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 April 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ________________.
Commission File No.: 0-23434
HIRSCH INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2230715
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Wireless Boulevard, Hauppauge, New York 11788
(Address of principal executive offices)
Registrant's telephone number, including area code: (516) 436-7100
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class of Number of
Common Equity Shares
Class A Common Stock, 6,583,098
par value $.01
Class B Common Stock, 2,732,249
par value $.01
HIRSCH INTERNATIONAL CORP. and SUBSIDIARIES
FORM 10-Q
INDEX
Page No.
Part I. Financial Information
Item 1. Consolidated Financial Statemen
Consolidated Balance Sheets - April 30, 1997
and January 31, 1997 3-4
Consolidated Statements of Income for the
Three Months Ended April 30, 1997 and 1996 5
Consolidated Statements of Cash Flows for the
Three Months Ended April 30, 1997 and 1996 6-8
Notes to Consolidated Financial Statements 9-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-16
Part II. Other Information 17
Signatures 18
2
Part I - Financial Information
Item 1. Consolidated Financial Statements
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30, January 31,
1997 1997
(Unaudited)
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $6,002,000 $7,865,000
SHORT-TERM INVESTMENTS AVAILABLE-FOR-SALE - 2,596,000
ACCOUNTS RECEIVABLE, NET
OF ALLOWANCE FOR DOUBTFUL
ACCOUNTS OF $2,578,000 28,073,000 21,761,000
NET INVESTMENT IN SALES-TYPE
LEASES-CURRENT PORTION (Note 6) 1,867,000 1,715,000
INVENTORIES, NET (Note 5) 18,036,000 15,769,000
OTHER CURRENT ASSETS 2,494,000 2,073,000
TOTAL CURRENT ASSETS 56,472,000 51,779,000
NET INVESTMENT IN SALES-TYPE
LEASES-NON-CURRENT PORTION (Note 6) 10,472,000 9,180,000
EXCESS OF COST OVER NET ASSETS ACQUIRED,
NET OF ACCUMULATED AMORTIZATION OF
$635,000 AND $383,000, RESPECTIVELY (Note 4) 14,965,000 14,043,000
PURCHASED TECHNOLOGIES, NET OF ACCUMULATED
AMORTIZATION OF $606,000 AND $558,000,
RESPECTIVELY 733,000 781,000
PROPERTY, PLANT AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION AND AMORTIZATION 6,539,000 6,242,000
OTHER ASSETS, NET 2,185,000 1,671,000
TOTAL ASSETS $91,366,000 $83,696,000
See notes to consolidated financial statements.
3
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30, January 31,
1997 1997
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
TRADE ACCEPTANCES PAYABLE $15,791,000 $13,332,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 11,542,000 10,160,000
CURRENT MATURITIES OF LONG-TERM DEBT (Note 7) 2,430,000 2,430,000
INCOME TAXES PAYABLE 2,650,000 1,541,000
CUSTOMER DEPOSITS PAYABLE 1,171,000 1,357,000
TOTAL CURRENT LIABILITIES 33,584,000 28,820,000
LONG-TERM DEBT, LESS CURRENT
MATURITIES (Note 7) 13,303,000 13,194,000
TOTAL LIABILITIES 46,887,000 42,014,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (Note 3)
PREFERRED STOCK, $.01 PAR VALUE; AUTHORIZED:
1,000,000 SHARES; ISSUED: NONE
CLASS A COMMON STOCK, $.01
PAR VALUE; AUTHORIZED:
20,000,000 SHARES, OUTSTANDING:
5,323,587 AND 5,312,666 SHARES, RESPECTIVELY 53,000 53,000
CLASS B COMMON STOCK, $.01
PAR VALUE; AUTHORIZED: 3,000,000 SHARES,
OUTSTANDING: 2,732,249 SHARES 27,000 27,000
ADDITIONAL PAID-IN CAPITAL 15,830,000 15,626,000
UNREALIZED HOLDING GAIN ON SHORT TERM
INVESTMENTS AVAILABLE-FOR-SALE 21,000
RETAINED EARNINGS 28,569,000 25,955,000
TOTAL STOCKHOLDERS' EQUITY 44,479,000 41,682,000
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $91,366,000 $83,696,000
See notes to consolidated financial statements.
