UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ________________.
Commission File No.: 0-23434
HIRSCH INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2230715
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
50 Engineers Road, Hauppauge, New York 11788
(Address of principal executive offices)
Registrant's telephone number, including area code: (631) 436-7100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. 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]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of July 24, 2006.
Class of Number of
Common Equity Shares
Class A Common Stock
par value $.01 7,961,871
Class B Common Stock, 525,018
par value $.01
HIRSCH INTERNATIONAL CORP. and SUBSIDIARIES
FORM 10-Q
INDEX
Part I. Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2006 and
January 28, 2006 3-4
Consolidated Statements of Operations for the Three
and Five Months Ended June 30, 2006 and for the Three
and Six Months Ended July 30, 2005 5
Consolidated Statements of Cash Flows for the Five
Months Ended June 30, 2006 and for the Six Months
Ended July 30, 2005 6
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Item 4. Controls and Procedures 14
Part II. Other Information
Item 1. Legal Proceedings 14
Item 1A. Risk Factors 14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits 15
Signatures 15
Certifications 16-19
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
June 30, 2006 January 28, 2006
-------------------- ---------------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $13,269 $13,166
Restricted cash - 510
Accounts receivable, net of an allowance for possible
losses of $589,000 and $372,000
respectively 5,159 4,929
Inventories, net (Note 3) 4,814 4,128
Other current assets 475 513
-------------------- ---------------------
Total current assets 23,717 23,246
-------------------- ---------------------
PROPERTY, PLANT AND EQUIPMENT, net 326 1,574
OTHER ASSETS (Note 4)
1,536 1,534
-------------------- ---------------------
TOTAL ASSETS $25,579 $26,354
==================== =====================
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
June 30, 2006 January 28, 2006
------------------- ---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Note 5) $ 9,316 $9,428
Other current liabilities (Note 6) 60 1,270
Customer deposits and other 436 430
------------------- ---------------------
Total current liabilities 9,812 11,128
------------------- ---------------------
Deferred gain (Note 6) - 608
Other long term liabilities - less current maturities
(Note 6) 210 -
------------------- ---------------------
Total liabilities 10,022 11,736
------------------- ---------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized:
1,000,000 shares; issued: none - -
Class A common stock, $.01 par value; authorized:
20,000,000 shares, issued and outstanding: 9,104,000
shares 91 91
Class B common stock, $.01 par value; authorized:
3,000,000 shares, outstanding: 525,000
shares 5 5
Additional paid-in capital 41,537 41,471
Accumulated deficit (24,079) (24,952)
------------------- ---------------------
17,554 16,615
Less: Treasury Class A Common stock at cost - 1,143,000
shares at June 30, 2006 and January 28, 2006 1,997 1,997
------------------- ---------------------
Total stockholders' equity 15,557 14,618
------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,579 $26,354
=================== =====================
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
Five Months Six Months
Three Months Ended Ended Ended
June 30, July 30, June 30, July 30,
2006 2005 2006 2005
--------------- ---------------- --------------- --------------
NET SALES $13,660 $ 12,586 $22,305 $26,310
COST OF SALES 9,093 8,220 14,669 17,712
-------------- --------------- ---------------- ---------------
GROSS PROFIT 4,567 4,366 7,636 8,598
-------------- --------------- ---------------- ---------------
OPERATING EXPENSES
Selling, General & Administrative
Expenses 4,020 3,845 6,828 7,809
Severance costs - - - 147
-------------- --------------- ---------------- ---------------
Total operating expenses 4,020 3,845 6,828 7,956
-------------- --------------- ---------------- ---------------
OPERATING INCOME 547 521 808 642
-------------- --------------- ---------------- ---------------
OTHER EXPENSE (INCOME)
Interest expense 36 41 61 78
Other income (Note 6) (84) (30) (140) (59)
-------------- --------------- ---------------- ---------------
Total other expense (income) (48) 11 (79) 19
-------------- --------------- ---------------- ---------------
INCOME BEFORE INCOME TAX PROVISION 595 510 887 623
INCOME TAX PROVISION 14 19 14 30
-------------- --------------- ---------------- ---------------
NET INCOME $581 $491 $873 $593
============== =============== ================ ===============
EARNINGS PER SHARE
Basic $0.07 $0.06 $0.10 $0.07
============== =============== ================ ===============
Diluted $0.06 $0.05 $0.09 $0.06
============== =============== ================ ===============
WEIGHTED AVERAGE NUMBER OF SHARES IN THE
CALCULATION OF EARNINGS PER SHARE
Basic 8,487 8,462 8,487 8,455
Diluted 9,649 9,408 9,649 9,401
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
Five Six
Months Months
Ended Ended
June 30, July 30,
2006 2005
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $873 $593
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 128 334
Recognized gain on sale of building (20) (59)
Gain on lease termination (128) -
