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 September 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 October 20, 2006.
Class of Number of
Common Equity Shares
Class A Common Stock
par value $.01 8,082,201
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 September 30, 2006
and January 28, 2006 3-4
Consolidated Statements of Operations for the Three
and Eight Months Ended September 30, 2006 and for the
Three and Nine Months Ended October 29, 2005 5
Consolidated Statements of Cash Flows for the Eight
Months Ended September 30, 2006 and for the Nine Months
Ended October 29, 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 14
Item 4. Controls and Procedures 14
Part II. Other Information
Item 1. Legal Proceedings 15
Item 1A. Risk Factors 15
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits 15
Signatures 16
Certifications 17-20
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
September 30, 2006 January 28, 2006
-------------------- ---------------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $13,249 $13,166
Restricted cash - 510
Accounts receivable, net of an allowance
for possible losses of $585 and $372 respectively 4,655 4,929
Inventories, net (Note 4) 6,161 4,128
Other current assets (Note 5) 1,358 513
-------------------- ---------------------
Total current assets 25,423 23,246
-------------------- ---------------------
PROPERTY, PLANT AND EQUIPMENT, net 376 1,574
OTHER ASSETS 535 1,534
-------------------- ---------------------
TOTAL ASSETS $26,334 $26,354
==================== =====================
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
September 30, 2006 January 28, 2006
------------------- ---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
CURRENT LIABILITIES:
Accounts payable and accrued expenses (Note 6) $ 9,568 $9,428
Other current liabilities (Note 6) 80 1,270
Customer deposits and other 313 430
------------------- ---------------------
Total current liabilities 9,961 11,128
------------------- ---------------------
Deferred gain (Note 7) - 608
Other long term liabilities - less current
maturities (Note 7) 210 -
------------------- ---------------------
Total liabilities 10,171 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:
9,225,000 shares 92 91
Class B common stock, $.01 par value; authorized:
3,000,000 shares, outstanding: 525,000
shares 5 5
Additional paid-in capital 41,718 41,471
Accumulated deficit (23,655) (24,952)
------------------- ---------------------
18,160 16,615
Less: Treasury Class A Common stock at cost - 1,143,000
shares at September 30, 2006 and January 28, 2006 1,997 1,997
------------------- ---------------------
Total stockholders' equity 16,163 14,618
------------------- ---------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,334 $26,354
=================== =====================
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
Eight Nine
Months Months
Three Months Ended Ended Ended
September October 29, September October 29,
30, 2006 2005 30, 2006 2005
---------------- --------------- --------------- ---------------
NET SALES $12,383 $ 12,854 $34,688 $39,165
COST OF SALES 7,926 8,660 22,596 26,373
---------------- --------------- --------------- ---------------
GROSS PROFIT 4,457 4,194 12,092 12,792
---------------- --------------- --------------- ---------------
OPERATING EXPENSES
Selling, General & Administrative
Expenses 4,100 3,965 10,927 11,774
Severance costs - - - 147
---------------- --------------- --------------- ---------------
Total operating expenses 4,100 3,965 10,927 11,921
---------------- --------------- --------------- ---------------
OPERATING INCOME 357 229 1,165 871
---------------- --------------- --------------- ---------------
OTHER (INCOME) EXPENSE
Interest expense - 41 61 128
Other income (87) (55) (227) (124)
---------------- --------------- --------------- ---------------
Total other (income) expense (87) (14) (166) 4
---------------- --------------- --------------- ---------------
INCOME BEFORE INCOME TAX PROVISION 444 243 1,331 867
INCOME TAX PROVISION 20 8 34 38
---------------- --------------- --------------- ---------------
NET INCOME $424 $235 $1,297 $829
================ =============== =============== ===============
EARNINGS PER SHARE
Basic $0.05 $0.03 $0.15 $0.10
================ =============== =============== ===============
Diluted $0.04 $0.02 $0.13 $0.09
================ =============== =============== ===============
WEIGHTED AVERAGE NUMBER OF SHARES IN
THE CALCULATION OF EARNINGS PER SHARE
Basic 8,510 8,464 8,495 8,458
Diluted 9,750 9,510 9,735 9,505
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
Eight Nine
Months Months
Ended Ended
September October
30, 2006 29, 2005
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,297 $829
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 184 514
Recognized gain on sale of building (20) (89)
Gain on lease termination (128) -
Lease termination payment (200) -
Provision for reserves 437 390
Stock option expense (Note 2) 147 -
Changes in assets and liabilities:
Accounts receivable 125 436
Net investment in sales-type leases - 61
Inventories (2,320) 1,169
Other assets 154 (361)
Accounts payable and accrued expenses (73) (3,790)
-------------- -------------
Net cash used in operating activities (397) (841)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (130) (40)
Investment in Sheridan Square Entertainment, Inc. - (1,000)
-------------- -------------
Net cash used in investing activities (130) (1,040)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt - (129)