4
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED
April 30,
1997 1996
NET SALES $37,145,000 $23,868,000
INTEREST INCOME RELATED
TO SALES-TYPE LEASES 928,000 821,000
TOTAL REVENUE 38,073,000 24,689,000
COST OF GOODS SOLD 24,317,000 15,644,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 8,911,000 5,729,000
INTEREST EXPENSE 338,000 69,000
OTHER INCOME, NET (39,000) (74,000)
TOTAL EXPENSES 33,527,000 21,368,000
INCOME BEFORE INCOME TAXES 4,546,000 3,321,000
PROVISION FOR INCOME TAXES 1,932,000 1,351,000
NET INCOME $2,614,000 $1,970,000
NET INCOME PER SHARE (Note 2) $0.32 $0.25
WEIGHTED AVERAGE NUMBER OF
SHARES USED IN THE CALCULATION
OF NET INCOME PER SHARE (Note 2) 8,281,000 7,766,000
See notes to consolidated financial statements.
5
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
April 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $2,614,000 $1,970,000
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 662,000 283,000
PROVISION FOR BAD DEBTS - 58,000
DEFERRED INCOME TAXES - (124,000)
LOSS ON DISPOSAL OF ASSETS 3,000 -
GAIN ON SALE OF SHORT-TERM INVESTMENTS (13,000) -
CHANGES IN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE (6,294,000) (582,000)
NET INVESTMENT IN SALES-TYPE LEASES (1,445,000) (75,000)
INVENTORIES (2,367,000) (1,749,000)
OTHER ASSETS (1,011,000) (1,000)
TRADE ACCEPTANCES PAYABLE 2,459,000 484,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1,160,000 (944,000)
INCOME TAXES PAYABLE 1,108,000 564,000
CUSTOMER DEPOSITS PAYABLE (186,000) 903,000
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (3,310,000) 787,000
See notes to consolidated financial statements.
6
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
April 30,
1997 1996
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (538,000) (200,000)
ACQUISITION OF EQUIPMENT CONNECTION, INC. (Note 4) (553,000) -
SALES (PURCHASES) OF SHORT-TERM INVESTMENTS 2,583,000 (502,000)
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 1,492,000 (702,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS OF BANK FINANCING 760,000 -
REPAYMENTS OF LONG-TERM DEBT (809,000) (64,000)
EXERCISE OF STOCK OPTIONS AND WARRANTS 4,000 -
NET CASH USED IN FINANCING ACTIVITIES (45,000) (64,000)
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (1,863,000) 21,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,865,000 6,565,000
CASH AND CASH EQUIVALENTS, END OF PERIOD $6,002,000 $6,586,000
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
INTEREST PAID $344,000 $69,000
INCOME TAXES PAID $718,000 $663,000
See notes to consolidated financial statements.
7
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
In March of 1997, the Company purchased all of the assets of Equipment
Connection, Inc. (see Note 4) for $805,000. In the prior year, the Company
purchased all of the capital stock of SMX and Sedeco (see Note 4) for $8,690,000
and $6,565,000, respectively. In connection with the acquisitions the following
activity was recorded:
SMX Sedeco ECI
FAIR VALUE OF ASSETS ACQUIRED $6,360,000 $3,965,000 $406,000
FAIR VALUE OF LIABILITIES ASSUMED (7,711,000) (1,378,000) (255,000)
NET ASSETS ACQUIRED ($1,351,000) $2,587,000 $151,000
CASH PAID (GROSS) FOR NET ASSETS $5,000,000 $4,165,000 $605,000
PROMISSORY NOTES ISSUED FOR NET ASSETS 3,500,000 - -
CLASS A COMMON STOCK ISSUED FOR
NET ASSETS 238,000 2,400,000 200,000
ACQUISITION COSTS & RESTRUCTURING RESERVE 755,000 628,000 47,000
TOTAL CONSIDERATION 9,493,000 7,193,000 852,000
LESS NET ASSETS ACQUIRED 1,351,000 (2,587,000) (151,000)
LESS ACCUMULATED AMORTIZATION (534,000) (96,000) (6,000)
LESS OFFSET OF PROMISSORY NOTES (550,000) - -
EXCESS OF COST OVER NET ASSETS ACQUIRED $9,760,000 $4,510,000 $695,000
See notes to consolidated financial statements.
