performing similar functions,
the Company will disclose the motive for the amendment or waiver, its effective
date and to what it applied on a report on Form 8-K filed with the Securities
and Exchange Commission.
Code of Conduct
The Company adopted a Code of Conduct that applies to all employees,
including all executive officers. Print copies of the Code of Conduct are
available to any stockholder that requests a copy.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors and persons who own more than ten percent of a
registered class of the Company's equity securities collectively, the "Reporting
Persons" to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and to furnish the Company with copies of
these reports. Based solely on the Company's review of the copies of such forms
received by it during the fiscal year ended January 28, 2006, the Company
believes that the Reporting Persons complied with all filing requirement
applicable to them.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation earned during the three
fiscal years ended January 28, 2006, January 29, 2005 and January 31, 2004 by
the Company's Chief Executive Officer and by the four most highly paid Company's
Executive Officers whose total compensation for such periods exceeded $100,000
(the "Named Executives"):
Summary Compensation Table
Long-term compensation
------------------------
Annual compensation Awards Payouts
-------------------------------------------------- ---------- ---------- ----------
Other
Annual Restricted Securities All Other
Compen- Stock Underlying LTIP Compen-
Fiscal Salary Bonus sation Awards(s) Options/ Payout sation
Name and Principal Position Year ($) ($) ($) ($) SARs (#) ($) ($)
- ---------------------------- -------- ---------- --------- ---------- ---------- ---------- ---------- --------
Henry Arnberg
Chairman of the Board
of Directors 2006 $150,000 $60,000 2 - - - -
2005 $218,000 - - - - - $2,919
2004 $250,000 - - - - - $2,060
Paul Gallagher 2006 $335,000 $350,000 2 - - 100,000 -
Chief Executive Officer 2005 $310,000 - - - 150,000 - $4,187
2004 $300,000 $150,000 1 - - - - $3,675
-
Beverly Eichel
Executive VP-Finance,
Chief Financial Officer
and Secretary 2006 $265,000 $185,000 2 - - 50,000 - -
2005 $265,000 - - - 40,000 - -
2004 $250,000 $87,500 1 - - - - -
Kristof Janowski
Executive Vice President
- Sales and Marketing 2006 $250,000 $175,000 2 - - 20,000 - -
2005 $250,000 - - - - - -
2004 $289,000 $50,000 1 - - - - -
Nicholas Paccione
Vice President -
Operations 2006 $175,000 $87,500 2 - - 20,000 - -
2005 $155,000 - - - - -
2004 $82,500 $21,500 1 - - 20,000 - -
1 Bonuses were earned in fiscal 2004 but paid in fiscal 2005
2 Bonuses were earned in fiscal 2006 but paid in fiscal 2007
The following table sets forth the individual grants of stock options made
during the fiscal year ended January 28, 2006 by the Company's Chairman of the
Board and the Named Executives:
Options/SAR Grants Table
Percent of
Number of total
Securities Options/SARs Exercise
Underlying Granted to or Base
Options/SARs Employees in Price Expiration 5% 10%
Name Granted (#) fiscal year ($/Sh) date ($) ($)
- ------------------- ----------- ----------- -------- --------- ----- -----
Henry Arnberg - - - - - -
Paul Gallagher 100,000 45% $1.34 1/27/2011 $171,000 $179,000
Beverly Eichel 50,000 22% $1.34 1/27/2011 $85,000 $90,000
Kristof Janowski 20,000 9% $0.97 4/1/2010 $25,000 $26,000
Nicholas Paccione 20,000 9% $0.97 4/1/2010 $25,000 $26,000
Option Exercises and Holdings
The following table sets forth information concerning the exercise of stock
options by the Named Executives during the Company's fiscal year ended January
28, 2006 the number of options owned by the Named Executives and the value of
any in-the-money unexercised stock options as of January 28, 2006.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
Number of Unexercised Value of Unexercised
Options at In-the-Money Options at
Fiscal Year End (#) Fiscal Year End ($)
Name Shares Acquired Value
on Exercise (#) Realized Exercisable/Unexercisable Exercisable/Unexercisable
- --------------------- ------------------- --------------- --------------------------- ------------------------------
Henry Arnberg 0 $0 0/0 $ 0/0
Paul Gallagher 0 $0 625,000/25,000 $ 356,000/26,000
Beverly Eichel 0 $0 294,000/14,000 $ 210,000/15,000
Kris Janowski 0 $0 81,000/20,000 $ 85,000/7,000
Nicholas Paccione 0 $0 13,000/27,000 $ 6,000/10,000
Employment Agreements
Paul Gallagher - President and Chief Executive Officer
As of September 11, 2004, Mr. Gallagher entered into a two-year employment
agreement to serve as the Company's President, Chief Operating Officer and a
director. Mr. Gallagher was subsequently appointed to the position of Chief
Executive Officer upon the retirement of Henry Arnberg.
Mr. Gallagher's employment agreement provides for the payment of an annual
base salary of $325,000 during the first year of the agreement, and $350,000
during the second year of the agreement. The agreement also entitles Mr.
Gallagher to participate in and receive a bonus under the Company's annual
incentive plan for key employees with a possible maximum bonus of up to 100% of
Mr. Gallagher's annual base salary. In addition, the employment agreement
provides for the reimbursement of certain business expenses, the provision of
health insurance and an automobile allowance.
The employment agreement requires Mr. Gallagher to devote his entire
business time and attention to the Company and provides for termination upon his
death or disability (defined as the inability to perform duties for three (3)
consecutive months or six (6) months in any nine (9) month period), or for cause
(as defined in the Gallagher Agreement).
In the event the Company terminates the employment agreement other than for
cause, or materially breaches its obligations thereunder, Mr. Gallagher is
entitled to receive payment of his salary for up to six months plus a pro-rata
portion, based upon his period of service to the Company, of the amount, if any,
he would have been entitled to receive under the Incentive Plan if his
employment had continued until the end of the fiscal year. The employment
agreement also provides that Mr. Gallagher shall not compete with the Company
during the term of the agreement and for a period of one (1) year thereafter. A
change of control provision under which Mr. Gallagher would be entitled to
receive an amount equal to his base salary for a period of one year following
the termination of employment is included, in addition to any and all health and
dental, disability, survivor income and life insurance plan or other benefit
plan maintained by the Company.
Beverly Eichel - Executive Vice President, Chief Financial Officer and Secretary
As of February 1, 2006, Ms. Eichel entered into a two-year employment
agreement to serve as the Company's Executive Vice-President-Finance and
Administration, Chief Financial Officer and Secretary
Ms. Eichel's employment agreement provides for the payment of an annual
salary of $275,000 during the first year of the agreement, and $290,000 during
the second year of the agreement. The agreement also entitles Ms. Eichel to
participate in and receive a bonus under the Company's annual incentive plan for
key employees with a possible maximum bonus of 70% of Ms. Eichel's annual base
salary. In addition, Ms. Eichel's employment agreement provides for the
reimbursement of business expenses including an automobile and cellular phone
allowance, the provision of health insurance and related benefits.
The employment agreement requires Ms. Eichel to devote her entire business
time and attention to the Company and provides for termination upon her death or
disability (defined as the inability to perform duties for three (3) consecutive
months or six (6) months in any nine (9) month period), or for cause (as defined
in the employment agreement). The employment agreement also provides that Ms.
Eichel not compete with the Company during the term of the agreement and for a
period of one (1) years thereafter. A change of control provision under which
Ms. Eichel would be entitled to receive an amount equal to her base salary for a
period of one year following the termination of employment, in addition to any
and all health and dental, disability, survivor income and life insurance plan
or other benefit plan maintained by the Company, is included.
Director's Compensation
Directors who are employees of the Company or its subsidiaries receive no
compensation, as such, for service as members of the Board other than
reimbursement of expenses incurred in attending meetings. Directors who are not
employees of the Company or its subsidiaries receive an annual directors' fee of
$6,000 plus $1,250 for each board or stockholder's meeting attended and $1,000
for each meeting of an executive committee of the Board attended, and are
reimbursed for expenses incurred in attending such meetings. In addition, all
non-employee directors participate in the Company's 2004 Non-Employee Director
Stock Option Plan. Under the terms of our 2004 Non-Employee Director Stock
Option Plan, each non-employee director receives a grant of 10,000 options upon
their appointment to the Board. In addition, each non-employee director receives
an automatic grant of 10,000 options on the date of our Annual Meeting of
Stockholder's, the exercise price for all of these options is the fair market
value on the date grant. In fiscal 2002, the Board approved the issuance of
50,000 warrants to one independent director and one retired director for
services rendered to the Company. The director was also granted certain
registration rights associated with the warrants. The warrants had an exercise
price of $.50 per share, which was the fair market value on the date of grant.
In fiscal 2006, each independent director was issued 10,000 options under the
Company's 2004 Non-Employee Stock Option. The options have an exercise price of
$1.33 per share, which was the fair market value as of the date of the grant.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The Company's Compensation Committee of the Board of Directors consists of
Marvin Broitman, Mary Ann Domuracki and Christopher Davino, all of who are
independent outside directors of the Company. The Compensation Committee's
primary responsibility is for reviewing the Company's compensation practices for
executive officers and key employees.
The Compensation Committee has furnished the following report on executive
compensation.
Compensation Committee Report
The Compensation Committee of the Board of Directors (the "Committee") is
composed of three independent outside directors of the Company.
The Committee focuses on compensating Company executives on a competitive
basis with other comparably sized and managed companies in a manner consistent
and supportive of overall Company objectives and through a compensation plan
which balances the long-term and short-term strategic initiatives of the
Company. The Committee intends that the Company's executive compensation program
will:
(1) reward executives for strategic management, the achievement of key
business objectives and enhancement of stockholder value;
(2) reflect each executive's success at resolving key operational issues;
(3) facilitate both the short-term and long-term planning process; and
(4) attract and retain key executives believed to be critical to the
long-term success of the Company.
The Company's compensation program for executive officers generally
consists of (i) a fixed base salary, (ii) performance-related annual bonus
awards and (iii) long-term incentive compensation in the form of stock options.
In addition, Company executives are able to participate in various benefit plans
generally available to other full-time employees of the Company. Each executive
officer's compensation package is designed to provide an appropriately weighted
mix of these elements, which in the aggregate provide a level of compensation
the committee believes is approximately equal to those provided by comparatively
sized and managed companies.
In reviewing the Company and executives' performance, the Committee takes
into consideration, among other things, the following performance factors in
making its compensation recommendations: revenues, net income and cash flow. The
Committee has received and considered outside guidance from compensation
consultants in its efforts to have comparability and fairness in their
determinations.
Base Salary
Base salary for the Company's executives is intended to provide competitive
remuneration for services provided to the Company over a one-year period. Base
salaries are set at levels designed to attract and retain the most appropriately
qualified individuals for each of the key management level positions within the
Company.
Short-Term Incentives
Short-term incentives are paid primarily to recognize specific operating
performance achieved within the last fiscal year. Since such incentive payments
are related to a specific year's performance, the Committee understands and
accepts that such payments may vary considerably from one year to the next. The
Company's bonus program generally ties executive compensation directly back to
the annual performance of both the individual executive and the Company overall.
Those executives not signatory to an employment agreement are able to earn a
percentage of their base salary as a performance-related bonus. Where there is
an employment agreement, an executive may earn a percentage of their base
salary, pursuant to the Company's annual incentive program, as a
performance-related bonus.
