UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1996
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 December 11, 1996:
Class of Number of
Common Equity Shares
Class A Common Stock, 5,159,544
par value $.01
Class B Common Stock, 2,732,249
par value $.01
<PAGE>
HIRSCH INTERNATIONAL CORP. and SUBSIDIARIES
FORM 10-Q
INDEX
Page No.
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - October 31, 1996
and January 31, 1996 3-4
Consolidated Statements of Income for the
Nine and Three Months Ended October 31, 1996 and 1995 5
Consolidated Statements of Cash Flows for the
Nine Months Ended October 31, 1996 and 1995 6-8
Notes to Consolidated Financial Statements 9-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-17
Part II. Other Information 18
Signatures 19
2
<PAGE>
Part I - Financial Information
Item 1. Consolidated Financial Statements
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
1996 1996
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $6,172,017 $6,564,628
SHORT-TERM INVESTMENTS AVAILABLE-FOR-SALE 2,493,311 2,286,194
ACCOUNTS RECEIVABLE, NET
OF ALLOWANCE FOR DOUBTFUL
ACCOUNTS OF $1,747,000 AND $1,041,000,
RESPECTIVELY 18,882,325 13,707,328
INVENTORIES, NET (Note 5) 13,787,534 7,969,203
NET INVESTMENT IN SALES-TYPE
LEASES-CURRENT PORTION (Note 4) 1,636,437 1,592,733
DEFERRED INCOME TAXES 1,098,981 1,055,473
OTHER CURRENT ASSETS 637,007 630,295
---------- -----------
TOTAL CURRENT ASSETS 44,707,612 33,805,854
---------- -----------
NET INVESTMENT IN SALES-TYPE
LEASES-NON-CURRENT PORTION (Note 4) 9,004,992 7,052,091
PROPERTY, PLANT AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION AND AMORTIZATION 5,483,276 4,840,530
EXCESS OF COST OVER NET ASSETS ACQUIRED,
NET OF ACCUMULATED AMORTIZATION OF
$213,000 AND $0, RESPECTIVELY (Note 6) 8,442,829 -
PURCHASED TECHNOLOGIES, NET OF ACCUMULATED
AMORTIZATION OF $510,000 AND
$367,000, RESPECTIVELY 829,025 972,508
OTHER ASSETS, NET 1,775,949 1,201,143
---------- ----------
TOTAL ASSETS $70,243,683 $47,872,126
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
1996 1996
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
TRADE ACCEPTANCES PAYABLE $12,969,486 $8,656,094
ACCOUNTS PAYABLE AND
ACCRUED EXPENSES 6,844,857 6,774,178
CURRENT MATURITIES OF LONG-TERM DEBT (Note 7) 2,429,500 242,760
INCOME TAXES PAYABLE 752,446 733,009
CUSTOMER DEPOSITS PAYABLE 742,594 552,981
---------- ---------
TOTAL CURRENT LIABILITIES 23,738,883 16,959,022
LONG-TERM DEBT, LESS CURRENT
MATURITIES (Note 7) 9,848,616 1,778,626
---------- ----------
TOTAL LIABILITIES 33,587,499 18,737,648
========== ==========
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:
5,137,909 AND 3,288,200 SHARES, RESPECTIVELY 51,379 32,882
CLASS B COMMON STOCK, $.01
PAR VALUE; AUTHORIZED: 3,000,000 SHARES,
OUTSTANDING: 2,732,249 AND 2,868,606
SHARES, RESPECTIVELY 27,322 28,686
ADDITIONAL PAID-IN CAPITAL 12,958,712 11,885,627
UNREALIZED HOLDING GAIN(LOSS) ON
SHORT-TERM INVESTMENTS AVAILABLE-FOR-SALE 17,586 (15,105)
RETAINED EARNINGS 23,601,185 17,202,388
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 36,656,184 29,134,478
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $70,243,683 $47,872,126
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
October 31, October 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
NET SALES $88,145,127 $64,877,259 $34,141,546 $22,566,437
INTEREST INCOME RELATED
TO SALES-TYPE LEASES 2,339,574 2,077,701 735,812 770,589
---------- ---------- ---------- ----------
TOTAL REVENUE 90,484,701 66,954,960 34,877,358 23,337,026
---------- ---------- ---------- ----------
COST OF GOODS SOLD 58,211,385 43,916,412 22,937,404 15,272,303
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 21,175,144 14,805,352 8,052,389 5,212,136
INTEREST EXPENSE 538,156 289,478 276,091 68,702