8
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Three Months Ended April 30, 1997 and 1996
1. Organization and Basis of Presentation
The accompanying consolidated financial statements as of and for the three
month periods ended April 30, 1997 and 1996 include the accounts of Hirsch
International Corp. ("Hirsch"), HAPL Leasing Co., Inc. ("HAPL"), Sewing Machine
Exchange, Inc. ("SMX"), Sedeco, Inc.("Sedeco"), Hirsch Equipment Connection,
Inc. ("HECI"), and Pulse Microsystems Ltd.("Pulse" and collectively with Hirsch,
HAPL, SMX, Sedeco, and HECI, the "Company"). The operations of HECI have been
included in consolidated operations since March 26, 1997 (the date of
acquisition).
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
month periods ended April 30, 1997 and 1996, the financial position at April 30,
1997 and cash flows for the three month periods ended April 30, 1997 and 1996,
respectively. 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
ending January 31, 1997 as filed with the Securities and Exchange Commission.
The interim financial results are not necessarily indicative of the results
to be expected for the full year.
2. Net Income Per Share
Net income per share is based on the weighted average number of common
shares outstanding during the period after giving retroactive effect to stock
dividends (See Note 3). Stock options and warrants are considered to be common
stock equivalents and have been included in the computation of earnings per
share using the treasury stock method.
3. Stock Dividend
On June 25, 1996, the Company declared a five-for-four stock split effected
in the form of a 25 percent stock dividend which was paid on July 22, 1996. The
par value of the shares remains unchanged at $.01 per share. All numbers of
shares, per share amounts and per share prices in the consolidated financial
statements and notes thereto have been adjusted to reflect this stock split
unless otherwise noted.
4. Acquisitions
(A) Acquisition of Equipment Connection On March 26, 1997 the Company
acquired all of the assets of Equipment Connection, Inc.("ECI"). The acquisition
was accounted for as a purchase in accordance with Accounting Principles Board
Opinion No. 16, "Business Combinations" ("APB 16") and accordingly, the acquired
assets and assumed liabilities have been recorded at their estimated fair market
values (pending final purchase price allocation) at the date of acquisition. The
cost in excess of fair value of ECI is being amortized over a 10-year period.
The purchase price was $805,000, paid in the form of $605,000 in cash and
$200,000 in the Company's Class A Common Stock. Concurrent with the acquisition,
the Company entered into five-year employment contracts with ECI's two former
principals.
9
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(B) Acquisition of Sedeco On December 20, 1996 the Company acquired all of
the outstanding capital stock of Sedeco,Inc.. The acquisition was accounted for
as a purchase in accordance with APB 16 and the acquired assets and assumed
liabilities have been recorded at their estimated fair market value (pending
final purchase price allocation) at the date of acquisition. The cost in excess
of fair value of Sedeco is being amortized over a 15-year period.
The purchase price was $6,565,000, paid in the form of $4,165,000 in cash
and $2,400,000 in the Company's Class A Common Stock. Concurrent with the
acquisition, the Company entered into a five-year employment contract with
Sedeco's former shareholder pursuant to which approximately 60,000 options to
purchase shares of Hirsch Class A Common Stock were issued. The options were
issued at fair market value at the date of acquisition and vest in four annual
installments of 25 percent each on the first, second, third, and fourth
anniversary of the date of grant and expires five years from the date of grant.
(C) Acquisition of Sewing Machine Exchange On June 7, 1996 the Company
acquired all of the outstanding capital stock of Sewing Machine Exchange, Inc..