Long-Term Incentives
In order to align long-term executive compensation with long-term
stockholder value improvements, the Committee has from time to time awarded
stock option grants to executives of the Company in recognition of the value of
these grants in motivating long-term strategic decision making. The Company's
long-term performance ultimately determines compensation from stock options
because stock option value is entirely dependent on the long-term growth of the
Company's Common Stock price. During the fiscal year ended January 28, 2006,
190,000 stock options were granted to the Company's senior executive officers.
During the fiscal year ended January 29, 2005, 190,000 options were granted to
the Company's senior executive officers.
Chief Executive Officer
Mr. Gallagher's base salary and long-term incentive compensation are
determined by the Compensation Committee based upon the same facts as those used
by the Compensation Committee for executives in general. Effective September 11,
2004, Mr. Gallagher entered into a two year agreement that provides for his
annual base salary at $325,000 for the first year and $350,000 for the second
year. In formulating the terms of Mr. Gallaghers agreement, the Committee
engaged and received guidance from an independent compensation consultant who
advised them on the comparability and fairness to the stockholders of the terms
of the employment agreement. Mr. Gallagher will receive a short-term incentive
bonus payment from the Company for fiscal 2006.
In addition to his base salary, Mr. Gallagher is eligible to participate in
the short-term and long-term incentive programs outlined above for the other
Named Executives (including the Company's annual incentive program). The targets
in the annual incentive program for Mr. Gallagher were developed by the
Compensation Committee with the input and guidance of an outside compensation
consultant.
COMPENSATION COMMITTEE:
Marvin Broitman (Chairperson)
Mary Ann Domuracki
Christopher Davino
Stock Option Plans
The Company maintains two active stock option plans pursuant to which
options to purchase an aggregate of 1,424,000 shares of Class A Common Stock may
be granted. In addition, certain options granted pursuant to the Company's
expired 1993 Stock Option Plan and 1994 Non-Employee Director Stock Option Plan
remained outstanding.
1993 Stock Option Plan. The 1993 Stock Option Plan was adopted by the Board
of Directors in December 1993 and was approved by the stockholders of the
Company in July 1994 (the "1993 Plan"). The 1993 Plan, as amended, had 1,750,000
shares of Class A Common Stock reserved for issuance upon exercise of options
designated as either (i) incentive stock options ("ISOs") under the Internal
Revenue Code of 1986, as amended (the "Code"), or (ii) non-qualified options.
ISOs may be granted under the 1993 Plan to employees and officers of the
Company. Non-qualified options are permitted to be granted to consultants,
directors (whether or not they are employees), employees or officers of the
Company.
The purpose of the 1993 Plan was to encourage stock ownership by certain
directors, officers and employees of the Company and certain other persons
instrumental to the success of the Company and to give them a greater personal
interest in the success of the Company. The 1993 Plan is administered by the
Stock Option Committee. The Committee, within the limitations of the 1993 Plan,
determined the persons to whom options were granted, the number of shares to be
covered by each option, whether the options granted were intended to be ISOs,
the duration and rate of exercise of each option, the option purchase price per
share and the manner of exercise, the time, manner and form of payment upon
exercise of an option, and whether restrictions such as repurchase rights in the
Company were to be imposed on shares subject to options. Options granted under
the 1993 Plan were not to be granted at a price less than the fair market value
of the Class A Common Stock on the date of grant (or 110% of fair market value
in the case of persons holding 10% or more of the voting stock of the Company).
The aggregate fair market value of shares for which ISOs granted to any person
were exercisable for the first time by such person during any calendar year
(under all stock option plans of the Company and any related corporation) may
not exceed $100,000. The 1993 Plan was terminated in December 2003; however,
options granted under the 1993 Plan will expire not more than five years from
the date of grant. Options granted under the 1993 Plan are not transferable
during an optionee's lifetime but are transferable at death by will or by the
laws of descent and distribution.
1994 Non-Employee Director Stock Option Plan. The 1994 Non-Employee
Director Stock Option Plan, as amended, (the "Directors Plan") was adopted by
the Board of Directors in September 1994 and was approved by the stockholders of
the Company in June 1995. The Directors Plan had 234,375 shares of Class A
Common Stock reserved for issuance. Pursuant to the terms of the Directors Plan,
each independent unaffiliated Director was automatically granted without any
further action by the Board of Directors or the Stock Option Committee: (i) a
non-qualified option to purchase 10,000 shares of Class A Common Stock upon
their election to the Board of Directors; and (ii) a non-qualified option to
purchase 10,000 shares of Class A Common Stock on the date of each annual
meeting of stockholders following their election to the Board of Directors. The
exercise price of each option was the fair market value of the Company's Class A
Common Stock on the date of grant. Each option expires five years from the date
of grant and vests in three annual installments of 33 1/3% each on the first,
second and third anniversary of the date of grant. Options granted under the
Directors Plan are generally not transferable during an optionee's lifetime but
are transferable at death by will or by the laws of descent and distribution. In
the event an optionee ceases to be a member of the Board of Directors (other
than by reason of death or disability), then the non-vested portion of the
option immediately terminates and becomes void and any vested but unexercised
portion of the option may be exercised for a period of 180 days from the date
the optionee ceased to be a member of the Board of Directors. In the event of
death or permanent disability of an optionee, all options accelerate and become
immediately exercisable until the scheduled expiration date of the option. The
plan expired in September 2004.
2003 Stock Option Plan. The 2003 Plan, as amended, was adopted by the Board
of Directors in May 2003 and was approved by the stockholders of the Company in
July 2003 (the "2003 Plan") and amended on January 25, 2006. The 2003 Plan
currently has 1,750,000 shares of Common Stock reserved for issuance upon the
exercise of options designated as either (i) incentive stock options ("ISOs")
under the Code or (ii) non-qualified stock options. ISOs may be granted under
the 2003 Plan to employees and officers of the Company. Non-qualified options
may be granted to consultants, directors (whether or not they are employees),
employees or officers of the Company. In certain circumstances, the exercise of
stock options may have an adverse effect on the market price of the Company's
Common Stock.
The purpose of the 2003 Plan is to encourage stock ownership by certain
directors, officers and employees of the Company and certain other persons
instrumental to the success of the Company and give them a greater personal
interest in the success of the Company. The 2003 Plan is administered by the
Stock Option Committee. The Committee, within the limitations of the 2003 Plan,
determines the persons to whom options will be granted, the number of shares to
be covered by each option, whether the options granted are intended to be ISOs,
the duration and rate of exercise of each option, the option purchase price per
share and the manner of exercise, the time, manner and form of payment upon
exercise of an option, and whether restrictions such as repurchase rights in the
Company are to be imposed on the shares subject to options. Options granted
under the 2003 Plan may not be granted at a price less than the fair market
value of the Common Stock on the date of the grant (or 110% of fair market value
in the case of persons holding 10% or more of the voting stock of the Company).
The aggregate fair market value of shares for which ISOs granted to any person
are exercisable for the first time by such person during any calendar year
(under all stock option plans of the Company and any related corporation) may
not exceed $100,000. The 2003 Plan will terminate in December, 2013 which means
no options may be granted after such date. Options granted under the 2003 Plan
will expire not more than five years from the date of grant; however, any
options outstanding on the termination date of the 2003 Plan will continue until
they expire by their terms. Options granted under the 2003 Plan are not
transferable during an optionee's lifetime but are transferable at death by will
or by the laws of descent and distribution.
2004 Non-Employee Director Stock Option Plan. The 2004 Plan was adopted by
the Board of Directors in August 2004 and approved by the stockholders of the
Company in January 2005 (the "2004 Plan"). The 2004 Plan reserves 148,042 shares
of Class A Common Stock for issuance to the Company's independent and
unaffiliated directors. Pursuant to the terms of the 2004 Plan each independent
and unaffiliated director shall automatically be granted, subject to
availability, without any further action by the Board of Directors or the Stock
Option Committee: (i) a non-qualified option to purchase 10,000 shares of Class
A Common Stock upon their initial election or appointment to the Board of
Directors; and (ii) a non-qualified option to purchase 10,000 shares of Class A
Common Stock on the date of each annual meeting of stockholders following their
election or appointment to the Board of Directors. The exercise price of each
option is the fair market value of the Company's Class A Common Stock on the
date of grant. Each option expires five years from the date of grant and vests
in three annual installments of 33 1/3% each on the first, second and third
anniversary of the date of grant. Options granted under the 2004 Plan would
generally not be transferable during an optionee's lifetime but would be
transferable at death by will or by the laws of descent and distribution. In the
event an optionee ceases to be a member of the Board of Directors (other than by
reason of death or disability), then the non-vested portion of the option would
immediately terminate and become void and any vested but unexercised portion of
the option may be exercised for a period of 180 days from the date the optionee
ceased to be a member of the Board of Directors. In the event of death or
permanent disability of an optionee, all options accelerate and become
immediately exercisable until the scheduled expiration date of the option.
Corporate Peformance Graph
We believe that we are the only publicly-held firm in the embroidery
equipment industry, and therefore do not believe that we can reasonably identify
an embroidery industry-based peer group. We have elected to define a peer group
based on a group of four industrial distributors, trading in similar SIC Codes,
with relatively low market capitalization for a benchmark. The following graph
and table compares the change in the cumulative total stockholder return for the
five-year period beginning on January 31, 2002, and ending on January 28, 2006,
based upon the market price of the Company's Class A Common Stock, with the
cumulative total return of the NASDAQ Composite Index and the defined Peer
Group. The Peer Group includes the following companies: Lancer Corp.; Quipp
Inc.; Paul Mueller Company; and Key Technology Inc. The graph assumes a $100
investment on January 31, 2002 in each of the indices and the reinvestment of
any and all dividends.
[GRAPHIC OMITTED]
Comparison of Five-Year Cumulative Total Return Among
Hirsch International Corp., NASDAQ Composite Index
and an industry-based market capitalization-based peer group
1/31/02 1/31/03 1/31/04 1/29/05 1/28/06
------- ------- ------- ------- -------
Hirsch International Corp. $100 $ 85 $458 $202 $254
NASDAQ Composite Index 100 68 107 107 119
Peer Group 100 102 139 157 187
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth the beneficial ownership of shares of Class A
Common Stock and Class B Common Stock as of March 30, 2006, by (i) each person
who owns more than 5% of the outstanding shares of Class A and Class B Common
Stock; (ii) each executive officer and director of the Company; and (iii) all
officers and directors of the Company as a group:
Name and Address Amount and Nature of
of Beneficial Owner (1) Title of Class (2) Beneficial Ownership Percent of Class
- ----------------------------------------- -------------------------- -------------------------- --------------------
Henry Arnberg................. Class A 981,658 12.3%
Class B 500,018(3) 95.2%
Paul Levine................... Class A 1,074,621(4) 13.5%
Class B - -
Paul Gallagher................ Class A 920,000(8) 11.6%
Class B - -
Marvin Broitman............... Class A 92,500(5) 1.2%
Class B - -
Mary Ann Domuracki............ Class A 40,001(6) *
Class B - -
Christopher Davino............ Class A 10,000(7) *
Class B - -
Beverly Eichel................ Class A 324,000(9) 4.0%
Class B - -
All Officers and Directors as Class A 3,442,780 43.1%
a group (six persons) Class B 500,018 95.2%
* Less than one percent
(1) All addresses are c/o Hirsch International Corp., 200 Wireless Boulevard,
Hauppauge, New York 11788.
(2) The Company's outstanding Common Stock consists of two classes. Class A
Common Stock and Class B Common Stock. The Class A Common Stock and the
Class B Common Stock are substantially identical except that two-thirds of
the directors of the Company will be elected by the holders of the Class B
Common Stock, as long as the number of outstanding Shares of Class B Common
Stock equals or exceeds 400,000 shares.