OTHER INCOME, NET (375,115) (223,526) (244,089) (122,453)
---------- ----------- ---------- ----------
TOTAL EXPENSES 79,549,570 58,787,716 31,021,795 20,430,688
---------- ----------- ---------- ----------
INCOME BEFORE INCOME TAXES 10,935,131 8,167,244 3,855,563 2,906,338
PROVISION FOR INCOME TAXES 4,520,918 3,386,375 1,610,167 1,241,718
---------- ---------- ---------- ----------
NET INCOME $6,414,213 $4,780,869 $2,245,396 $1,664,620
========== ========== ========== ==========
NET INCOME PER SHARE (Note 2) $0.81 $0.64 $0.28 $0.22
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF
SHARES USED IN THE CALCULATION
OF NET INCOME PER SHARE (Note 2) 7,946,212 7,496,230 7,991,112 7,512,103
=========== ========== ========== ==========
</TABLE>
5
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
October 31,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
NET INCOME $6,414,213 $4,780,869
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 1,184,051 842,922
PROVISION FOR BAD DEBTS 120,709 255,000
PROVISION FOR SLOW-MOVING INVENTORIES 35,000 90,000
DEFERRED INCOME TAXES (116,961) (19,145)
LOSS ON DISPOSAL OF ASSETS - 61,615
CHANGES IN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE (1,903,644) (1,334,777)
NET INVESTMENT IN SALES-TYPE LEASES (2,034,105) (3,271,242)
INVENTORIES (2,775,422) (698,957)
OTHER CURRENT ASSETS 68,144 (29,696)
OTHER ASSETS (631,723) (359,986)
TRADE ACCEPTANCES PAYABLE 4,313,392 1,833,563
ACCOUNTS PAYABLE AND ACCRUED EXPENSES (4,094,522) 1,232,162
INCOME TAXES PAYABLE 19,437 (550,270)
CUSTOMER DEPOSITS PAYABLE 189,613 (69,650)
---------- ----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 788,182 2,762,408
========== ==========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
October 31,
1996 1995
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (969,100) (800,114)
ACQUISITION OF SMX, NET OF CASH ACQUIRED (Note 6) (4,973,222) -
(PURCHASES) SALES OF SHORT-TERM INVESTMENTS (325,790) 452,655
---------- --------
NET CASH USED IN INVESTING ACTIVITIES (6,268,112) (347,459)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS OF BANK FINANCING 7,500,000 -
REPAYMENTS OF LONG-TERM DEBT (3,297,639) (240,141)
EXERCISE OF STOCK OPTIONS AND WARRANTS 884,958 -
---------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 5,087,319 (240,141)
---------- ---------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (392,611) 2,174,808
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,564,628 2,746,665
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $6,172,017 $4,921,473
========== ==========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
INTEREST PAID $ 512,406 $ 281,043
========== ==========
INCOME TAXES PAID $4,371,675 $3,856,137
========== ==========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
PROPERTY AND EQUIPMENT RETURNED
IN SATISFACTION OF CAPITAL LEASE - $ 622,295
========== ==========
SATISFACTION OF CAPITAL LEASE OBLIGATION - $ 691,052
========== ==========
</TABLE>
7
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
The Company purchased all of the capital stock of SMX (see Note 6) for
$8,690,000. In connection with the acquisition the following activity was
recorded:
<TABLE>
<CAPTION>
<S> <C>
FAIR VALUE OF ASSETS ACQUIRED $7,241,000
FAIR VALUE OF LIABILITIES ASSUMED (6,541,000)
-----------
NET ASSETS ACQUIRED $ 700,000
===========
CASH PAID (GROSS) FOR NET ASSETS $5,000,000
PROMISSORY NOTES ISSUED FOR NET ASSETS 3,500,000
CLASS A COMMON STOCK ISSUED FOR NET ASSETS 190,000
ACQUISITION COSTS & RESTRUCTURING RESERVE 666,000
----------
TOTAL CONSIDERATION 9,356,000
LESS NET ASSETS ACQUIRED (700,000)
LESS ACCUMULATED AMORTIZATION (213,000)
-----------
EXCESS OF COST OVER NET ASSETS ACQUIRED $8,443,000
==========
</TABLE>
See notes to consolidated financial statements.