The acquisition was accounted for as a purchase in accordance with APB 16 and
accordingly, the acquired assets and assumed liabilities have been recorded at
their estimated fair market values at the date of acquisition. The cost in
excess of fair value of SMX is being amortized over a 15-year period.
The purchase price was $8,690,000 paid in the form of a promissory note in
the principal amount of $4,250,000 to each of the two shareholders of SMX and by
delivery of an aggregate of 9,375 shares of the Company's Class A Common Stock.
Pursuant to the terms of the promissory notes, the Company was required to make
a principal payment on each note in the amount of $2,500,000 on June 13, 1996
with the balance of each note ($1,750,000) payable in 60 equal monthly
installments of principal and interest beginning July 7, 1996 (see Note 7B).
Concurrent with the acquisition, the Company entered into five-year employment
contracts with SMX's former shareholders pursuant to which they received
approximately 331,000 options to purchase shares of Hirsch Class A common stock.
The options were issued at fair market value at the date of acquisition and vest
in four annual installments of 25 percent each on the first, second, third, and
fourth anniversary of the date of grant and expire five years from the date
thereof.
5. Inventories, Net April 30, 1997 January 31, 1997
Machines............................... $14,079,000 $12,245,000
Parts.................................. 5,960,000 5,527,000
20,039,000 17,772,000
Less: Reserve.......................... (2,003,000) (2,003,000)
Inventories, net....................... $18,036,000 $15,769,000
10
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
6. Net Investment in Sales-Type Leases
April 30, 1997 January 31, 1997
Total Minimum Lease Payments Receivable $12,576,000 $11,142,000
Estimated Residual Value of Leased
Property (Unguaranteed)................ 3,492,000 3,059,000
Allowance for Estimated Uncollectible
Lease Payments .. ......................(338,000) (338,000)
Less: Unearned Income..................(3,391,000) (2,968,000)
Net Investment.........................12,339,000 10,895,000
Less: Current Portion..................(1,867,000) (1,715,000)
Long-Term Portion.....................$10,472,000 $9,180,000
7. Long-Term Debt
April 30, 1997 January 31, 1997
Term Note (A)..........................$6,375,000 $6,750,000
Promissory Notes (B)................... 2,367,000 2,542,000
Acquisitions (C)............... 5,207,000 4,446,000
Mortgage (D)..................... ......1,721,000 1,779,000
Other...................... .. 63,000 107,000
Total (E)..............................15,733,000 15,624,000
Less: Current maturities...............(2,430,000) (2,430,000)
Long-Term Maturities..................$13,303,000 $13,194,000
(A) On June 10, 1996, the Company entered into a term loan agreement with a
bank (the "Term Loan Agreement") pursuant to which the bank lent $7,500,000 to
the Company to fund the acquisition of SMX and to repay SMX's credit facilities.
The loan is repayable in 20 equal quarterly installments of principal and
interest (as defined in the Term Loan Agreement) beginning September 30, 1996.
The loan has been guaranteed by Hirsch, Pulse and SMX, and requires the Company
to maintain, among others, certain minimum tangible net worth, quick asset ratio
and fixed charge coverage ratio levels, as defined.
(B) In connection with the acquisition of SMX (See Note 4), the Company
issued promissory notes in the principal amount of $4,250,000 to each of the two
former shareholders of SMX. Pursuant to the terms of the promissory notes, the
Company was required to make a principal payment on June 13, 1996 with the
balance of each note ($1,750,000) payable in 60 equal monthly installments of
principal and interest beginning July 7, 1996. The notes bear interest at the
rate (the "Hirsch Rate") defined in the Hirsch Term Agreement plus 2% through
June 1999 and from July 1999 through maturity at the Hirsch Rate. Pursuant to
the terms of the Stock Purchase Agreement, the former shareholders of SMX made
certain guarantees with respect to collectibility of accounts receivable and
salability of inventory among other things. In the fourth quarter of fiscal
1997, these notes were reduced by approximately $550,000.