(3) Includes 400,018 shares of Class B Common Stock held by an estate planning
entity for the benefit of Mr. Arnberg's children. Mr. Arnberg exercises
voting control over these shares
(4) Includes 100,000 shares of Class A Common Stock owned by trusts created for
the benefit of his minor children as to which he disclaims beneficial
ownership.
(5) Includes options to purchase 10,000 shares of Class A Common Stock at an
exercise price of $0.96, 12,500 shares of Class A Common Stock at an
exercise price of $0.27, 10,000 shares of Class A Common Stock at an
exercise price of $0.92 per share, 6,667 shares of Class A Common Stock at
an exercise price of $1.02 per share and options to purchase 3,333 shares
of Class A Common Stock at an exercise price of $1.33 per share. Also
includes warrants to purchase 50,000 shares of Class A Common Stock at
$0.50 per share. Does not include options to purchase 3,333 shares of Class
A Common Stock at an exercise price of $1.02 per share and options to
purchase 6,667 shares of Class A Common Stock at and exercise price of
$1.33.
(6) Includes options to purchase 10,000 shares of Class A Common Stock at an
exercise price of $0.89, 10,000 shares of Class A Common Stock at an
exercise price of $0.27, 10,000 shares of Class A Common Stock at an
exercise price of $0.92 per share, 6,667 shares of Class A Common Stock at
an exercise price of $1.02 per share and options to purchase 3,334 shares
of Class A Common Stock at an exercise price of $1.33 per share. Does not
include options to 3,333 shares of Class A Common Stock at an exercise
price of $1.02 per share and options to purchase 6,666 shares of Class A
Common Stock at and exercise price of $1.33.
(7) Includes options to purchase 6,667 shares of Class A Common Stock at an
exercise price of $1.01 per share and options to purchase 3,333 shares of
Class A Common Stock at an exercise price of $1.33 per share. Does not
include options to purchase 3,333 shares of Class A Common Stock at an
exercise price of $1.01 per share and options to purchase 6,667 shares of
Class A Common Stock at and exercise price of $1.33.
(8) Includes options to purchase 100,000, 275,000, 150,000 and 100,000 shares
of Class A Common Stock at an exercise price of $0.95, $0.27, $1.12 and
$1.34 per share respectively. Does not include options to purchase 25,000
shares of Class A Common Stock at an exercise price of $0.27 per share.
(9) Includes options to purchase 50,000, 154,000, 40,000 and 50,000 shares of
Class A Common Stock at an exercise price of $0.52, $0.27, $1.12 and $1.34
per share respectively. Does not include options to purchase 14,000 shares
of Class A Common Stock at an exercise price of $0.27 per share.
The Company is unaware of any arrangements between stockholders that may
result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective January 31, 2004. we executed a TUI Agreement with Tajima
pursuant to which we sold all of the common stock constituting a 55% equity
interest of our TUI subsidiary owned by us to Tajima. The Company's Consolidated
Financial Statements have been restated to reflect the discontinued operations
of TUI (See Note 7 to the Consolidated Financial Statements).
During the quarter ended April 30, 2004, we determined that our Hometown
Threads subsidiary was not strategic to our long-term objectives. On October 22,
2004, we sold substantially all of the assets of our Hometown Threads subsidiary
to Embroidery Acquisition LLC, a wholly owned subsidiary of PCA, LLC pursuant to
the terms of a certain Asset Purchase Agreement. Hometown Threads was accounted
for as discontinued operations in the consolidated financial statements for all
periods presented (See Note 7 to the Consolidated Financial Statements).
Prior to January 2003, we had advanced approximately $496,000 for premiums
on split dollar life insurance for Henry Arnberg, the Company's Chairman of the
Board and Paul Levine, our former Vice-Chairman of the Board. The spouse of each
Messrs. Arnberg and Levine are the beneficiaries of these respective policies.
These advances are collateralized by the cash surrender value of the policies,
which totaled in the aggregate approximately $989,000 at January 28, 2006 for
both policies. The premiums for these policies are currently being paid out of
the accumulated dividends for the policies.
On April 2, 2004, we entered into a 36 month consulting agreement with Paul
Levine, former Vice-Chairman of the Board of Directors. Under the agreement, Mr.
Levine resigned from the Board of Directors and was relieved of all fiduciary
positions or committees. Mr. Levine is longer an employee of the Company and for
the term of the agreement is considered an independent contractor. A monthly fee
of $9,166.67 will be paid to Mr. Levine, in addition to the cost of medical
benefits as provided to executive level employees of the Company, premiums for
his disability policy and payments under an automobile lease which expired
January 18, 2005. Mr. Levine will provide consulting services for up to 4 days
per month during the term of the agreement including attendance at trade shows,
business development activities, contact with key customer accounts, product
assessment and undertaking special projects.
During the fourth quarter of fiscal 2005, Howard Arnberg, former President
of Hometown Threads, received a lump sum payment in the amount of $92,500. This
payment was made pursuant to a change of control provision in an employment
agreement between Mr. Howard Arnberg and us in connection with the sale of
Hometown Threads in October, 2004. Howard Arnberg is no longer affiliated with
the Company.
On December 1, 2004, we entered into a 36 month consultant agreement with
Henry Arnberg, Chairman of the Board of Directors. Under the agreement, Mr.
Arnberg is no longer an employee of the company, but will remain Chairman of the
Board of Directors. A monthly fee of $12,500 will be paid to Mr. Arnberg in lieu
of any other compensation for his service on the Board of Directors. Mr. Arnberg
would continue to receive medical benefits as provided to the executive level of
employees of the Company, premiums for his disability policy and payments under
the current automobile lease until the lease expires. Mr. Arnberg will provide
consulting services for up to 10 days per month during the term of the agreement
including attendance at trade shows, contact with key customer accounts, product
assessment and undertaking special projects.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The policy of the Audit Committee is to review and pre-approve both audit
and non-audit services to be provided by our independent registered public
accounting firm (other than certain exceptions permitted by the Sarbanes Oxley
Act of 2002). The Audit Committee negotiates the annual audit fee directly with
our independent registered public accounting firm. Any work in addition to these
pre-approved services in a quarter requires the advance approval of the Audit
Committee. The Audit Committee considered and discussed with BDO Seidman, LLP
and management as to whether the provision of permitted non-audit services is
compatible with maintaining BDO Seidman, LLP's independence. All fees for both
audit and tax services were pre-approved by the Audit Committee.
The following table sets forth the fees paid to BDO Seidman, LLP for
professional services for each of the two fiscal years ended January 28, 2006
and January 29, 2005:
2006 2005
---------------- --------------
Audit Fees...................... $157,000 $160,500
Audit-Related Fees.............. 17,000 114,000
Tax Fees........................ 30,500 30,500
---------------- --------------
$204,500 $305,000
================ ==============
Audit fees include fees billed for (a) the audit of Hirsch International
Corp. and its consolidated subsidiaries, (b) the review of quarterly financial
information, (c) attendance at the annual stockholders' meeting and (d) the
statutory audit for one subsidiary.
Audit-Related Fees include fees billed for (a) consultation on accounting
matters and (b) the audit of an employee benefit plan and (c) assistance with
the proposed merger with Sheridan Square Entertainment.
Tax Fees include fees billed for the preparation of tax returns and
consulting on tax examinations and planning matters.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
(a)(1) All financial statements Page(s)
Index to Consolidated Financial Statements.................. F-1
Report of Independent Registered Public Accounting Firm..... F-2
Consolidated Balance Sheets................................. F-3 to F-4
Consolidated Statements of Operations....................... F-5
Consolidated Statements of Stockholders' Equity............. F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8 to F-27
Exhibits.................................................... F-28 to F-32
(a)(3) Exhibits which are listed on the Exhibit Index below
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ---------------- ----------------------------------------------------------
%3.1 Restated Certificate of Incorporation of the Registrant
^3.2 Amended and Restated By-Laws of the Registrant
*4.1 Specimen of Class A Common Stock Certificate
*4.2 Specimen of Class B Common Stock Certificate
@10.1 Distributorship Agreement dated as of April, 2004 among the Company,
Tajima Industries Ltd ("Tajima"), Tajima USA, Inc ("TUI") and Tajima
America Corp.("TAC")
@10.2 Distributorship Agreement dated as of April, 2004 among the Company,
Tajima Industries Ltd ("Tajima"), Tajima USA, Inc ("TUI") and Tajima
America Corp.("TAC")
+++10.3 1993 Stock Option Plan, as amended
***10.4 2003 Stock Option Plan, as amended
+++10.5 1994 Non-Employee Director Stock Option Plan, as amended
*****10.6 2004 Non-Employee Director Stock Option Plan
**10.7 Lease Agreement dated March 8, 2001 between the Company and
Brandywine Operating Partnership, L.P.
++10.8 First Amendment to Lease dated December 2001 between the Company and
Brandywine Operating Partnership, L.P.
****10.9 Loan and Security Agreement dated as of November 26, 2002, by and
between Congress Financial Corporation, as Lender and Hirsch
International Corp., as Borrower.
++++10.10 Amendment No.1 to Loan and Security Agreement dated as of April
28, 2003
#10.11 Amendment No.2 to Loan Security Agreement dated as of July 16, 2003
+10.12 Amendment No.3 to Loan and Security Agreement dated April 30, 2004
@10.13 Amendment No. 4 to Loan and Security Agreement dated August 31,
2004.
## 10.14 Agreement and Plan of Merger dated July 20, 2005.
10.15 Lease Agreement dated February 23, 2006 between the Company and 50
Engineers Road H LLC.
21.1 List of Subsidiaries of the Registrant
23.1 Independent Registered Public Accounting Firm Consent
31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14 and
15d-14 of the Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer pursuant to Rules 13a-14 and
15d-14 of the Securities Exchange Act of 1934.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
the 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 Form 10-Q filed for
the quarter ended July 31, 2004.
+ Incorporated by reference from Registrant's Form 10-K filed for the
year ended January 29, 2005.
* Incorporated by reference from the Registrant's Registration Statement
on Forms S-1, Registration Number 33-72618.
** Incorporated by reference from Registrant's Report on Form 8-K filed
with the Commission March 15, 2001.
++ Incorporated by reference from Registrant's Form 10-K for the fiscal
year ended January 31, 2002.
+++ Incorporated by reference from Registrant's definitive proxy statement
filed with the Commission on May 30, 2002.
*** Incorporated by reference from Registrant's definitive proxy statement
filed with the Commission on December 21, 2005.
**** Incorporated by reference from Registrant's Report on Form 8-K with
the Commission on December 6, 2002.
***** Incorporated by reference from Registrant's definitive proxy
statement filed with the Commissions on August 6, 2004.
++++ Incorporated by reference from Registrant's Report on Form 10-K filed
with the Commission on April 30, 2003.
# Incorporated by reference from Registrant's Report on Form 10-Q filed
with the Commission on September 15, 2003.
## Incorporated by reference from Registrant's Report on Form 8-K filed
with the Commission on July 26, 2005.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 Gallagher, President
Chief Executive Officer and
Chief Operating Officer
Dated: April 27, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
- ---------------------------------- Chairman of the Board of Directors April 27, 2006
Henry Arnberg
- ---------------------------------- President, Chief Executive Officer (Principal April 27, 2006
Paul Gallagher Executive Officer), Chief Operating Officer and
Director
- ---------------------------------- Executive VP-Finance and Administration, and Chief April 27, 2006
Beverly Eichel Financial Officer (Principal Accounting and Financial
Officer), Secretary
- ---------------------------------- Corporate Controller April 27, 2006
Daniel Vasquez
- ---------------------------------- Director April 27, 2006
Marvin Broitman
- ---------------------------------- Director April 27, 2006
Mary Ann Domuracki
- ---------------------------------- Director April 27, 2006
Christopher Davino
INDEX TO FINANCIAL STATEMENTS
HIRSCH INTERNATIONAL CORP.