8
<PAGE>
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Nine and Three Months Ended October 31, 1996 and 1995
1. Organization and Basis of Presentation
The accompanying consolidated financial statements as of and for the nine
and three month periods ended October 31, 1996 and 1995 include the accounts of
Hirsch International Corp. ("Hirsch"), HAPL Leasing Co., Inc. ("HAPL"), Sewing
Machine Exchange, Inc. ("SMX") and Pulse Microsystems Ltd. ("Pulse" and
collectively with Hirsch, HAPL, and SMX, the "Company"). The operations of SMX
have been included in consolidated operations since June 7, 1996 (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 nine and
three month periods ended October 31, 1996 and 1995, the financial position at
October 31, 1996 and cash flows for the nine month periods ended October 31,
1996 and 1995, 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, 1996 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, accordingly, approximately 221,000 and 266,000 and 52,000
and 68,000 common stock equivalent shares have been included in the computation
of earnings per share for the nine and three month periods ended October 31,
1996 and 1995, respectively, 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.
9
<PAGE>
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
4. Net Investment in Sales-Type Leases
<TABLE>
<CAPTION>
October 31, 1996 January 31, 1996
<S> <C> <C>
Total Minimum Lease Payments Receivable $11,248,965 $9,595,952
Allowance for Estimated Uncollectible
Lease Payments ........................ (337,500) (300,000)
Estimated Residual Value of Leased
Property (Unguaranteed)................ 2,770,415 1,832,088
Less: Unearned Income.................. (3,040,451) (2,483,216)
------------ -----------
Net Investment......................... 10,641,429 8,644,824
Less: Current Portion.................. (1,636,437) (1,592,733)
------------ -----------
Long-Term Portion...................... $9,004,992 $7,052,091
============ ===========
</TABLE>
5. Inventories, Net
<TABLE>
<CAPTION>
October 31, 1996 January 31, 1996
<S> <C> <C>
Machines............................... $10,067,398 $6,158,040
Parts.................................. 5,171,634 2,837,165
------------ -----------
15,239,032 8,995,205
Less: Reserve.......................... (1,451,498) (1,026,002)
------------ -----------
Inventories, net....................... $13,787,534 $7,969,203
=========== ===========
</TABLE>
6. Acquisition of SMX
On June 7, 1996 the Company acquired all of the outstanding capital stock
of Sewing Machine Exchange, Inc. ("SMX"). The acquisition was accounted for as a
purchase in accordance with Accounting Principles Board Opinion No. 16 "Business
Combinations" and accordingly, the acquired assets and assumed liabilities have
been recorded at their estimated
10
<PAGE>
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
fair market values at the date of acquisition. The fair value of the assets
purchased was approximately $7,241,000 and the fair value of the liabilities
assumed was approximately $6,541,000. The cost in excess of the net assets
acquired including approximately $713,000 in paid and accrued acquisition costs
and restructuring costs was capitalized. Amortization of goodwill approximated
$213,000 from date of acquisition through October 31, 1996. The costs incurred
to secure the debt financing are approximately $107,000 and have been
capitalized and included in Other Assets, Net in the Consolidated Balance
Sheets. These costs are being amortized over the life of the related debt
agreements.
The purchase price was $8.69 million, paid in the form of a promissory note
in the principal amount of $4.25 million 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 $2.5 million on June
13, 1996 with the balance of each note ($1.75 million) payable in 60 equal
monthly installments of principal and interest beginning July 7, 1996.
Concurrent with the acquisition, the Company entered into 5 year employment
contracts with SMX's former shareholders pursuant to which they received 265,000
options to purchase shares of Hirsch Class A common stock. The options were
issued at fair market value at the date of acquisition and are exercisable one
year from the date of grant for a period of 5 years (See Note 2).
7. Long-Term Debt
<TABLE>
<CAPTION>
October 31, 1996 January 31, 1996
<S> <C> <C>
Long-Term Debt: (e) .......................
Term Loan (a)............................... $7,125,000 $0
Promissory Notes (b)........................ 3,266,664 0
Mortgage (c)................................ 1,836,000 2,008,126
Other capitalized lease obligations (d)..... 50,452 13,260
----------- -----------
Total....................................... 12,278,116 2,021,386
=========== ===========
Less: Current maturities.................... (2,429,500) (242,760)
----------- -----------
Long-Term Maturities........................ $9,848,616 $1,778,626
=========== ===========
</TABLE>
(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 $7.5 million to
the Company to
11
<PAGE>
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
fund the acquisition of SMX and to repay SMX's credit facilities. The loan
is repayable in twenty (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, the Company issued
promissory notes in the principal amount of $4.25 million 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 ($1.75 million) 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 greement plus 2% through
June 1999 and from July 1999 through maturity at the Hirsch Rate.