11
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(C) In connection with the acquisitions of ECI and Sedeco, the Company
borrowed approximately $761,000 and $4,446,000, respectively, to fund the
acquisitions and repay existing credit facilities. The amounts were borrowed
under the provisions of the Revolving Credit Facility (see E) and bear interest
as defined therein. The Revolver matures three years from the closing date at
which point, any amounts used to fund acquisitions thereunder will convert to a
term loan facility and be paid in 12 equal quarterly installments over a three
year period. At April 30, 1997, all amounts outstanding thereunder were
classified in Long-Term Debt on the Balance Sheets.
(D) On October 27, 1994, Hirsch entered into a ten year, $2,295,000
mortgage agreement with a bank (the "Mortgage") for its new corporate
headquarters. The Mortgage bears interest at a fixed rate of 8.8 percent and is
payable in equal monthly principal installments of approximately $19,000. The
terms of the Mortgage, among other things, restrict additional borrowings by the
Company, and require the Company to maintain certain debt service coverage ratio
levels, as defined in the Mortgage. The obligation under the Mortgage is secured
by a lien on the premises and the related improvements thereon.
(E) The Company has a $30,000,000 Revolving Credit Facility (the
"Facility"). The Facility is for working capital loans, letters of credit, and
deferred payment letters of credit and bear interest as defined in the Facility.
The terms of the Facility, among other things, restrict additional borrowings by
the Company and require the Company to maintain certain minimum tangible net
worth, quick asset ratio and fixed charge coverage levels, as defined. The
Facility also provides a $15,000,000 sub-limit to finance acquisitions (as
defined therein), under which approximately $5,207,000 was outstanding at April
30, 1997 for the ECI (approximately $761,000) and Sedeco (approximately
$4,446,000) acquisitions (see Notes 4 and 7C). This Facility has also been used
for letters of credit and deferred payment letters of credit aggregating
approximately $15,791,000 at April 30, 1997.
8. Subsequent Event
On June 6, 1997, the Company consummated a secondary public offering of
Class A Common Stock (the "Secondary Offering"). The Company sold 1,210,526
shares at $20.00 per share. Another 750,022 were sold by certain stockholders of
the Company ("Selling Stockholders"). The Company and certain Selling
Stockholders have granted the underwriters a 30-day option to purchase up to an
additional 294,082 shares of Class A Common Stock solely to cover
over-allotments, if any.
12
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.
Results of Operations
[GRAPHIC OMITTED]
Three months ended April 30, 1997 as Compared to the three months ended
April 30, 1996
Net Sales. Net sales for three months ended April 30, 1997 were
$37,145,000, an increase of $13,277,000, or 55.6%, compared to $23,868,000 for
the three months ended April 30, 1996. Approximately $10,760,000 of such
increase was due to the sale of embroidery machinery for the three months ended
April 30, 1997. The Company believes that this increase is the result of the
continued strong demand for embroidered products, the expansion into new
territories acquired through recent acquisitions (See Note 4), the creation of
new embroidery applications and markets and the continued strength of
"embroidery entrepreneurs" as a growing segment of the marketplace.
Additionally, technological advances and innovations in embroidery equipment
have opened up new marketing opportunities.
The Company's revenues have also grown in large part as a result in the
growth in sales of the singlehead embroidery machine. Singlehead embroidery
machines and multihead embroidery machines represented 46.4% and 53.6%,
respectively, of the number of embroidery machines sold during the three months
ended April 30, 1997 as compared to 43.3% and 56.7% for the three months ended
April 30, 1996, respectively.
Revenue from the sale of the Company's computer hardware and software,
parts, service, used machines, application software and embroidery supplies for
the three months ended April 30, 1997 aggregated approximately $5,931,000, an
increase of approximately 73.7% as compared to $3,414,000 for the three months
ended April 30, 1996. This increase is primarily attributable to the increase in
machine revenues.
13
Interest income related to sales-type leases. HAPL's interest income
increased 13.0% to $928,000 for the three months ended April 30, 1997 from
$821,000 for the comparable period of the prior year. This increase is a result
of the continued expansion of HAPL's operations and staff. In order to increase
market share, HAPL reduced its rates in certain instances, which resulted in
growth that was not proportionate to the growth in machine revenue.