Report of Independent Registered Public Accounting Firm F-2
Consolidated Financial Statements
Balance Sheets as of January 28, 2006 and January 29, 2005 F-3-F-4
Statements of Operations for the years ended
January 28, 2006, January 29, 2005 and January 31, 2004 F-5
Statements of Stockholders' Equity for the years ended
January 28, 2006, January 29, 2005 and January 31, 2004 F-6
Statements of Cash Flows for the years ended
January 28, 2006, January 29, 2005 and January 31, 2004 F-7
Notes to the Consolidated Financial Statements F-8-F-27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Hirsch International Corp.
Hauppauge, New York
We have audited the accompanying consolidated balance sheets of Hirsch
International Corp. and subsidiaries as of January 28, 2006 and January 29,
2005, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended January
28, 2006. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
controls over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hirsch
International Corp. and subsidiaries as of January 28, 2006 and January 29,
2005, and the results of their operations and their cash flows for each of the
three years in the period ended January 28, 2006, in conformity with accounting
principles generally accepted in the United States of America.
- -----------------------------
BDO Seidman, LLP
Melville, New York
March 31, 2006, except for Note 16 which is April 26, 2006.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
JANUARY 28, JANUARY 29,
ASSETS 2006 2005
--------------------- ---------------------
CURRENT ASSETS:
Cash and cash equivalents $13,166,000 $6,398,000
Restricted cash (Note 2c) 510,000 5,650,000
Accounts receivable, net of an allowance for possible losses
of $372,000 and $630,000, respectively (Notes 4 and 15c) 4,929,000 4,914,000
Inventories, net (Notes 3, 4 and 15c) 4,128,000 5,776,000
Other current assets 513,000 393,000
Assets of discontinued operations (Note 7) - 831,000
--------------------- ---------------------
Total current assets 23,246,000 23,962,000
--------------------- ---------------------
PROPERTY, PLANT AND EQUIPMENT, Net (Note 6) 1,574,000 1,949,000
OTHER ASSETS (Note 8) 1,534,000 715,000
--------------------- ---------------------
TOTAL ASSETS $26,354,000 $26,626,000
===================== =====================
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
JANUARY 28, JANUARY 29,
LIABILITIES AND STOCKHOLDERS' EQUITY 2006 2005
--------------------- ---------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Notes 4,9,15(d)) $9,428,000 $8,346,000
Capitalized lease obligation - short term (Note 10) 1,270,000 148,000
Customer deposits and other 430,000 585,000
Liabilities of discontinued operations (Note 7) - 1,495,000
--------------------- ---------------------
Total current liabilities 11,128,000 10,574,000
CAPITALIZED LEASE OBLIGATIONS - Less current maturities (Note 10) - 1,270,000
DEFERRED GAIN - (Note 10) 608,000 727,000
--------------------- ---------------------
11,736,000 12,571,000
Total liabilities --------------------- ---------------------
COMMITMENTS AND CONTINGENCIES (Note 15, 16)
STOCKHOLDERS' EQUITY (Note 12):
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 and outstanding; 9,104,000 and 9,002,000 shares respectively 91,000 90,000
Class B common stock, $.01 par value; authorized: 3,000,000 shares,
outstanding: 525,000 and 600,000 shares, respectively 5,000 6,000
Additional paid-in capital 41,471,000 41,465,000
Accumulated deficit (24,952,000) (25,489,000)
--------------------- ---------------------
16,615,000 16,072,000
Less: Treasury Class A Common stock at cost - 1,143,000 shares at
January 28, 2006 and 1,164,000 shares at January 29, 2005 (Note 13) 1,997,000 2,017,000
--------------------- ---------------------
Total stockholders' equity 14,618,000 14,055,000
--------------------- ---------------------
$26,354,000 $26,626,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ===================== =====================
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
Years Ended
January 28, January 29, January 31,
2006 2005 2004
---------------- ---------------- ----------------
$51,139,000 $44,394,000 $47,116,000
NET SALES
COST OF SALES (Note 15d,e) 34,033,000 30,660,000 32,003,000
---------------- ---------------- ----------------
17,106,000 13,734,000 15,113,000
GROSS PROFIT
---------------- ---------------- ----------------
OPERATING EXPENSES
Selling, general and administrative expenses 16,337,000 15,874,000 18,204,000
Restructuring costs (income) 147,000 - (716,000)
---------------- ---------------- ----------------
Total operating expenses 16,484,000 15,874,000 17,488,000
---------------- ---------------- ----------------
OPERATING INCOME (LOSS) 622,000 (2,140,000) (2,375,000)
---------------- ---------------- ----------------
OTHER INCOME (EXPENSE)
Interest expense (166,000) (185,000) (215,000)
Transaction costs (Note 16) (605,000) - -
Other income (expense) - net 271,000 186,000 565,000
---------------- ---------------- ----------------
Total other (expense) income (500,000) 1,000 350,000
---------------- ---------------- ----------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
PROVISION (BENEFIT) FOR INCOME
TAXES, AND DISCONTINUED OPERATIONS 122,000 (2,139,000) (2,025,000)
INCOME TAX PROVISION (Note 11) 32,000 9,000 25,000
---------------- ---------------- ----------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 90,000 (2,148,000) (2,050,000)
INCOME FROM DISCONTINUED OPERATIONS - NET (Note 7)
(Includes $943,000 gain on sale
of Hometown Threads for fiscal 2005) 447,000 376,000 2,494,000
---------------- ---------------- ----------------
$537,000 ($1,772,000) $444,000
NET INCOME (LOSS)
================ ================ ================
INCOME/(LOSS) PER SHARE:
BASIC:
Income (loss) from continuing operations $0.01 ($0.26) ($0.24)
Income (loss) from discontinued operations 0.05 0.05 0.29
================ ================ ================
Net income (loss) $0.06 ($0.21) $0.05
================ ================ ================
DILUTED:
Income (loss) from continuing operations $0.01 ($0.26) ($0.24)
Income (loss) from discontinued operations 0.05 0.05 0.29
================ ================ ================
Net income (loss) $0.06 ($0.21) $0.05
================ ================ ================
WEIGHTED AVERAGE NUMBER OF SHARES IN THE CALCULATION
OF INCOME (LOSS) PER SHARE
Basic 8,481,000 8,351,000 8,571,000
================ ================ ================
Diluted 9,617,000 8,351,000 8,571,000
================ ================ ================
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 28, 2006, JANUARY 29, 2005 AND JANUARY 31, 2004
- -------------------------------------------------------------------------------
Class A Class B
Common Stock Common Stock
(Note 12) (Note 12)
-------------------------------- ------------------------------
Shares Amount Shares Amount Additional
Paid-In Capital
--------------- -------------- ------------ -------------- ----------------
BALANCE, JANUARY 31, 2003 6,815,000 $68,000 2,668,000 $27,000 $41,397,000
Exercise of stock options & warrants 12,000 -- -- -- 11,000
Dividends -- -- -- -- --
Purchase of treasury shares (Note 13) -- -- -- -- --
Net income -- -- -- -- --
--------------- -------------- ------------ -------------- ----------------
BALANCE, JANUARY 31, 2004 6,827,000 68,000 2,668,000 27,000 41,408,000
Exercise of stock options & warrants 107,000 1,000 -- -- 57,000
Dividends -- -- -- -- --
Transfers 2,068,000 21,000 (2,068,000) (21,000) --
Net loss -- -- -- -- --
--------------- -------------- ------------ -------------- ----------------
BALANCE, JANUARY 29, 2005 9,002,000 90,000 600,000 6,000 41,465,000
Exercise of stock options & warrants 27,000 -- -- -- 6,000
Transfers 75,000 1,000 (75,000) (1,000) --
Treasury shares issued for services -- -- -- -- --
Net income -- -- -- -- --
--------------- -------------- ------------ -------------- ----------------
BALANCE, JANUARY 28, 2006 9,104,000 $91,000 525,000 $5,000 $41,471,000
=============== ============== ============ ============== ================
Treasury
Accumulated Stock
Deficit (Note 13) Total
-------------------- --------------- ---------------
BALANCE, JANUARY 31, 2003 $ (23,825,000) $ (1,602,000) $16,065,000
Exercise of stock options & warrants -- -- 11,000
Purchase of treasury shares (Note 13) -- (415,000) (415,000)
Dividends (257,000) -- (257,000)
Net income 444,000 -- $444,000
-------------------- --------------- ---------------
BALANCE, JANUARY 31, 2004 (23,638,000) (2,017,000) $15,848,000
Exercise of stock options & warrants -- -- 58,000
Dividends (79,000) -- (79,000)
Net loss (1,772,000) -- (1,772,000)
-------------------- --------------- ---------------
BALANCE, JANUARY 28, 2005 (25,489,000) (2,017,000) 14,055,000
Exercise of stock options & warrants -- -- 6,000
Treasury shares issued for services -- 20,000 20,000
Net income 537,000 -- 537,000
-------------------- --------------- ---------------
BALANCE, JANUARY 28, 2006 $(24,952,000) $(1,997,000) $14,618,000
==================== =============== ===============
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY
- ------------------------------------------------------------------------------
January 28, January 29, January 31,
2006 2005 2004
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $537,000 $(1,772,000) $444,000
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 582,000 786,000 887,000
Gain on sale of assets - - (50,000)
Recognized gain on sale of building (119,000) (119,000) (119,000)
Provision for (reversal of) reserves 570,000 (200,000) (140,000)
Minority interest - - 235,000
Reversal of restructuring accrual reserves - - (716,000)
Gains from discontinued operations (447,000) (943,000) (2,000,000)
Treasury stock issued for services 20,000
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable (65,000) 1,838,000 (2,493,000)
Net investments of sales type leases 43,000 (85,000) 553,000
Inventories 1,298,000 1,142,000 1,431,000
Other current assets and other assets 9,000 (315,000) 453,000
Trade acceptances payable 0 (1,324,000) 355,000
Accounts payable and accrued expenses 426,000 280,000 1,994,000
Prepaid income taxes and income taxes payable (6,000) (8,000) 3,176,000
--------------- ----------------- -----------------
Net cash provided by (used in) operating activities 2,848,000 (720,000) 4,010,000
--------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (49,000) (166,000) (552,000)
Proceeds from sale of fixed assets - 100,000
Proceeds from sale of subsidiary 1,139,000 500,000
Investment in Sheridan Square Entertainment, LLC (1,000,000)
--------------- ----------------- -----------------
Net cash (used in) provided by investing activities (1,049,000) 973,000 48,000
--------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash 5,140,000 (2,650,000) (2,100,000)
Repayments of long-term debt (177,000) (147,000) (123,000)
Exercise of stock options 6,000 58,000 11,000
Payment of dividends (79,000) (170,000)
Purchase of treasury shares - (415,000)
--------------- ----------------- -----------------
Net cash provided by (used in) financing activities 4,969,000 (2,818,000) (2,797,000)
--------------- ----------------- -----------------
NCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,768,000 (2,565,000) 1,261,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,398,000 8,963,000 7,702,000
--------------- ----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF YEAR 13,166,000 $6,398,000 $8,963,000
=============== ================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest and bank fees paid $569,000 $566,000 $584,000
=============== ================= =================
Income taxes paid $41,000 $50,000 $350,000
=============== ================= =================
Supplemental Disclosure of non-cash investing activity: In connection with the
sale of its TUI subsidiary effective January 31, 2004, the Company incurred
accounts payable to TUI in the amount of $4.5 million.