(c) On October 27, 1994, Hirsch entered into a ten year, $2,295,000
mortgage agreement with a bank (the "Mortgage") covering property being used as
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
Mortgage, among other matters, restricts additional borrowings by the Company
and requires the company to maintain certain debt service coverage ratio levels,
as defined in the Mortgage. The Company's obligations under the Mortgage are
secured by a lien on the property and related improvements.
(d) The Company leases certain automobiles and equipment under
noncancelable leases expiring at various times through January 1998.
(e) At October 31, 1996 the Company had an unsecured Line of Credit
Agreement (the "Agreement") with a bank for an aggregate of $15 million. The
Agreement, which is uncommitted, is for working capital loans, letters of credit
and deferred payment letters of credit, and bear interest at the alternate base
rate. There were no working capital loans outstanding against this Agreement at
October 31, 1996.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
For the nine and three month periods ended October 31, 1996 as compared to
the nine and three month periods ended October 31, 1995
Net Sales - Net sales for the nine and three months ended October 31, 1996
were $88,145,000 and $34,142,000, an increase of $23,268,000 and $11,575,000, or
35.9% and 51.3%, respectively, compared to $64,877,000 and $22,566,000 for the
nine and three months ended October 31, 1995. Approximately $16,736,000 and
$8,525,000 of such increase was due to the sale of embroidery machinery for the
nine and three months ended October 31, 1996. The Company believes that this
increase is the result of the continued strong demand for traditional
embroidered products, 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
believes that purchasers of smaller embroidery machines are a significant source
of repeat business for the sale of multihead machines as the entrepreneurs'
operations expand. Additionally, approximately $10 million of additional sales
were attributable to the acquisition of Sewing Machine Exchange, Inc. ("SMX")
for the period from June 7, 1996 (date of acquisition) though October 31, 1996.
(See Note 6 of Notes to the Consolidated Financial Statements.)
The Company sells embroidery machines manufactured by Tajima Industries
Ltd. ("Tajima"), Brother Industries Ltd. ("Brother") and through the acquisition
of SMX, Melco Embroidery Systems ("Melco"). Singlehead embroidery machines and
multihead embroidery machines represented 42.8% and 57.2% and 41.1% and 58.9%,
respectively, of the number of embroidery machines sold during the nine and
three months ended October 31, 1996 as compared to 39.2% and 60.8% and 37.0% and
63.0% for the nine and three months ended October 31, 1995, respectively.
Effective October 16, 1996, Hirsch announced that it has discontinued the
distribution of Brother embroidery machines. In addition, the Company has come
to a mutual agreement with Melco to discontinue the distribution of Melco
embroidery equipment through SMX, effective December 31, 1996.
Revenue from the sale of the Company's computer hardware and software,
parts, service, used machines, application software and embroidery supplies for
the nine and three months ended October 31, 1996 aggregated approximately
$15,298,000 and $6,266,000, as compared to $8,766,000 and $3,215,000 for the
nine and three months ended October 31, 1995, respectively.
Interest income related to sales-type leases - HAPL's interest income
increased 12.6% to $2,340,000 for the nine month period ended October 31, 1996
from $2,078,000 for the
13
<PAGE>
comparable period of the prior year. This increase is a result of the
continued expansion of HAPL's operations. For the three months ended October 31,
1996, the interest income decreased by approximately 4.5% to $736,000 from
$771,000 for the comparable period of the prior year. This decrease for the
three month period ended October 31, 1996 is attributable to reduced rates in
order to increase market share.
Cost of Goods Sold - For the nine and three months ended October 31, 1996,
cost of goods sold increased $14,295,000 and $7,665,000, or 32.6% and 50.2%, to
$58,211,000 and $22,937,000 from $43,916,000 and $15,272,000 for the nine and
three months ended October 31, 1995, respectively. 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. Profit margins are consistent
throughout the Tajima and Brother product lines. 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 nine and
three months ended October 31, 1996 SG&A increased $6,370,000 and $2,840,000, or
43.0% and 54.5%, to $21,175,000 and $8,052,000 from $14,805,000 and $5,212,000
for the nine and three months ended October 31, 1995, respectively. SG&A
expenses increased as a percentage of revenues to 23.4% and 23.1% for the nine
and three months ended October 31, 1996, respectively, from 22.1% and 22.3% for
the same periods of the prior year. 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
acquisition of SMX has also attributed to this increase in SG&A. Amortization of
the excess of cost over net assets acquired and acquisition costs have also
increased SG&A costs.