Restricted cash 510 5,140
Exercise of stock options 100 6
-------------- -------------
Net cash provided by financing activities 610 5,017
Increase in cash and cash equivalents 83 3,136
Cash and cash equivalents, beginning of period 13,166 6,398
-------------- -------------
Cash and cash equivalents, end of period $13,249 $ 9,534
============== =============
Supplemental disclosure of cash flow information:
Interest paid $ 61 $ 105
Income taxes paid $ 14 $ 8
============== =============
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Eight Months Ended September 30, 2006
and Three and Nine Months Ended October 29, 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 eight months ended September 30, 2006 and the three and nine
month period ended October 29, 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 eight month periods ended September 30, 2006 and the three
and nine month periods ended October 29, 2005, the financial position at
September 30, 2006 and January 28, 2006 and cash flows for the eight month
period ended September 30, 2006 and the nine month period ended October 29,
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 eight month
periods ended September 30, 2006 to the three and nine month periods ended
October 29, 2005 because it is not practical to recast the prior year
comparative quarter ended September 30, 2005. The Company will file a
transition report on Form 10K covering the 11 month period ending December
31, 2006.
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 eight months ended September 30, 2006, the Company recognized
$147,000 of non-cash compensation expense (included in Selling, General and
Administrative expense in the unaudited Consolidated Statement of
Operations) 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% - 5.11%
-------------------------------------------------- --------------------
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 eight months ended
September 30, 2006:
- --------------------------------------------------- ---------------- ----------------- ------------------ -------------------
Weighted-
Average
Weighted Remaining
Average Contractual Aggregate
Exercise Price Term Intrinsic
Shares (per share) (Years) Value
- --------------------------------------------------- ---------------- ----------------- ------------------ -------------------
Options outstanding at beginning of period 1,346,000 $0.68
- --------------------------------------------------- ---------------- ----------------- ------------------ -------------------
Granted 543,000 $1.27
- --------------------------------------------------- ---------------- ----------------- ------------------ -------------------
Exercised (121,000) $0.83
- --------------------------------------------------- ---------------- ----------------- ------------------ -------------------
Forfeited (14,000) $0.95
- --------------------------------------------------- ---------------- ----------------- ------------------ -------------------
Expired (10,000) $0.96
- --------------------------------------------------- ---------------- ----------------- ------------------ -------------------
Options outstanding at end of period 1,744,000 $0.85 2.7 $2,256,000
- --------------------------------------------------- ---------------- ----------------- ------------------ -------------------
Options exercisable at end of period 1,140,000 $0.63 1.8 $1,719,000
- --------------------------------------------------- ---------------- ----------------- ------------------ -------------------
Options available for future grants 772,000
- --------------------------------------------------- ---------------- ----------------- ------------------ -------------------
The weighted average grant-date fair value of stock options granted
during the eight months ended September 30, 2006 was $1.27 per share. As of
September 30, 2006, there was approximately $284,396 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
eight months ended September 30, 2006:
----------------------------------------------- -------------- -------------------------------------------
Weighted-Average Grant-Date Fair
Shares Value (per share)
----------------------------------------------- -------------- -------------------------------------------
Nonvested at beginning of period 149,000 $ 0.85
----------------------------------------------- -------------- -------------------------------------------
Granted 543,000
$ 1.27
----------------------------------------------- -------------- -------------------------------------------
Vested (76,000)
$ 0.62
----------------------------------------------- -------------- -------------------------------------------
Forfeited (12,000)
$ 1.06
----------------------------------------------- -------------- -------------------------------------------
Nonvested at end of period 604,000
$ 1.25
----------------------------------------------- -------------- -------------------------------------------
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 October
29, 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 Nine Months
Ended Ended
October 29, October 29,
2005 2005
(in thousands) (in thousands)
------------------------------------------------------------------ -------------------- --------------------
------------------------------------------------------------------ -------------------- --------------------
Net income, as reported $ 235 $829
------------------------------------------------------------------ -------------------- --------------------