Lease termination payment (200) -
Provision for reserves 526 205
Stock option expense (Note 2) 65 -
Changes in assets and liabilities:
Accounts receivable (363) 114
Net investment in sales-type leases - 80
Inventories (1,078) (2,462)
Other assets 37 (250)
Accounts payable and accrued expenses (224) (1,771)
-------------- -------------
Net cash used in operating
activities (384) (3,216)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (23) (34)
Investment in Sheridan Square Entertainment, Inc. - (500)
-------------- -------------
Net cash used in investing
activities (23) (534)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt - (84)
Restricted cash 510 750
Exercise of stock options - 6
-------------- -------------
Net cash provided by financing activities 510 672
Increase (decrease) in cash and cash
equivalents 103 (3,078)
Cash and cash equivalents, beginning of period 13,166 6,398
-------------- -------------
Cash and cash equivalents, end of period $13,269 $ 3,320
============== =============
Supplemental disclosure of cash flow information:
Interest paid $ 61 $ 87
Income taxes paid $ 14 $ 32
============== =============
See notes to consolidated financial statements.
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Three and Five Months Ended June 30, 2006 and Three and
Six Months Ended July 31, 2005
1. Summary of Significant Accounting Policies
a) Business Organization and Basis of Presentation
The accompanying consolidated financial statements as of and for the
three and five months ended June 30, 2006 and the three and six month
period ended July 31, 2005 include the accounts of Hirsch International
Corp. ("Hirsch") and HAPL Leasing Co., Inc. ("HAPL") and together with
Hirsch collectively referred to as the "Company"
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all the adjustments, consisting of normal
accruals, necessary to present fairly the results of operations for each of
the three and five month periods ended June 30, 2006 and the three and six
month periods ended July 31, 2005, the financial position at June 30, 2006
and January 28, 2006 and cash flows for the five month period ended June
30, 2006 and the six month period ended July 31, 2005. Such adjustments
consisted only of normal recurring items. The consolidated financial
statements and notes thereto should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended January 28,
2006 as filed with the Securities and Exchange Commission.
Our accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnote disclosures required by
accounting principles generally accepted in the United States for complete
financial statements.
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States requires us
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. There are risks inherent
in making estimates and assumptions and, therefore, actual results could
differ from those estimates.
The interim financial results are not necessarily indicative of the
results to be expected for the full year. Certain amounts from prior
periods have been reclassified to conform to the current period's
presentation.
b) Change in Reporting Period
In April 2006, our Board of Directors approved a change in our 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 end January to the period ending
December 31 each year. In this report we compare the three and five month
periods ended June 30, 2006 to the three and six month periods ended July
30, 2005 because it is not practical to recast the prior year comparative
quarter ended June 30, 2005.
c) Reclassifications
Certain reclassifications have been applied to prior year amounts to
conform to current year presentation.
d) New Accounting Standards
In February 2006, the FASB issued SFAS No. 155, "Accounting for
Certain Hybrid Financial Instruments - an amendment of FASB Statements No.
133 and 140," which simplifies accounting for certain hybrid financial
instruments by permitting fair value remeasurement for any hybrid
instrument that contains an embedded derivative that otherwise would
require bifurcation, and eliminates a restriction on the passive derivative
instruments that a qualifying special-purpose entity may hold. SFAS No. 155
is effective for all financial instruments acquired, issued or subject to a
remeasurement (new basis) event occurring after the beginning of an
entity's first fiscal year that begins after September 15, 2006. The
adoption of SFAS No. 155 will have no impact on our results of operations
or our financial position.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing
of Financial Assets - an amendment of FASB Statement No. 140," which
establishes, among other things, the accounting treatment for all
separately recognized servicing assets and servicing liabilities by
requiring that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable. SFAS No.
156 is effective as of the beginning of an entity's first fiscal year that
begins after September 15, 2006. The adoption of SFAS No. 156 will have no
impact on our results of operations or our financial position.
2. Share-Based Compensation
The Company had previously accounted for its stock-based employee
compensation plans under the recognition and measurement principles of
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. No stock-based employee
compensation cost was reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of the Common
Stock on the date of grant.