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 28, 2006, JANUARY 29, 2005 AND JANUARY 31, 2004
- -------------------------------------------------------------------------------
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Hirsch International Corp. ("Hirsch"), HAPL Leasing Co., Inc. ("HAPL" or "HAPL
Leasing"), Hirsch Business Concepts LLC ("HBC"), Hometown Threads LLC
("Hometown") through October 22, 2004, and Tajima USA, Inc. ("TUI") through
January 31, 2004 (collectively, the "Company").
The Company is a single source provider of sophisticated equipment and
value added products and services to the embroidery industry. The embroidery
equipment and value added products sold by the Company are widely used by
contract embroiderers, large and small manufacturers of apparel and fashion
accessories, retail stores and embroidery entrepreneurs servicing specialized
niche markets.
As of January 31, 2004 the Company sold its majority position in TUI to
Tajima Industries, Ltd. ("Tajima") and its earnings have been reported as
discontinued operations.
See Note 7 to the Consolidated Financial Statements for discontinued
operations of HAPL, Hometown and TUI.
Due to the discontinuation of entities noted above, the Company currently
only operates in a single reportable segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries.
All material inter-company balances and transactions have been
eliminated in consolidation.
b. Revenue Recognition - The Company distributes embroidery equipment.
Where installation and customer acceptance are a substantive part of
the sale, by its terms, the Company has deferred recognition of the
revenue until such customer acceptance of installation has occurred.
In fiscal years 2006, 2005, and 2004, most sales of new equipment did
not require installation as a substantive part of its sales and
accordingly; these sales were recorded at the time of shipment.
Service revenues and costs are recognized when services are provided.
Sales of software are recognized when shipped provided that no
significant vendor and post-contract and support obligations remain
and collection is probable.
c. Cash Equivalents - Cash equivalents consist of money market accounts
with initial maturities of three months or less. As of January 28,
2006, the Company had $0.5 million in restricted cash which was used
as a security deposit for the Company's corporate headquarters in
Hauppauge, NY. As of January 29, 2005, the Company had $5.7 million in
restricted cash which was used to collateralize outstanding standby
letters of credit. During fiscal 2006, the Company terminated the
standby letter of credit related to machine purchases, thereby
unrestricting $5.2 million in cash. On February 23, 2006, the Company
terminated its lease for its corporate headquarters and terminated its
standby letter of credit which then in turn unrestricted its cash.
d. Allowance for Doubtful Accounts - The Company maintains an allowance
for estimated losses resulting from the inability of its customers to
make required payments. An estimate of uncollectible amounts is made
by management based upon historical bad debts, current customer
receivable balances, age of customer receivable balances, the
customer's financial condition and current economic trends. If the
actual uncollected amounts significantly exceed the estimated
allowance, then the Company's operating results would be significantly
and adversely affected.
e. Inventories - Inventories consisting of machines and parts are stated
at the lower of cost or market. Cost for machinery is determined by
specific identification and for all other items on a first-in,
first-out weighted average basis. Reserves are established to record
provisions for slow moving inventories in the period in which it
becomes reasonably evident that the product is not salable or the
market value is less than cost. Used equipment is valued based on an
assessment of age, condition, model type, accessories, capabilities
and demand in the used machine market.
f. Foreign Currency Transactions - Trade acceptances payable are
denominated in Japanese yen and are related to the purchase of
equipment from the Company's major supplier. Gains and losses from
foreign currency transactions are included in cost of sales.
g. Property, Plant and Equipment - Property, plant and equipment are
stated at cost less accumulated depreciation and amortization.
Capitalized values of property under leases are amortized over the
life of the lease or the estimated life of the asset, whichever is
less. Depreciation and amortization are provided on the straight-line
or declining balance methods over the following estimated useful
lives:
Furniture and fixtures 3-7
Machinery and equipment 3-7
Software 3
Automobiles 3-5
Leasehold improvements 3-20
Property under capital lease 10
h. Impairment of Long-Lived Assets - The Company reviews long-lived
assets whenever events or changes in circumstances indicate that the
carrying value of any of these assets may not be recoverable. In that
regard the Company will assess the recoverability of such assets based
upon estimated undiscounted cash flow forecasts.
i. Warranty - The Company has a five-year limited warranty policy for its
embroidery machines. The Company's policy is to accrue the estimated
cost of satisfying future warranty claims on a quarterly basis. In
estimating its future warranty obligations, the Company considers
various relevant factors, including the Company's stated warranty
policies and practices, the historical frequency of claims, and the
cost to replace or repair its products under warranty. If the number
of actual warranty claims or the cost of satisfying warranty claims
significantly exceeds the estimated warranty reserve, the Company's
operating expenses and net income (loss) could be significantly
adversely affected.
j. Leases - Leases (in which the Company is lessee) which transfer
substantially all of the risks and benefits of ownership are
classified as capital leases, and assets and liabilities are recorded
at amounts equal to the lesser of the present value of the minimum
lease payments or the fair value of the leased properties at the
beginning of the respective lease terms. Interest expense relating to
the lease liabilities is recorded to effect constant rates of interest
over the terms of the leases. Leases which do not meet such criteria
are classified as operating leases and the related rentals are charged
to expense as incurred.
k. Income Taxes - The Company records deferred tax assets and liabilities
for the expected future tax consequences of events that have been
included in the Company's consolidated financial statements or tax
returns. Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial accounting
and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Valuation allowances are established when the Company cannot determine
the future utilization of some portion or all of the deferred tax
asset.
l. Income (Loss) Per Share - Basic earnings per share are based on the
weighted average number of shares of common stock outstanding during
the period. Diluted earnings per share are based on the weighted
average number of shares of common stock and dilutive common stock
equivalents (options and warrants) outstanding during the period,
computed in accordance with the treasury stock method. Outstanding
options and warrants of 1,136,000 were dilutive for the fiscal year
ended January 28, 2006 and 160,000 outstanding options were not
dilutive. Outstanding options and warrants of 1,253,000, and 1,258,000
were anti-dilutive for the fiscal years ended January 29, 2005 and
January 31, 2004, respectively. Included in the calculation of basic
and diluted earnings per share were 1,143,000 in treasury shares.
m. Stock-Based Compensation - The Company accounts for stock-based awards
to employees using the intrinsic value method.
The Company follows Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based compensation," ("SFAS 123") which
requires the disclosure of pro forma net income (loss) and earnings
(loss) per share. Under SFAS 123, the fair value of stock-based awards
to employees is calculated through the use of option pricing models,
even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock
option awards. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise,
which greatly affect the calculated values. The Company's calculations
were made at the date of the grant using the Black-Scholes option
pricing model with the following weighted average assumptions: Fiscal
2006: dividend yield of 0.00%, volatility of 78% and risk free
interest rate of 4.45% for grants on 1/27/06,volatility of 71% and
risk free interest rate of 3.84% for grants on 6/10/05, volatility of
74% and risk free interest rate of 3.72% for grants on 4/1/05 and an
expected life of 5 years. Fiscal 2005: dividend yield of 0.00%,
volatility of 67% and risk free interest rate of 3.72% for grants on
12/1/2004, 77% volatility and 3.40% 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. Fiscal 2004: dividend yield of 4.00%, volatility of 72%,
risk-free interest rate of 2.37% for grants on 06/02/2003, 2.14% for
grants on 06/16/2003 and 2.63% for grants on 07/09/2003 and an
expected life of 5 years. The Company's calculations are based on a
multiple option valuation approach and forfeitures are recognized as
they occur. The weighted average fair value of the options granted
during 2006, 2005 and 2004 was $1.24, $1.11 and $0.84, respectively.
If compensation cost for the Company's stock options had been
determined consistent with SFAS No. 123, the Company's net income
(loss) and earnings (loss) per share would have been the pro forma
amounts indicated below:
Year Ended
January 28 January 29 January 31
2006 2005 2004
---- ---- ----
Net income (loss):
Net income (loss) as reported $537,000 $(1,772,000) $444,000
Deduct Total stock-based employee
compensation expense determined
under fair value method 229,000 103,000 70,000
-------------------- -------------------- --------------------
Pro forma net income (loss) $308,000 $(1,875,000) $374,000
==================== ==================== ====================
Earnings (loss) per share:
Basic - as reported $0.06 $(0.21) $0.05
Basic - pro forma $0.04 $(0.22) $0.04
Diluted - as reported $0.06 $(0.21) $0.05
Diluted- pro forma $0.03 $(0.22) $0.04
n. Comprehensive Income - Statement of Financial Accounting Standards No.
130. "Reporting Comprehensive Income" ("SFAS 130") is equivalent to
the Company's net income for fiscal years 2006, 2005 and 2004.
o. Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted requires
management 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.
p. Fair Value of Financial Instruments - Financial instruments consist
primarily of investments in cash, cash equivalents, trade account
receivables, accounts payable and debt obligations. Where quoted
market prices are not available, fair values are estimated based on
assumptions concerning the amount and timing of estimated future cash
flow and assumed discount rates reflecting varying degrees of credit
risk, at January 28, 2006 and January 29, 2005, the fair value of the
Company's financial instruments approximated the carrying value.
q. Recent Accounting Pronouncements - The Financial Accounting Standards
Board ("FASB") has issued the following:
In November 2004, the FASB issued SFAS No. 151, "Inventory
Costs," which clarifies the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material
(spoilage) by requiring these items to be recognized as current-period
charges. SFAS No. 151 is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005, with earlier application
permitted. The adoption of SFAS No. 151 will have no impact on our
results of operations or our financial position.
In December 2004, the FASB issued SFAS 123R, "Share-Based
Payment." This statement is a revision of SFAS 123, "Accounting for
Stock-Based Compensation" and supercedes APB 25, "Accounting for Stock
Issued to Employees," and is effective beginning the first annual or
interim period after December 15, 2005. SFAS 123R establishes
standards on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. This statement
measurement of the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value of
the award. The cost will be recognized over the period during which an
employee is required to provide service in exchange for the award,
which is usually the vesting period. SFAS 123R also addresses
transactions in which an entity incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's
equity instruments or that may be settled by the issuance of those
equity instruments. The adoption of this statement could have a
material effect on our financial position or results of operations. We
intend to implement this statement in the first quarter of fiscal
2007.
In December 2004, the FASB issued SFAS 153, "Exchanges of
Nonmonetary Assets," which is effective for fiscal years beginning
after June 15, 2005. SFAS 153 amends APB 29, "Accounting for
Nonmonetary Transactions", which is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair
value of the assets exchanged. The guidance in APB29 included certain
exceptions to that principle. SFAS 153 amends APB 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The
adoption of this statement is not expected to have a material effect
on our financial position
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes
and Error Corrections," which changes the requirements for accounting
for and reporting of a change in accounting principle. SFAS No. 154
requires retrospective application to prior periods' financial
statements of a voluntary change in accounting principle unless it is
impracticable. SFAS No. 154 also requires that a change in method of
depreciation, amortization, or depletion for long-lived, nonfinancial
assets be accounted for as a change in accounting estimate that is
effected by a change in accounting principle. SFAS No. 154 is
effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005, but does not change
the transition provisions of any existing accounting pronouncements,
including those that are in a transition phase as of the effective
date of SFAS No. 154. The adoption of SFAS No. 154 will not have a
material effect on our results of operations or our financial
position.