Cost of Goods Sold. For the three months ended April 30, 1997, cost of
goods sold increased $8,673,000, or 55.4%, to $24,317,000 from $15,644,000 for
the three months ended April 30, 1996. The increase was in direct proportion to
the Company's increased sales volume. The fluctuation of the dollar against the
yen has a minimal effect on Tajima equipment gross margins since all currency
fluctuations have been reflected in pricing adjustments in order to maintain
consistent gross margins on machine revenues. Gross margins for the Company's
value-added products are generally higher than gross margins on the sale of
embroidery machinery.
Selling, General and Administrative ("SG&A") Expenses. For the three months
ended April 30, 1997 SG&A expenses increased $3,182,000, or 55.5%, to $8,911,000
from $5,729,000 for the three months ended April 30, 1996. SG&A expenses
increased as a percentage of revenues to 23.4% from 23.2%. This increase in SG&A
expenses as a percentage of revenues is primarily attributable to the following
factors:
In order to implement its growth strategy the Company has hired additional
sales and marketing personnel for small machines and supplies, opened several
new sales offices and hired additional software programmers and technicians. The
Company also increased expenditures for advertising and for participation in
trade shows and seminars.
The Company made a significant investment in its infrastructure as it
relates to the West Coast Expansion. Additional sales, marketing, training,
administrative and technical support personnel were hired to commence operations
on the West Coast. The Company also entered into leases for several new sales
offices and incurred start up costs related to these offices.
The Company incurred certain incremental costs in connection with the
acquisitions of SMX, Sedeco, and ECI.
Interest Expense. Interest expense for the three months ended April 30,
1997 increased $269,000 to $338,000 from $69,000 for the three months ended
April 30, 1996. This increase is directly attributable to the increased interest
costs related to the additional debt assumed for the SMX, Sedeco, and ECI
acquisitions.
Provision for income taxes. The provision for income taxes reflected an
effective tax rate of approximately 42.5% for the three months ended April 30,
1997 as compared to 40.7% for the three months ended April 30, 1996. Differences
from the federal statutory rate consisted primarily of provisions for state
income taxes net of Federal tax benefit. The increase in the tax rate for the
three months ended April 30, 1997 is principally the result of changes in the
sales mix which resulted in increased sales to states and other taxing
jurisdictions with higher effective tax rates. Additionally, the goodwill
related to the Sedeco acquisition, which was accounted for as a stock purchase
for tax purposes, resulted in a permanent difference since it is not deductible
for tax purposes. The principal components of the deferred income tax assets
result from allowances and accruals which are not currently deductible for tax
purposes and differences in amortization periods between book and tax bases.
There was no effect on deferred taxes as a result of the SMX acquisition, which
was accounted for as an asset purchase for tax purposes. The goodwill related to
the SMX acquisition is being amortized over 15 years for both book and tax
purposes. The Company has not established any valuation allowances against these
deferred tax assets as management believes it is more likely than not that the
Company will realize these assets in the future based upon the historical
profitable operations of the Company.
Net Income. Net Income for the three months ended April 30, 1997 increased
$644,000, or 32.7%, to $2,614,000 from $1,970,000 for the three months ended
April 30, 1996. This increase is due to the continued growth in machine sales in
addition to the contribution to net income from the sale of the Company's value
added products.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $22,888,000 at April 30, 1997, decreasing
$71,000, or .3%, from $22,959,000 at January 31, 1997. The Company has financed
its operations principally through cash generated from operations, long-term
financing of certain capital expenditures and the proceeds from the Secondary
Offering completed in January 1996. The
14
acquisition of SMX was financed through a term loan agreement with a bank.
The acquisitions of Sedeco and ECI were financed through borrowings against the
$30 million Revolving Credit Facility (See Note 7 of Notes to Consolidated
Financial Statements).