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS 123R, "Share-Based Payment," a revision of SFAS 123 which
supercedes APB 25 "Accounting for Stock Issued to Employees". As of January
29, 2006, the Company adopted SFAS 123R using the modified prospective
transition method. Under that transition method, compensation cost
recognized in fiscal 2006 includes (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of January 28,
2006, based on the grant-date fair value estimated, and (b) compensation
cost for all share-based payments granted subsequent to January 28, 2006,
based on the grant-date fair value estimate. Accordingly, the Company's
unaudited consolidated financial statements for the prior periods have not
been restated to reflect the adoption of SFAS 123R. Because the Company
previously adopted only the pro forma disclosure provisions of SFAS 123, it
will recognize compensation cost relating to the unvested portion of awards
granted prior to the date of adoption, using the same estimate of the
grant-date fair value and the same attribution method used to determine the
pro forma disclosures under SFAS 123, except that forfeiture rates will be
estimated for all options, as required by SFAS 123R. The cumulative effect
of applying the forfeiture rates is not material.
For the five months ended June 30, 2006, the Company recognized
$66,000 of non-cash compensation expense (included in Selling, General and
Administrative expense in the unaudited Consolidated Income Statement)
attributable to stock options granted or vested subsequent to January 28,
2006. The Company used the Black-Scholes valuation model and straight-line
amortization of compensation expense over the requisite service period of
the grant.
The following is a summary of the assumptions used:
-------------------------------------------- --------------------
Risk-free interest rate 2.14% - 4.64%
-------------------------------------------- --------------------
Expected dividend yield 0%-4%
-------------------------------------------- --------------------
Expected term 2-10 years
-------------------------------------------- --------------------
Expected volatility 67%-78.16%
-------------------------------------------- --------------------
The risk-free interest rate is based on the U.S Treasury yield curve
at the time of the grant. The expected term of stock options granted is
derived from historical data and represents the period of time that stock
options are expected to be outstanding. The Company also uses historical
data to estimate expected dividend yield and forfeiture rates. The expected
volatility is based on historical volatility, implied volatility and other
factors impacting the Company.
A summary of stock option transactions is as follows for the five months ended
June 30, 2006:
- --------------------------------------------------- ---------------- ----------------- ------------------ -------------------
Weighted Weighted-Average
Average Remaining
Exercise Contractual Aggregate
Price Term Intrinsic
Shares (per share) (Years) Value
- --------------------------------------------------- ---------------- ----------------- ------------------ -------------------
Options outstanding at beginning of period 1,346,000 $0.68
- --------------------------------------------------- ---------------- ----------------- ------------------ -------------------
Granted 325,000 $1.20
- --------------------------------------------------- ---------------- ----------------- ------------------ -------------------
Exercised 0
- --------------------------------------------------- ---------------- ----------------- ------------------ -------------------
Forfeited (14,000) $0.95
- --------------------------------------------------- ---------------- ----------------- ------------------ -------------------
Expired 0 0
- --------------------------------------------------- ---------------- ----------------- ------------------ -------------------
Options outstanding at end of period 1,657,000 $0.78 2.5 $948,000
- --------------------------------------------------- ---------------- ----------------- ------------------ -------------------
Options exercisable at end of period 1,222,000 $0.66 1.9 $839,000
- --------------------------------------------------- ---------------- ----------------- ------------------ -------------------
Options available for future grants 1,113,000
- --------------------------------------------------- ---------------- ----------------- ------------------ -------------------
The weighted average grant-date fair value of stock options granted
during the five months ended June 30, 2006 was $1.20 per share. As of June
30, 2006, there was approximately $198,000 of total unrecognized
stock-based compensation costs related to options granted under our plans
that will be recognized over the next three years
A summary of nonvested stock option transactions is as follows for the
five months ended June 30, 2006:
----------------------------------------------- -------------- -------------------------------------------
Weighted-Average Grant-Date Fair
Shares Value (per share)
----------------------------------------------- -------------- -------------------------------------------
Nonvested at beginning of period 149,000 $ 0.85
----------------------------------------------- -------------- -------------------------------------------
Granted 325,000 $ 1.20
----------------------------------------------- -------------- -------------------------------------------
Vested (27,000) $ 0.97
----------------------------------------------- -------------- -------------------------------------------
Forfeited (12,000) $ 1.06
----------------------------------------------- -------------- -------------------------------------------
Nonvested at end of period 435,000 $ 1.10
----------------------------------------------- -------------- -------------------------------------------
A reconciliation of shares used in calculating basic and diluted
earnings per common share for the five months ended June 30, 2006 follows:
Basic 8,486,889
Effect of assumed conversion
of employee stock options 1,161,936
---------
Diluted 9,648,825
=========
Options to purchase approximately 160,000 shares of common stock at
prices ranging from $1.33 to $1.34 that were outstanding during the five
months ended June 30, 2006 were excluded from the computation of diluted
earnings per share because the options' exercise prices exceeded the
average fair market value of the Company's common stock.