In March 2005, the FASB issued FASB Interpretation No. 47 ("FIN
47"), "Accounting for Conditional Asset Retirement Obligations." FIN
47 clarifies that the term "conditional asset retirement obligation"
as used in SFAS No. 143, "Accounting for Assets Retirements
Obligations," refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement
are conditional on a future event that may or may not be within the
control of the entity. Furthermore, the uncertainty about the timing
and or method of settlement of a conditional asset retirement
obligation should be factored into the measurement of the liability
when sufficient information exists. FIN 47 clarifies that an entity is
required to recognize the liability for the fair value of a
conditional asset obligation when incurred if the liability's fair
value can be reasonably estimated. The adoption of this statement is
not expected to have a material effect on our financial position or
results of operations. We intend to implement the provisions of this
statement in the first quarter of 2006. Also in March 2005, the SEC
issued Staff Accounting Bulletin No. 107, "Share-Based Payments" ("SAB
107"). SAB 107 expresses views of the SEC regarding the interaction
between SFAS 123R and certain SEC rules and regulations and provides
the SEC's views regarding the valuation of share-based compensation
for public companies. We intend to apply the principles of SAB 107 in
conjunction with our adoption of SFAS 123R.
r. Reclassifications - Certain reclassifications have been applied to
prior year amounts to conform to current year presentation.
s. Shipping and handling expenses - The Company records freight charges
to customers in net sales and the cost of the freight in cost of
sales. Other freight costs are expensed in operating expenses on the
statement of operations. These expenses were approximately; $230,000,
$200,000, and $334,000 during the years ended January 28, 2006,
January 29, 2005, and January 31, 2004, respectively.
t. Advertising expenses - The Company expenses advertising as incurred.
These expenses were approximately; $419,000, $673,000, and $608,000
during the years ended January 28, 2006, January 29, 2005, and January
31, 2004, respectively
3. INVENTORIES
January 28, January 29,
------------------ -------------------
2006 2005
------------------ -------------------
New machines $2,386,000 $3,824,000
Used machines 183,000 566,000
Parts and accessories 2,868,000 2,979,000
Less reserve for slow-moving
inventory (1,309,000) (1,593,000)
------------------ -------------------
Total $4,128,000 $5,776,000
------------------ -- -------------------
4. CHANGES IN RESERVES
Allowance for Doubtful Accounts:
- --------------------------------
Opening Ending
Balance Additions Write Offs Adjustments Balance
------- --------- ---------- ----------- -------
Year ended January 28, 2006 $ 630,000 $ 150,000 $ 408,000 $ 0 $ 372,000
Year ended January 29, 2005 $ 680,000 $ 0 $ 0 $ (50,000) $ 630,000
Year ended January 31, 2004 $ 1,451,000 $ 230,000 $ (1,001,000) $ 0 $ 680,000
Inventory Reserve
-----------------
Opening Ending
Balance Additions Write Offs Adjustments Balance
------- --------- ---------- ----------- -------
Year ended January 28, 2006 $ 1,593,000 $ 350,000 $ 634,000 $ 0 $1,309,000
Year ended January 29, 2005 $ 1,582,000 $ 59,000 $ (148,000) $ 100,000 $1,593,000
Year ended January 31, 2004 $ 1,946,000 $ 80,000 $ 0 $ (444,000) $1,582,000
Warranty Reserve
----------------
Opening Ending
Balance Additions Write Offs Adjustments Balance
------- --------- ---------- ----------- -------
Year ended January 28, 2006 $ 543,000 $ 187,819 $ 0 $ (117,819) $ 613,000
Year ended January 29, 2005 $ 543,000 $ 233,602 $ 0 $ (233,602) $ 543,000
Year ended January 31, 2004 $ 543,000 $ 257,896 $ 0 $ (257,896) $ 543,000
During fiscal 2005, the Company reversed $50,000 in Accounts Receivable reserves
that were no longer necessary. The Company also received a $100,000 credit from
TUI (a former subsidiary) included in inventory reserve. During fiscal 2004, the
Company reversed $444,000 in inventory reserves that were no longer necessary.
5. NET INVESTMENT IN SALES-TYPE LEASES
January 28, January 29,
-------------------- -------------------
2006 2005
-------------------- -------------------
Total minimum lease payments receivable $0 $228,000
Estimated residual value of leased property (unguaranteed) (A) 0 461,000
Reserve for estimated uncollectible lease payments 0 (50,000)
Less: Unearned income 0 (56,000)
-------------------- -------------------
Net investment - Included in Assets of discontinued operations $0 $583,000
(See Note 7)
==================== ===================
(A) The estimated residual value of leased property will fluctuate based
on volume of transactions, financial structure of the transactions,
sales of residuals to third party financing organizations and periodic
recognition of the increased net present value of the residuals over
time.
6. PROPERTY, PLANT AND EQUIPMENT
January 28, January 29,
-------------------- -----------------
2006 2005
-------------------- -----------------
Property Under Capital Lease Obligation $1,786,000 $1,786,000
Software 614,000 614,000
Machinery and equipment 800,000 760,000
Furniture and fixtures 319,000 319,000
Automobiles 15,000 35,000
Leasehold improvements 604,000 594,000
-------------------- -----------------
Total 4,138,000 4,108,000
Less: Accumulated depreciation and amortization (2,564,000) (2,159,000)
-------------------- -----------------
Property, plant and equipment, net $1,574,000 $1,949,000
==================== =================
7. 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 segregated the assets, liabilities and operating results of these
discontinued operations for all periods presented.
In September 2003, the Company entered into a transaction whereby the
Company sold to Beacon Funding Corporation the residual receivables associated
with the lease portfolio for approximately $375,000. In the fourth quarter of
fiscal 2006, the Company completed the wind down of the remaining assets of the
lease portfolio. In conjunction with the termination of the portfolio, the
Company reversed, as part of discontinued operations, $270,000 of reserves that
had previously been recorded in fiscal 2002.
Assets and liabilities of discontinued operations of HAPL Leasing are as follows
(in thousands):
For the year ended,
January 28, January 29,
2006 2005
------------------- ----------------
Assets:
Accounts receivable......................... $0 $ 92
Minimum lease payments receivable and
residuals (Note 5)...... 0 583
Inventory................................... 0 0
Prepaid taxes and other assets..... 0 8
------------------- ----------------
Total Assets................................... $0 $ 683
=================== ================
Liabilities:
Accounts payable and accrued expenses $0 $1,009
Income taxes payable....................... 0 87
------------------- ----------------
Total Liabilities............................ $0 $1,096
=================== ================
Summary operating results of the discontinued operations of HAPL Leasing are as
follows (in thousands):
For the year ended
January 28, January 29, January 31,
2006 2005 2004
---- ---- ----
Revenue ........................... $ 32 $107 $ 619
Gross profit....................... 32 85 278
Income (loss) from discontinued
operations....... $270 $ 0 $2,000
Effective January 29, 2005, the Company executed an agreement with Tajima
Industries, Ltd. pursuant to which the Company sold all of the common stock (the
"Shares") constituting a 55% equity interest of its TUI subsidiary owned by it
to Tajima, upon the terms and conditions set forth in a certain Purchase and
Sale Agreement by and among the Company, Tajima and TUI (the "Agreement"). Upon
the consummation of the sale, Tajima owned 100% of TUI and the Company no longer
had an influence over the operations of TUI. TUI is reflected as discontinued
operations in the financial statements.
The purchase price (the "Purchase Price") for the Shares was equal to the
Book Value (as defined in the Agreement) calculated in accordance with generally
accepted accounting principles. At the closing, Tajima paid the Company the sum
of $500,000 (the "Initial Payment") in partial payment of the Purchase Price.
The remaining balance due on the Purchase Price was paid in accordance with the
terms of the Agreement.
In addition, the Company agreed to repay TUI the sum of $7,182,002,
representing amounts owed by the Company to TUI as of January 31, 2004 (the "Net
Intercompany Payable"). The Net Intercompany Payable was paid as follows:
(a) the Initial Payment ($500,000) was paid by Tajima to TUI on behalf of
the Company
(b) the assignment by the Company to TUI of its right to receive the sum
of $2,200,000 from Tajima upon payment of the balance due on the
Purchase Price, and
(c) the payment by the Company of the sum of $4,482,000 in five (5) equal
monthly installments of $735,167 each and a sixth payment of $806,165,
commencing February 29,2004 and continuing through and including July
31, 2004.
The Consolidated Financial Statements for all periods presented have been
restated to reflect the discontinued operations of TUI.
Summary operating results of the discontinued operations of TUI (in thousands)
are as follows:
For the year
ended
January 31,
2004
--------------
Revenue $13,228
Gross profit 1,812
Income (Loss) from Discontinued Operations $965
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. Pursuant to the Agreement, the Company, Hometown and
Buyer have entered into a certain Supply Agreement having a term of five (5)
years. Under the terms of the Supply Agreement, the Company agreed to supply to
Buyer and Buyer is required to purchase from the Company all products previously
purchased by Hometown from the Company and utilized in the Business upon the
prices, terms and conditions contained therein.
As a result of the sale of the Hometown Threads subsidiary, the Company
recognized a gain of approximately $943,000 in fiscal 2004.
The Buyer 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 were resolved.
During the fourth quarter of fiscal 2006, the Company resolved the remaining
open contingencies and recognized income from discontinued operations of
approximately $177,000.
Hometown Threads, LLC was accounted for as discontinued operations in the
consolidated financial statements for all periods presented.
Assets and liabilities of the discontinued operations of Hometown Threads, LLC
are as follows (in thousands):
January 29,
2005
------------------
Assets:
Accounts receivable 148
Property, Plant & Equipment -
Other Assets -
------------------
Total Assets $ 148
==================
Liabilities:
Accounts payable and accrued expenses $ 399
------------------
------------------
Total Liabilities $ 399
==================
Summary operating results of the discontinued operations of Hometown Threads,
LLC (in thousands) are as follows:
For the year ended
January 28, January 29, January 31,
2006 2005 2004
--------------- ---------------- ---------------
Revenue $0 $1,425 $1,693
Gross profit 0 646 867
Gain on Sale 0 943 0
Income (Loss) from
Discontinued Operations $177 $ (567) $ (471)
8. OTHER ASSETS
January 28, January 29,
---------------- ---------------
2006 2005
---------------- ----------------
Deferred financing costs (1) $0 $ 527,000
Officers Loans Receivable (2) 496,000 496,000
Investment in SSE, LLC (3) 1,000,000 -
Other 38,000 61,000
---------------- ----------------
Total other assets $1,534,000 $1,084,000
Accumulated amortization of Long Term
Other Assets - (369,000)
---------------- ----------------
Other Assets, net $ 1,534,000 $715,000
================ ================
(1) Deferred financing costs related to the (3 year) Loan and Security
Agreement in November 2002, and were being amortized over the term of
the agreement from Congress Financial Corp.
(2) Related to split dollar life insurance policy on 2 officers of the
Company. The Company no longer pays the premiums on the policies which
are collateralized by the cash surrender value of the policies of
$989,000 at January 28, 2006.
(3) On July 20, 2005 the Company entered into a definitive merger
agreement with Sheridan Square Entertainment, Inc. ("Sheridan
Square"), a privately held producer of recorded music, and SSE
Acquisition Corp, our wholly-owned subsidiary. In connection with the
merger agreement the Company purchased 20 shares of Series B Preferred
Stock of Sheridan Square for $500,000. On September 19, 2005, the
Company purchased an additional 20 shares of 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
Designation 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
the consummation of the merger, the Series B Preferred Stock will be
cancelled and of no further force and effect. As of January 28, 2006,
the Company expensed approximately $605,000 in transaction costs
associated with the termination of the merger between Sheridan Square
Entertainment and Hirsch. (See Note 16 to the Consolidated Financial
Statements).