Deduct: Total stock-based employee compensation expense
determined under fair value based method (24) (72)
------------------------------------------------------------------ -------------------- --------------------
Pro-forma net income $ 211 $757
------------------------------------------------------------------ ==================== ====================
Earnings per share:
------------------------------------------------------------------ -------------------- --------------------
Basic - as reported $0.03 $0.10
------------------------------------------------------------------ -------------------- --------------------
Basic - pro forma $0.02 $0.09
------------------------------------------------------------------ -------------------- --------------------
Diluted - as reported $0.02 $0.09
------------------------------------------------------------------ -------------------- --------------------
Diluted - pro forma $0.02 $0.08
------------------------------------------------------------------ -------------------- --------------------
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. Earnings per share
A reconciliation of shares used in calculating basic and diluted
earnings per common share for the three and eight months ended September
30, 2006 and the three and nine months ended October 29, 2005 follows:
Three Months Eight months Three months Nine months
ended ended ended ended
September 30, 2006 October 29, 2005
------------------ ----------------
Basic 8,510,366 8,495,408 8,463,581 8,458,055
Effect of assumed conversion of
employee stock options 1,240,337 1,240,337 1,046,734 1,046,734
------------------ ----------------- ------------------ -----------------
Diluted 9,750,703 9,735,745 9,510,315 9,504,789
================== ================= ================== =================
There were no options outstanding during the eight months ended
September 30, 2006 that were excluded from the computation of diluted
earnings per share.
4. Inventories
September 30, 2006 January 28, 2006
----------------------- -----------------------
New Machines and Software $ 5,178 $ 2,386
Used Machines 94 183
Parts 2,469 2,868
----------------------- -----------------------
7,741 5,437
Less: Reserve for slow moving
inventory (1,580) (1,309)
----------------------- -----------------------
Inventories, net $ 6,161 $ 4,128
======================= =======================
5. 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. (See Note 8)
6. Warranty Reserve
The warranty reserve included in Accounts Payable and Accrued Expenses
was $563,000 at September 30, 2006 and $613,000 at January 28, 2006. The
Company reversed approximately $50,000 in warranty reserve for the eight
months ended September 30, 2006 and expensed $50,000 for the nine months
ended October 29, 2005.
7. 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.
8. Subsequent Events
On November 6, 2006, the Company filed a report on Form 8-K disclosing
that Sheridan Square Entertainment, Inc. failed to make payment of the
$1,200,000 Purchase Price to Hirsch as required under the terms of the
Purchase Agreement (see Note 5). The Company believes that the Purchase
Price remains collectible, and has retained legal counsel to advise it as
to the proper course of action to be taken to enforce its rights under the
Purchase Agreement and to collect all amounts due thereunder.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained herein constitute forward-looking statements
as such term is defined in Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements are not guarantees of future performance. Our future
results, financial condition, results of operations and business may differ
materially from those expressed in these forward-looking statements. You can
find many of these statements by looking for words such as "approximates,"
"believes," "expects," "anticipates," "estimates," "intends," "plans," "would,"
"may," or other similar expressions in this Quarterly Report of Form 10-Q. These
forward-looking statements represent our intentions, plans, expectations and
beliefs and are subject to numerous assumptions, risks and uncertainties. See
"Item IA - Risk Factors" in our Annual Report on Form 10-K for the year ended
January 28, 2006, for more information about important factors that would cause
actual results to differ materially from the results anticipated by these
forward-looking statements.
We claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995 for these
forward-looking statements. You are cautioned not to place undue reliance on the
forward-looking statements, which speak only as of the date of this Quarterly
Report on Form 10-Q or the date of the applicable document incorporated by
reference. All subsequent written and oral forward-looking statements
attributable to us or any person acting on our behalf are expressly qualified in
their entirety by the cautionary statements contained or referred to in this
section. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a discussion of our consolidated financial statements for
the three and eight months ended September 30, 2006 and the three and nine
months ended October 29, 2005. The preparation of financial statements in
conformity with accounting principles generally accepted in the United Sates of
America 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 periods. Actual results could differ
from those estimates.
Three and Eight months ended September 30, 2006 as compared to the three and
nine months ended October 29, 2005.