Awards granted prior to the adoption of FASB 123R were accounted for
under the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and its related
interpretations. Under this intrinsic value method there was no
compensation expense recognized for the three month period ended July 31,
2005 because all the options had exercise prices equal to the market value
of the underlying stock on the date of grant. The following table details
the effect on net income and earnings per share if the Company had applied
the fair value recognition provisions of Statement of Financial Accounting
Statement ("SFAS") No. 123, Accounting for Stock-Based Compensation, as
amended by SFAS No. 148, to stock-based employee compensation.
------------------------------------------------------------------ -------------------- --------------------
Three Months Ended Six Months Ended
July 31, 2005 July 31, 2005
(in thousands) (in thousands)
------------------------------------------------------------------ -------------------- --------------------
Net income, as reported $491 $593
------------------------------------------------------------------ -------------------- --------------------
Deduct: Total stock-based employee compensation
expense determined under fair value based method (24) (48)
------------------------------------------------------------------ -------------------- --------------------
Pro-forma net income $467 $545
------------------------------------------------------------------ ==================== ====================
Earnings per share:
------------------------------------------------------------------ -------------------- --------------------
Basic - as reported $0.06 $0.07
------------------------------------------------------------------ -------------------- --------------------
Basic - pro forma $0.06 $0.06
------------------------------------------------------------------ -------------------- --------------------
Diluted - as reported $0.05 $0.06
------------------------------------------------------------------ -------------------- --------------------
Diluted - pro forma $0.05 $0.06
------------------------------------------------------------------ -------------------- --------------------
The following weighted average assumptions were used in the Black-Scholes
option-pricing model for grants during Fiscal year ended 1/28/2006:
dividend yield of 0.0%, volatility of 74% and risk-free interest rate of
3.72% for grants issued on 4/1/2005, volatility of 70.7% and risk-free
interest rate of 3.84% for grants issued on 6/10/05 and an expected life of
5 years.
3. Inventories
June 30, 2006 January 28, 2006
----------------- --------------------
New Machines and Software $ 3,676 $ 2,386
Used Machines 100 183
Parts 2,739 2,868
----------------- --------------------
6,515 5,437
Less: Reserve for slow
moving inventory (1,701) (1,309)
----------------- --------------------
Inventories,
net $ 4,814 $ 4,128
================= ====================
4. Other Assets
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 40 shares of Series B Preferred Stock of Sheridan Square
for $1,000,000. 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.
On April 26, 2006, the Company announced that it had reached an
agreement in principle to terminate its previously announced merger with
Sheridan Square Entertainment. On June 1, 2006, the Company terminated the
merger. On July 12, 2006, the Company entered into a Stock Purchase
Agreement with Sheridan pursuant to which Hirsch sold and SSE repurchased
all of Hirsch's right, title and interest in forty (40) shares of the
Series B Convertible Participating Stock of SSE, together with all
payment-in-kind dividends whether or not issued (the "Purchased Stock") for
an aggregate purchase price of $1,200,000 (the "Purchase Price"). The
purchase price is payable on or before October 31, 2006.
5. Warranty Reserve
The warranty reserve included in Accounts Payable and Accrued Expenses
was $613,000 at June 30, 2006 and January 28, 2006. The Company recorded
approximately $27,000 in warranty expense for the five months ended June
30, 2006 and $50,000 for the six months ended July 31, 2005.
6. Long Term Obligations
On February 23, 2006, the Company agreed to terminate the lease on its
corporate facility located in Hauppauge, New York and concurrently signed a
new operating lease for a facility also located in Hauppauge, New York.
During the quarter ended March 31, 2006, the Company wrote off certain
balance sheet items (approximately $1.2 million) related to the
sale-leaseback transaction that the Company had previously recorded and
recognized $128,000 gain associated with the deferred termination. In
connection with the lease termination, the Company incurred $500,000 in
termination fees related to the lease termination agreement ($200,000 due
on signing and $300,000 over 2 1/2 years commencing July 1, 2006) and
recognized approximately $128,000 in deferred gain.