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
January 28, January 29,
2006 2005
--------------- --------------
Other accrued expenses $ 1,232,000 $ 516,000
Accounts payable 6,302,000 6,887,000
Accrued payroll and bonus costs 1,281,000 400,000
Accrued warranty 613,000 543,000
--------------- --------------
Total accounts payable and accrued expenses $ 9,428,000 $8,346,000
=============== ==============
10. LONG TERM OBLIGATIONS
January 28, January 29,
2006 2005
--------------------- -------------------
$1,270,000 $1,418,000
Obligation Under Capital Lease (A)
Deferred Gain on Sale of Building (B) 608,000 727,000
--------------------- -------------------
Total 1,878,000 2,145,000
Less: Current maturities (1,270,000) (148,000)
--------------------- -------------------
$608,000 $1,997,000
Long-term maturities ===================== ===================
(A) Obligation Under Capital Lease of the Company at January 28, 2006 matures
as follows:
Fiscal Year Ending January 28, 2006 $ 1,705,000
Less: Amount representing interest (435,000)
-----------------
Present value of net minimum lease payments 1,270,000
Less current portion 1,270,000
-----------------
Long term lease obligations $0
=================
(B) On March 8, 2001, the corporate headquarters facility located at 200
Wireless Boulevard, Hauppauge, New York, was sold and partially leased back
from Brandywine Realty Trust in a concurrent transaction.
In fiscal 2003, the Company leased the entire facility and the lease of the
remaining portion of the building was accounted for as an operating lease.
Concurrent sale and leaseback transactions are subject to specific rules
regarding the timing of the recognition of the gain. This transaction
results in a non-recurring gain of $1.2 million deferred over the life of
the lease, a period of ten years. The related lease obligation meets the
rules requiring classification as a capital lease. The operating expense is
therefore reported as interest and depreciation on a straight-line basis
over the life of the lease, with both current and long-term portions,
rather than rent expense. The capitalized lease obligation and the related
asset were booked at an aggregate value of $1.8 million, and the term of
the lease is ten years. Cash proceeds of approximately $4.0 million were
provided by the sale.
On February 23, 2006, the Company terminated this lease and concurrently
signed a new operating lease of a facility also located in Hauppauge, New
York.
In the first quarter of Fiscal 2007, the Company will write off certain
balance sheet items related to the sales leaseback transaction previously
recorded in connection with the termination of the lease. The remaining
assets of approximately $1.2 million will be netted against the remaining
liabilities of approximately $1.2 million. In addition, after payment of
surrender fees of approximately $500,000, related to the termination of the
lease, the Company will recognize the remaining $100,000 in deferred gain.
11. INCOME TAXES
The income tax provision from continuing operations for each of the periods
presented herein is as follows:
January 28, January 29, January 31,
----------------- ------------------ -----------------
2006 2005 2004
----------------- ------------------ -----------------
Current:
Federal $ - $ - $ -
State 32,000 9,000 25,000
----------------- ------------------ -----------------
Total current 32,000 9,000 25,000
----------------- ------------------ -----------------
Deferred:
Federal - - -
State and foreign - - -
----------------- ------------------ -----------------
Total deferred: - - -
----------------- ------------------ -----------------
Total income tax provision $32,000 $9,000 $25,000
================= ================== =================
The tax effects of temporary differences that give rise to deferred income tax
assets and liabilities at January 28, 2006 and January 29, 2005 are as follows:
January 28, 2006 January 29, 2005
---------------- ----------------
Net Current
Net Current Net Long- Deferred Net Long-
Deferred Tax Term Deferred Tax Term Deferred
Assets Tax Assets Assets Tax Assets
---------------- ----------------- ------------------- ------------------
Accounts receivable $149,000 - $231,000 $-
Inventories 556,000 - 681,000 -
Accrued warranty costs 245,000 - 217,000 -
Acquisition costs 256,000 - - -
Other accrued expenses 9,000 - 10,000 -
Property, Plant and Equipment - 332,000 - -
Purchased technologies and goodwill - 1,658,000 - 1,958,000
Net operating loss - 11,151,000 - 10,079,000
Reserves for discontinued operations - - 377,000 -
Gain on sale of building 243,000 - - 291,000
---------------- ----------------- ------------------
1,458,000 13,141,000 1,516,000 12,328,000
Less valuation allowance (1,458,000) (13,141,000) (1,516,000) (12,328,000)
---------------- ----------------- ------------------- ------------------
$- $- $- $-
================ ================= =================== ==================
A full valuation allowance for such deferred tax assets has been established at
January 28, 2006 and January 29, 2005, since the Company cannot determine the
future utilization of those assets.
Net operating loss carry-forwards of $19.9 million for federal and $48.8 million
for state expire on various dates through 2024.
A reconciliation of the differences between the federal statutory tax rate of 34
percent and the Company's effective income tax rate is as follows:
Year Ended
January 28, January 29, January 31,
---------------- ----------------- ----------------
2006 2005 2004
---------------- ----------------- ----------------
Federal statutory income tax rate 34.0% (34.0)% (34.0)%
State income taxes, net of Federal benefit 36.8 - 1.0
Permanent differences 41.4 (45.0) 27.3
Valuation Allowance (75.4) 79 6.9
---------------- ----------------- ----------------
Effective income tax rate 36.8% 0% 1.2%
================ ================= ================
12. STOCKHOLDERS' EQUITY
a. Common and Preferred Stock - The Class A Common Stock and Class B
Common Stock has authorizations of 20,000,000 and 3,000,000 shares,
respectively. The Class A Common Stock and Class B Common Stock, are
substantially identical in all respects, except that the holders of
Class B Common Stock (one member of the Company's current management
and his affiliates) elect two-thirds of the Company's Board of
Directors (as long as the number of shares of Class B Common Stock
outstanding equals or exceeds 400,000), while the holders of Class A
Common Stock elect one-third of the Company's Board of Directors. Each
share of Class B Common Stock automatically converts into one share of
Class A Common Stock upon transfer to a non-Class B common stock
holder. The 1,000,000 shares of preferred stock are authorized and may
be issued from time to time, in such series and with such
designations, rights and preferences as the Board may determine.
b. Stock Option Plans - The Company maintains two active stock option
plans (2003 and 2004) pursuant to which an aggregate of approximately
1,424,000 shares of Common Stock may be granted. In addition, certain
options granted pursuant to the Company's expired stock option plan
and 1994 Non-Employee Director Stock Option Plan remained outstanding.
The 1993 Stock Option Plan (the "1993 Plan") had 1,750,000 shares of Common
Stock reserved for issuance upon the exercise of options designated as either
(i) incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as
amended (the "Code"), or (ii) non-qualified options. ISOs may be granted under
the Stock Option Plan to employees and officers of the Company. Non-qualified
options may be granted to consultants, directors (whether or not they are
employees), employees or officers of the Company.
Stock option transactions during the years ended January 28, 2006, January 29,
2005 and January 31, 2004 for the 1993 Plan are summarized below:
Shares Exercise Weighted Average
Price Range Exercise Price
----------------- --------------------- ----------------------
Options outstanding - January 31, 2003 1,058,000 $0.27-$1.00 $0.50
Options canceled (18,000) $0.27-$21.13 $1.09
Options exercised (12,000) $0.27-$1.00 $1.88
Options issued 40,000 $0.72-$0.86 $0.79
----------------- --------------------- ----------------------
Options outstanding - January 31, 2004 1,068,000 $0.27-$5.25 $0.50
Options canceled (95,000) $0.27-$5.25 $1.36
Options exercised (100,000) $0.27-$1.00 $0.56
Options issued - - -
----------------- --------------------- ----------------------
Options outstanding - January 29, 2005 873,000 $0.27-$2.72 $0.40
Options canceled (34,000) $0.27-$2.72 $0.68
Options exercised (27,000) $0.99-$1.33 $1.11
Options issued - - -
----------------- --------------------- ----------------------
Options outstanding - January 28, 2006 812,000 $0.27-$0.95 $0.38
================= ===================== ======================
767,000 $0.27-$0.95 $0.39
Options exercisable at January 28, 2006 ================= ===================== ======================
Options Outstanding Options Exercisable
Weighted Avg. Weighted Weighted
Range of Exercise Price Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life (yrs) Price Exercisable Price
- ---------------------------- ---------------- ----------------- ------------- ---------------- -------------
$0.95 100,000 1.0 $0.95 100,000 $0.95
$0.27-$0.52 692,000 2.0 $0.29 654,000 $0.29
$0.86 20,000 3.0 $0.86 13,000 $0.86
---------------- ----------------
812,000 767,000
Most options issued vest in three annual installments of 33-1/3 percent
each on the first, second, and third anniversary of the date of grant
except for 50,000 issued in 2003 which vested immediately. This plan
expired in December 2003.
The 1994 Non-Employee Director Stock Option Plan (the "Directors Plan") has
approximately 234,000 shares of Common Stock reserved for issuance.
Pursuant to the terms of the Directors Plan, each independent unaffiliated
Director shall automatically be granted, subject to availability, without
any further action by the Board of Directors or the Stock Option Committee:
(i) a non-qualified option to purchase 10,000 shares of Common Stock upon
their election to the Board of Directors; and (ii) a non-qualified option
to purchase 10,000 shares of Common Stock on the date of each annual
meeting of stockholders following their election to the Board of Directors.
The exercise price under each option is the fair market value of the
Company's Common Stock on the date of grant. Each option has a five-year
term and vests in three annual installments of 33-1/3 percent each on the
first, second, and third anniversary of the date of grant. Options granted
under the Directors Plan are generally not transferable during an
optionee's lifetime but are transferable at death by will or by the laws of
descent and distribution. In the event an optionee ceases to be a member of
the Board of Directors (other than by reason of death or disability), then
the non-vested portion of the option immediately terminates and becomes
void and any vested but unexercised portion of the option may be exercised
for a period of 180 days from the date the optionee ceased to be a member
of the Board of Directors. In the event of death or permanent disability of
an optionee, all options accelerate and become immediately exercisable
until the scheduled expiration date of the option.
Stock option transactions during the years ended January 28, 2006, January
29, 2005 and January 31, 2004 for the Directors' Plan are summarized below:
Exercise Weighted Average
Shares Price Range Exercise Price
--------------- ----------------- ----------------------
Options & Warrants outstanding -
January 31, 2003 160,000 $0.27-$0.96 $0.54
Options issued 30,000 $0.92 $0.92
--------------- ----------------- ----------------------
Options & Warrants outstanding - 190,000 $0.27-$0.96 $0.68
January 31, 2004
Options exercised (6,000) $0.91 $0.91
Options cancelled (24,000) $0.27-$0.96 $0.82
--------------- ----------------- ----------------------
Options & Warrants outstanding - 160,000 $0.27-$0.96 $0.58
January 29, 2005 --------------- ----------------- ----------------------
Options exercised - - -
Options cancelled - - -
--------------- ----------------- ----------------------
Options & Warrants outstanding - 160,000 $0.27-$0.96 $0.58
January 28, 2006
--------------- ----------------- ----------------------
Options outstanding-January 28, 2006 60,000 $0.27-$0.96 $0.71
=============== ================= ======================
Warrants exercisable-January 28, 2006 100,000 $0.50 $0.50
=============== ================= ======================
This plan expired in September 2004.