During the three months ended April 30, 1997, the Company's cash and cash
equivalents and short-term investments available-for-sale decreased by
$4,459,000 to $6,002,000. Net cash of $3,310,000 was used in the Company's
operating activities principally as a result of the increase in accounts
receivable, net of $6,294,000. Cash provided by increases in the balance of
trade acceptances payable, accounts payable and accrued expenses, and income
taxes payable aggregating approximately $4,727,000 was offset by cash used to
increase inventory, accounts receivable, net investment in sales-type leases and
other assets aggregating $11,117,000 and a decrease in customer deposits payable
of approximately $186,000. These changes resulted from expansion of the
Company's business and the acquisitions during fiscal year 1997 and the three
months ended April 30, 1997.
The Company purchases foreign currency futures contracts to hedge specific
purchase commitments. Substantially all foreign currency purchases commitments
are matched with specific foreign currency futures contracts. Consequently, the
Company believes that no material foreign currency exchange risk exists relating
to outstanding trade acceptances payable. The cost of such contracts are
included in the cost of inventory.
Revolving Credit Facility and Borrowings
In January 1997, The Company entered into a $30,000,000 Revolving Credit
Facility with two banks (the "Facility"). The Facility is to be used for working
capital loans, letters of credit and deferred payment letters of credit and bear
interest as defined in the Facility. The terms of the Facility restrict
additional borrowings by the Company and require the Company to maintain certain
minimum tangible net worth, quick asset ratio and fixed charge coverage levels
as defined. The Facility also provides a $15,000,000 sub-limit to finance
acquisitions (as defined therein), under which approximately $761,000 and
$4,446,000 was outstanding at April 30, 1997 to finance the ECI and Sedeco
acquisitions, respectively and repay their outstanding credit facilities (see
Notes 4 and 7(C) of Notes to Consolidated Financial Statements). This Facility
has also been used for letters of credit and deferred payment letters of credit
aggregating approximately $15,791,000 at April 30, 1997. There were no working
capital loans outstanding against this Facility at April 30, 1997.
On June 10, 1996, the Company entered into a term loan agreement with a
bank (the "Term Loan Agreement") pursuant to which the bank lent $7,500,000 to
the Company to fund the acquisition of SMX and to repay SMX's credit facilities.
The loan is repayable in twenty equal quarterly installments of principal and
interest (as defined in the Term Loan Agreement) commencing September 30, 1996.
The loan has been guaranteed by Hirsch, Pulse and SMX and requires the Company
to maintain, among others, certain minimum tangible net worth, quick asset ratio
and fixed charge coverage ratio levels, as defined.
HAPL sells substantially all of its leases to financial institutions on a
non-recourse basis several months after the commencement of the lease term
thereby reducing its financing requirements. HAPL Leasing, which was fully
activated in May 1993, has closed $105,304,000 million in lease agreements as of
April 30, 1997. To date, approximately $93,238,000 million, or 88.5%, of the
leases have been sold to third party financial institutions on a non-recourse
basis.
On January 27, 1994, Hirsch entered into a ten year, $2,295,000 Mortgage
agreement with a bank (the "Mortgage") for its new corporate headquarters. The
Mortgage bears interest at a fixed rate of 8.8% and is payable in equal monthly
principal installments of $19,125. The obligation under the Mortgage is secured
by a lien on the premises and the related improvements thereon.
Future Capital Requirements
The Company believes that the net proceeds from the Secondary Offering (see
Note 8 of Notes to Consolidated Financial Statements), its existing cash and
funds generated from operations, together with its existing revolving credit
facility, will be sufficient to meet its working capital and capital expenditure
requirements and to finance planned growth.
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.
Inventory at April 30, 1997 of new Tajima embroidery machines was
$10,526,000 representing approximately one month's sales which is comparable to
historical inventory levels. Inventory of approximately $3,553,000 consisted of
computer software, used machines and other equipment.
15
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.
16
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
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 and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
17
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\ Henry Arnberg
---------------------------------------------
Henry Arnberg, President and
Chief Executive Officer
By: \s\ Kenneth Shifrin
----------------------------------------------
Kenneth Shifrin,
Chief Financial Officer
Dated: June 13, 1997
18