7. Subsequent Events
On August 2, 2006 the Company announced that it had entered into a new
Distribution Agreement with MHM Siebdruckmaschinen GMBH (Austria) to
exclusively distribute the MHM Screenprinting equipment in North America.
The distribution agreement enables the Company to market the MHM brand of
screenprinting equipment to all of North America for an initial period of
ten years.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. When used herein, the words "anticipate",
"believe", "estimate" and "expect" and similar expressions as they relate to the
Company or its management are intended to identify such forward-looking
statements. The Company's actual results, performance or achievements could
differ materially from the results expressed in or implied by these
forward-looking statements. Factors that could cause or contribute to such
differences should be read in conjunction with, and is qualified in its entirety
by, the Company's Consolidated Financial Statements, including the notes
thereto. Historical results are not necessarily indicative of trends in
operating results for any future period.
Three and Five months ended June 30, 2006 as compared to the three and six
months ended July 31, 2005.
Net sales. Net sales for the three months ended June 30, 2006 were $13.7
million, an increase of $1.1 million, or 8.7%, compared to $12.6 million for the
three months ended July 30, 2005 and $22.3 million for the five months ended
June 30, 2006, a decrease of $4.0 million, or 15%, compared to $26.3 for the six
months ended July 30, 2005. The increase in sales for the three months ended
June 30, 2006 is primarily attributable to an increase in new machine sales. The
decrease in sales for the five months ended June 30, 2006 is primarily
attributable to the inclusion of five months of sales versus six months for the
comparable period.
Cost of sales. For the three months ended June 30, 2006, cost of sales
increased $0.9 million to $9.1 million from $8.2 million for the three months
ended July 30, 2005 and for the five month ended June 30, 2006 decreased $3.0
million to $14.7 million from $17.7 million for the six months ended July 30,
2005. The increase for the three month period ended June 30, 2005 is the result
of higher sales volume. The decrease for the five months ended June 30, 2006 is
directly related to lower sales volume recorded during the shorter (five months)
reporting period versus the six months ended July 30, 2005. The Company's gross
margin decreased to 33.4% for the three months ended June 30, 2006 as compared
to 34.7% for the three months ended July 30, 2005 and increased to 34.2% for the
five months ended June 30, 2006 from 32.7% for the six months ended July 30,
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 and gross
margins.
Operating Expenses. For the three months ended June 30, 2006 operating
expenses were $4.0 million, an increase of $0.2 million, or 0.5%, as compared to
$ 3.8 million for the three months ended July 31, 2005 and for the five months
ended June 30, 2006 were $6.8 million, a decrease of $1.2 million, or 15%, as
compared to $8.0 million for the six months ended July 31, 2006. The increase in
operating expenses for the three months ended June 30, 2006 is attributable to
variable selling costs that have increased in connection with the increase in
sales for the period. The primary difference for the five months ended June 30,
2006 was the timing of expenses associated with the change of fiscal year from a
52/53 week fiscal year to a year ended December 31 as compared to the six months
ended July 31, 2005. Included in operating expenses for the five months ended
June 30, 2006 is the recognition of $128,000 in deferred gain associated with
the termination of the lease on the corporate headquarters. (See Note 6 to the
Consolidated Financial Statements). Included in operating expenses for the six
months ended July 31, 2005 was $147,000 in severance costs.
Interest Expense. Interest expense for the three months ended June 30, 2006
decreased to $36,000 from $41,000 for the three months ended July 30, 2005 and
for the five months ended June 30, 2006, decreased to $61,000 from $78,000 for
the six months ended July 30, 2005. Interest expense is primarily associated
with the sale/leaseback transaction of the corporate headquarters (See Note 6 to
the Consolidated Financial Statements).
Other Income. Other income for the three months ended June 30, 2006
increased by $54,000 to $84,000 from $30,000 for the three months ended July 30,
2005 and for the five months ended June 30, 2006 increased $81,000 to $140,000
from $59,000 for the six months ended July 30, 2005. The increase in both
periods is primarily attributable to an increase in interest income.
Income tax expense. Income tax expense for the three months ended June 30,
2006 was $14,000 versus $19,000 for the three months ended July 31, 2005 and for
the five months ended June 30, 2006 was $14,000 versus $30,000 for the six
months ended July 31, 2005. These amounts represent taxes due on year end income
for various state and local income taxes, for which the Net Operating Loss
carry-forwards from prior years do not apply.