Options Outstanding Options Exercisable
Weighted Avg. Weighted Weighted
Range of Exercise Price Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life (yrs) Price Exercisable Price
- ---------------------------- ---------------- ----------------- ------------- ----------------
$0.89-$0.96 20,000 1.0 $0.93 20,000 $0.93
$0.27 20,000 2.0 $0.27 20,000 $0.27
$0.92 20,000 3.0 $0.92 20,000 $0.92
---------------- ----------------
60,000 60,000
The 2003 Stock Option Plan, as amended, (the "2003 Plan") has 1,750,000
shares of Common Stock reserved for issuance upon the exercise of options
designated as either (i) incentive stock options ("ISOs") under the Code,
or (ii) non-qualified options. ISOs may be granted under the 2003 Plan to
employees and officers of the Company. Non-qualified options may be granted
to consultants, directors (whether or not they are employees), employees or
officers of the Company. In certain circumstances, the exercise price of
stock options may have an adverse effect on the market price of the
Company's Common Stock.
Stock option transactions during the year ended January 28, 2006 and
January 29, 2005 for the 2003 Plan are summarized below:
Exercise Weighted Average
Shares Price Range Exercise Price
----------------- --------------------- ----------------------
Options outstanding - January 31, 2004 0 0 0
Options issued 190,000 $1.12 $1.12
----------------- --------------------- ----------------------
Options outstanding - January 29, 2005 190,000 $1.12 $1.12
Options issued 224,000 $0.97-$1.34 $1.23
----------------- --------------------- ----------------------
Options outstanding - January 28, 2006 414,000 $0.97-$1.34 $1.18
Options exercisable at January 28, 2006 340,000 $1.12-$1.34 $1.22
================= ===================== ======================
Options Outstanding Options Exercisable
Weighted Avg. Weighted Weighted
Range of Exercise Price Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life (yrs) Price Exercisable Price
- ---------------------------- ---------------- ----------------- ------------- ----------------
$1.12 190,000 4.0 $1.12 190,000 $1.12
$0.97-$1.34 224,000 5.0 $1.23 150,000 $1.34
---------------- ----------------
414,000 340,000
Most options issued vest in three annual installments of 33-1/3 percent
each on the first, second, and third anniversary of the date of grant
except for 190,000 issued in 2004 50% of which vested December 31, 2004,
and 50% of which will vest December 31, 2005 and 150,000 issued in 2005
which vested immediately. There are approximately 336,000 shares available
for future grants under the 2003 Plan.
The 2004 Non-Employee Director Stock Option Plan (the "Directors Plan") The
2004 Plan was adopted by the Board of Directors in August 2004. The 2004
Plan reserves 148,042 shares of Class A Common Stock for issuance to the
Company's independent and unaffiliated directors. Pursuant to the terms of
the 2004 Plan, as proposed each independent and unaffiliated director shall
automatically be granted, subject to availability, without any further
action by the Board of Directors or the Stock Option Committee: (i) a
non-qualified option to purchase 10,000 shares of Class A Common Stock upon
their initial election or appointment to the Board of Directors; and (ii) a
non-qualified option to purchase 10,000 shares of Class A Common Stock on
the date of each annual meeting of stockholders following their election or
appointment to the Board of Directors. The exercise price of each option is
the fair market value of the Company's Class A Common Stock on the date of
grant. Each option expires five years from the date of grant and vests in
three annual installments of 33 1/3% each on the first, second and third
anniversary of the date of grant. Options granted under the 2004 Plan would
generally not be transferable during an optionee's lifetime but would be
transferable at death by will or by the laws of descent and distribution.
In the event an optionee ceases to be a member of the Board of Directors
(other than by reason of death or disability), then the non-vested portion
of the option would immediately terminate and become void and any vested
but unexercised portion of the option may be exercised for a period of 180
days from the date the optionee ceased to be a member of the Board of
Directors. In the event of death or permanent disability of an optionee,
all options accelerate and become immediately exercisable until the
scheduled expiration date of the option.
Stock option transactions during the years ended January 28, 2006 and
January 29, 2005 for the Directors' Plan are summarized below:
Exercise Weighted Average
Shares Price Range Exercise Price
--------------- ----------------- ----------------------
Options outstanding-January 31, 2004 0 0 0
Options issued 30,000 $1.01-$1.02 $1.02
Warrants issued - - -
Options cancelled - - -
--------------- ----------------- ----------------------
Options outstanding-January 29, 2005 30,000 $1.01-$1.02 $1.02
Options issued 30,000 $1.33 $1.33
Warrants issued - - -
Options cancelled - - -
--------------- ----------------- ----------------------
Options outstanding-January 28, 2006 60,000 $1.01-$1.33 $1.17
=============== ================= ======================
Options exercisable-January 28, 2006 30,000 $1.01-$1.33 $1.12
=============== ================= ======================
Options Outstanding Options Exercisable
Weighted Avg. Weighted Weighted
Range of Exercise Price Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life (yrs) Price Exercisable Price
- ---------------------------- ---------------- ----------------- ------------- ----------------
$1.01-$1.02 30,000 4.0 $1.02 20,000 $1.02
$1.33 30,000 5.0 $1.33 10,000 $1.33
---------------- ----------------
60,000 30,000
There are approximately 88,000 shares available for future grants under the
Directors' Plan
13. TREASURY STOCK
Treasury stock at January 28, 2006 and January 29, 2005 consists of
1,143,000 and 1,164,000 shares of Class A common stock purchased in open market
transactions for a total cost of approximately $1,997,000 and $2,017,000,
respectively pursuant to a stock repurchase program authorized by the Board of
Directors in fiscal year 1999.
14. PROFIT SHARING PLAN
Profit Sharing Plan - The Company has a voluntary contribution profit
sharing plan (the "Plan"), which complies with Section 401(k) of the Internal
Revenue Code. Employees who have attained the age of 21 and have one year of
continuous service are eligible to participate in the Plan. The Plan permits
employees to make a voluntary contribution of pre-tax dollars to a pension
trust, with a discretionary matching contribution by the Company up to a maximum
of two percent of an eligible employee's annual compensation. The Company
elected not to make matching contributions for fiscal years ended January 28,
2006, January 29, 2005 and January 31, 2004.
15. COMMITMENTS AND CONTINGENCIES
a. Minimum Operating Lease Commitments - The Company has non-cancelable
operating leases for various automobiles and sales and service locations.
The annual aggregate rental commitments required under these leases, except
for those providing for month-to-month tenancy, are as follows:
Fiscal Year Ending
January 31,
2007 463,000
2008 337,000
2009 290,000
2010 260,000
2011 231,000
2012 and after 3,000
------------------
$1,584,000
==================
Rent expense was approximately $508,000, $473,000, and $584,000 for the
years ended January 28, 2006, January 29, 2005 and January 31, 2004,
respectively.
b. Litigation - The Company is a defendant in various litigation matters, all
arising in the normal course of business. Based upon discussion with
Company counsel, management does not expect that these matters will have a
material adverse effect on the Company's consolidated financial position or
results of operations and cash flows.
c. The Company had a Loan and Security Agreement ("the Congress Agreement")
with Congress Financial Corporation ("Congress") for a three year term
expiring on November 26, 2005. The Congress Agreement as amended, August
31, 2004, 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 all financial covenants at January 28, 2006.
The Company has placed $0.5 million in restricted cash to support the
standby letter of credit backing the lease on the Company's facilities in
Hauppauge. 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. On February
23, 2006, the Company terminated its lease for its facility in Hauppauge,
New York. As of February 28, 2006, the Company signed a Termination
Agreement with Wachovia Bank, National Association (successor by merger to
Congress Financial Corporation). In conjunction with this transaction, the
standby letter of credit (classified as restricted cash as of January 28,
2006) of $0.5 million was terminated. The Company, at this time, does not
intend to enter into a new bank agreement.
d. Dependency Upon Major Supplier - During the fiscal years ended January 28,
2006, January 29, 2005 and January 31, 2004; the Company made purchases of
$24,660,000, $22,067,000, and $21,115,000, respectively, from Tajima and
TUI. This amounted to approximately 82, 73, and 74, percent of the
Company's total purchases for the years ended January 28, 2006, January 29,
2005 and January 31, 2004, respectively. Purchases directly from Tajima are
purchased under letters of credit. Outstanding bankers acceptances as of
January 28, 2006 are reflected in accounts payable and accrued expenses on
the balance sheet. The Company had outstanding letters of credit of
approximately $2.5 million at January 28, 2006.
On August 30, 2004, the Company entered into new consolidated distribution
agreements (the "Consolidated Agreements") with Tajima granting the Company
certain rights to distribute the full line of Tajima commercial embroidery
machines and products.
The Consolidated Agreements grant the Company distribution rights on
an exclusive basis in 39 states for the period February 21, 2004 through
February 21, 2011. In addition, the Company was also granted certain
non-exclusive distributorship rights in the remaining 11 western states for
the period February 21, 2004 through February 21, 2005. The Company is in
the process of negotiating an extension of the West Coast Agreement. The
Consolidated Agreements supercede all of the other distribution agreements
between the Company and Tajima. Each agreement may be terminated upon the
failure of the Company to achieve certain minimum sales quotas. In fiscal
2006, the Company met its minimum sales quota and in fiscal 2005, the
Company failed to meet these minimum sales quotas and Tajima waived the
Company's failure. The termination of the Tajima agreements would have a
material adverse effect on the Company's business, financial condition and
results of operations.
e. Purchase Commitments - The Company entered into a three year minimum
purchase commitment with Pulse Microsystems, Ltd. (a former subsidiary)
under which the Company is obligated to purchase $100,000 of software each
month. The commitment was effective November 1, 2005 and runs until October
31, 2008. As of January 28, 2006 there was $3,300,000 remaining under this
commitment.
16. SUBSEQUENT EVENTS
a) On February 23, 2006, the Company terminated its lease for its Corporate
Headquarters in Hauppauge, New York effective on or about June 30, 2006.
The agreement stipulates that the Company will pay M3GH Properties, LLC a
surrender fee of $500,000. Upon the execution of the agreement, the Company
paid the landlord the initial fee of $200,000. The agreement states that
the Company will also pay the landlord commencing on July 1, 2006 on a
quarterly basis in ten equal installments of thirty thousand ($30,000)
dollars every October 1, January 1, April 1 and July 1 thereafter until the
remainder of $300,000 is paid in full.
In the first quarter of Fiscal 2007, the Company will write off
certain balance sheet items related to the sales leaseback transaction
previously recorded in connection with the termination of the lease. The
remaining assets of approximately $1.2 million will be netted against the
remaining liabilities of approximately $1.2 million. In addition, after
payment of surrender fees of approximately $500,000, related to the
termination of the lease, the Company will recognize the remaining $0.1
million in deferred gain.
Concurrent with the lease termination, on February 23, 2006 the
Company entered into a new five year lease for its Corporate headquarters
also in Hauppauge, New York.
b) On April 13, 2006, the Company filed a report on Form 8-K with the
Securities and Exchange Commission announcing that the Board of Directors
of the Company determined to change the Company's fiscal year from a 52/53
week fiscal year ending on the last Saturday in the last month of each
quarterly period in the year ended January to the period ending December 31
in each year. This change in fiscal year is effective for the period ended
December 31, 2006. The Company will file a transition report on Form 10-K
covering the 11-month period ended December 31, 2006.
c) On April 21, 2006, the Company announced that it had reached an agreement
in principal to terminate the merger with Sheridan Square Entertainment.
The parties are presently negotiating a formal termination agreement which,
among other things, presently contemplates that the Company will maintain
the equity investment in Sheridan. In conjunction with the termination of
the merger, the Company expensed approximately $605,000 in related
transaction costs (See Note 8 to the Consolidated Financial Statements.