Net sales. Net sales for the three months ended September 30, 2006 were
$12.4 million, a decrease of $0.5 million, or 3.9%, compared to $12.9 million
for the three months ended October 29, 2005 and $34.7 million for the eight
months ended September 30, 2006, a decrease of $4.5 million, or 11.5%, compared
to $39.2 for the nine months ended October 29, 2005. The decrease in sales for
the three months ended September 30, 2006 is primarily attributable to a
decrease in new machine sales. The decrease in sales for the eight months ended
September 30, 2006 is primarily attributable to the inclusion of eight months of
sales versus nine months for the comparable period.
Cost of sales. For the three months ended September 30, 2006, cost of sales
decreased $0.8 million to $7.9 million from $8.7 million for the three months
ended October 29, 2005 and for the eight months ended September 30, 2006
decreased $3.8 million to $22.6 million from $26.4 million for the nine months
ended October 29, 2005. The decrease for the three month period ended September
30, 2006 is the result of lower sales volume. The decrease for the eight months
ended September 30, 2006 is directly related to lower sales volume recorded
during the shorter (eight months) reporting period versus the nine months ended
October 29, 2005. The Company's gross margin increased to 36% for the three
months ended September 30, 2006 as compared to 32.6% for the three months ended
October 29, 2005 and increased to 34.9% for the eight months ended September 30,
2006 from 32.7% for the nine months ended October 29, 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 September 30, 2006 operating
expenses were $4.1 million, an increase of $0.1 million, or 2.5%, as compared to
$4.0 million for the three months ended October 29, 2005 and for the eight
months ended September 30, 2006 were $10.9 million, a decrease of $0.9 million,
or 7.6%, as compared to $11.9 million for the nine months ended October 29,
2006. The increase in operating expenses for the three months ended September
30, 2006 is attributable to additional costs associated with the new
distribution of the MHM line of screen printing equipment. The primary
difference for the eight months ended September 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 nine months ended October 29,
2005 and the additional costs associated with the new MHM line of screen
printing equipment. Included in operating expenses for the eight months ended
September 30, 2006 is the recognition of $128,000 in deferred gain associated
with the termination of the lease on the corporate headquarters. (See Note 7 to
the Consolidated Financial Statements). Included in operating expenses for the
six months ended October 29, 2005 was $147,000 in severance costs.
Interest Expense. Interest expense for the three months ended September 30,
2006 decreased to $0 from $41,000 for the three months ended October 29, 2005
and for the eight months ended September 30, 2006, decreased to $61,000 from
$128,000 for the nine months ended October 29, 2005. Interest expense is
primarily associated with the sale/leaseback transaction of the corporate
headquarters (See Note 7 to the Consolidated Financial Statements).
Other Income. Other income for the three months ended September 30, 2006
increased by $32,000 to $87,000 from $55,000 for the three months ended October
29, 2005 and for the eight months ended September 30, 2006 increased $103,000 to
$227,000 from $124,000 for the nine months ended October 29, 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 September
30, 2006 was $20,000 versus $8,000 for the three months ended October 29, 2005
and for the eight months ended September 30, 2006 was $34,000 versus $38,000 for
the nine months ended October 29, 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 September 30, 2006 was
$424,000 an increase of $189,000 over the net income of $235,000 for the three
months ended October 29, 2005 and for the eight months ended September 30, 2006
was $1,297,000 an increase of $468,000 over the net income of $829,000 for the
nine months ended October 29, 2005 primarily from the increase in operating
income.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $15.5 million at September 30, 2006,
increasing $3.4 million, or 28.0 % from $12.1 million at January 28, 2006.
During the eight months ended September 30, 2006, the Company's cash and
cash equivalents remained the same at $13.2 million from January 28, 2006. Of
the $0.4 million net cash used by the Company's operating activities, $2.3
million was used to increase inventory, $0.2 million was used to pay lease
termination fees which was offset by income from operations of $1.3 million and
cash of $130,000 was used for capital expenditures. Cash of $610,000 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 and the exercise of stock options.
Inventory purchase commitments are covered by current purchases of foreign
currency. As of September 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
On November 6, 2006, the Company filed a report on Form 8-K diclosing that
Sheridan Square Entertainment, Inc. failed to make payment of the $1,200,000
Purchase Price to Hirsch as required under the terms of the Purchase Agreement
(see Note 5 and 8 to the financial statements). The Company believes that the
Purchase Price remains collectible, and has retained legal counsel to advise it
as to the proper course of action to be taken to enforce its rights under the
Purchase Agreement and to collect all amounts due thereunder.
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: November 13, 2006