Net Income. Net income for the three months ended June 30, 2006 was
$581,000 an increase of $90,000 over the net income of $491,000 for the three
months ended July 30, 2005 and for the five months ended June 30, 2006 was
$873,000 an increase of $280,000 over the net income of $593,000 for the six
months ended July 30, 2005 primarily from the increase in operating income.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $13.9 million at June 30, 2006,
increasing $1.8 million, or 14.9%, from $12.1 million at January 28, 2006.
During the five months ended June 30, 2006, the Company's cash and cash
equivalents increased slightly to $13.3 million from $13.2 million at January
28, 2006. Of the $0.4 million net cash used by the Company's operating
activities, $1.1 million was used to increase inventory, $0.2 million was used
to pay lease termination fees which was offset by income from operations of $0.9
million and cash of $20,000 was used for capital expenditures. Cash of $500,000
was provided by financing activities resulting from the unrestricting of cash
related to the termination of the capital lease on the corporate facility in
Hauppauge, New York.
Inventory purchase commitments are covered by current purchases of foreign
currency. As of June 30, 2006 the Company did not own any foreign currency
futures contracts.
Revolving Credit Facility and Borrowings
The Company had a Loan and Security Agreement ("the Congress Agreement")
with Congress Financial Corporation ("Congress") for an initial term of three
years which expired on November 26, 2005. The Congress Agreement, as amended,
August 31, 2004 provided for a credit facility of $12 million for Hirsch and all
subsidiaries. Advances made pursuant to the Congress Agreement were 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 required
the Company to maintain certain financial covenants. 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 approximately $500,000 was
terminated. The Company, at this time, does not intend to enter into a new bank
agreement.
Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting policies and
estimates from those disclosed in Item 7 of our Annual Report on Form 10-K for
the year ended January 28, 2006.
Future Capital Requirements
The Company believes that its existing cash and funds generated from
operations, will be sufficient to meet its working capital and capital
expenditure requirements in the foreseeable future.
Backlog and Inventory
The ability of the Company to fill orders quickly is an important part of
its customer service strategy. The embroidery machines held in inventory by the
Company are generally shipped within a week from the date the customer's orders
are received, and as a result, backlog is not meaningful as an indicator of
future sales.
Inflation
The Company does not believe that inflation has had, or will have in the
foreseeable future, a material impact upon the Company's operating results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including changes in
foreign currency exchange rates and interest rates. Market risk is the potential
loss arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The recent 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. 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.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and the Chief Financial
Officer, the Company carried out an evaluation of the effectiveness of the
design and operation of the disclosure controls and procedures, as defined in
Rules 13a-15e and 15d-15e of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective, as of the end of the period covered by
this Report, in ensuring that material information relating to the Company
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rule and
forms, including ensuring that such material information is accumulated and
communicated to the Company's Management, including the Company's Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
There have been no changes in the Company's internal controls over
financial reporting that occurred during the period covered by this report that
have materially affected, or are reasonably likely to affect, the Company's
internal controls over financial reporting.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
We are, from time to time, a party to various legal actions arising in the
normal course of business. However, management believes that as a result of
legal defenses and insurance arrangements with parties believed to be
financially capable, there are no proceedings, threatened or pending against us
that, if determined adversely, would have a material adverse effect on our
business or financial position.
Item 1A. Risk Factors
There were no material changes from the risk factors previously disclosed in our
Report on form 10-K for the year ended January 28, 2006. For a full description
of these risk factors, please refer to Item 1A (Risk Factors) in the Company's
Report on Form 10-K for the year ended January 28, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits
(a) Exhibits
*3.1 Restated Certificate of Incorporation of the Registrant
**3.2 Amended and Restated By-laws of the Registrant
***4.1 Specimen of Class A Common Stock Certificate
***4.2 Specimen of Class B Common Stock Certificate
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d - 14(a).
31.2 Certification of Chief Financial Officer to Section Rule 13a-14(a) or
Rule 15d - 14(a).
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
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* Incorporated by reference from the Registrant's Form 10-Q filed for
the quarter ended July 31, 1997.
** Incorporated by reference from the Registrant's Form 10-Q filed for
the quarter ended October 31, 1997.
***Incorporated by reference from the Registrant's Registration Statement
on Form S-1, Registration Number 33-72618
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HIRSCH INTERNATIONAL CORP.
Registrant
By: /s/ Paul Gallagher
-----------------------------------
Paul Gallagher,
President and Chief Executive Officer
By: /s/ Beverly Eichel
-----------------------------------
Beverly Eichel,
Executive Vice President, Finance and
Chief Financial Officer and Secretary
Dated: August 10, 2006