Interest Expense - Interest expense for the nine and three months ended
October 31, 1996 increased $249,000 and $207,000, or 85.9% and 301.9% as
compared to the nine and three month periods ended October 31, 1995. This
increase is directly attributable to the increased interest costs related to the
debt assumed for the acquisition of SMX.
Other income, net - Other income, net, consists principally of investment
interest.
Provision for income taxes - The provision for income taxes reflected an
effective tax rate of approximately 41.3% and 41.8% for the nine and three
months ended October 31, 1996 as compared to 41.5% and 42.7% for the nine and
three months ended October 31, 1995. Differences from the Federal statutory rate
consisted primarily of provisions for state income taxes net of Federal tax
benefit. The decrease in the tax rate for the nine and three months ended
October 31, 1996 is principally the result of changes in the sales mix which
resulted in increased sales to states and other taxing jurisdictions with lower
effective tax
14
<PAGE>
rates. 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 has
been no effect on deferred taxes as a result of the SMX acquisition as the
goodwill is being deducted over 15 years for book and tax bases. 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 nine and three months ended October 31,
1996 increased $1,633,000 and $581,000, or 34.2% and 34.9%, to $6,414,000 and
$2,245,000 from $4,781,000 and $1,665,000 for the nine and three months ended
October 31, 1995, respectively. 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
The Company's working capital was $20,969,000 at October 31, 1996,
increasing $4,122,000, or 24.4%, from $16,847,000 at January 31, 1996. 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. The acquisition of SMX has been financed through a
term loan agreement with a bank (See Note 7 of notes to consolidated financial
statements).
During the nine months ended October 31, 1996, the Company's cash and cash
equivalents and short-term investments available-for-sale decreased by $185,000
to $8,665,000. Net cash of $788,000 was provided by the Company's operating
activities principally as a result of the Company's earnings of $6,414,000.
Changes to working capital components resulted in a use of cash of $6,849,000.
Cash provided by increases in the balance of trade acceptances payable, income
taxes payable and customer deposits aggregating $4,522,000 was offset by cash
used to increase inventory, accounts receivable, net investment in sales-type
leases and other assets aggregating $7,345,000 and a decrease in accounts
payable and accrued expenses of approximately $4,095,000. These changes resulted
from expansion of the Company's business.
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. See Note 10(B) of Notes to Consolidated
Financial Statements in the 1996 Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission.
At October 31, 1996, the Company had an uncommitted line of credit
agreement with a bank for $15,000,000. This line, which is unsecured, can be
used for working capital loans,
15
<PAGE>
bankers acceptances, letters of credit and deferred payment letters of
credit. This line of credit can be canceled at any time by either party. This
line has been used for letters of credit and deferred payment letters of credit
aggregating approximately $12,969,000 at October 31, 1996. The absence of this
line would impair the Company's ability to purchase Tajima equipment.
The Company is presently in negotiations with a Bank for an aggregate of
$35 million ($30 million for Hirsch and $5 million for HAPL) in senior revolving
credit and term loan facilities (the "Facilities"). The $30 million facility,
which will be unsecured, and the $5 million facility, which will be secured by a
first lien on substantially all of HAPL's assets, will be used for working
capital loans, letters of credit and deferred payment letters of credit,
financing of sales-type leases and financing of permitted acquisitions
(collectively, as defined therein). These Facilities have not been consummated
as of December 10, 1996.
On June 7, 1996 the Company acquired all of the outstanding capital stock
of SMX. This acquisition was accounted for as a purchase and accordingly, the
acquired assets and assumed liabilities were recorded at their estimated fair
market values at the date of acquisition. The cost in excess of fair value of
SMX was recorded as goodwill. The purchase price was $8.69 million, in the form
of a promissory note in the principal amount of $4.25 million 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 $2.5 million on June 12, 1996 with the balance of each note ($1.75 million)
payable in 60 equal monthly installments of principal and interest beginning
July 7, 1996. Concurrent with the acquisition, the Company entered into 5 year
employment contracts with SMX's former shareholders.
Based in Chicago, Illinois, SMX is the exclusive distributor in 7
midwestern states of single and multihead machines manufactured by Tajima, and
the exclusive distributor in 11 midwestern states, of 1, 4 and 12 head
embroidery machines and related software manufactured by Melco. The Company has
entered into a mutual agreement with Melco to discontinue the distribution of
Melco embroidery equipment through SMX, effective December 31, 1996.
On June 10, 1996, the Company entered into a term loan agreement with a
bank (the "Term Loan Agreement") pursuant to which to bank lent $7.5 million to
the Company to fund the acquisition of SMX and to repay SMX's credit facilities.
The loan is repayable in twenty (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.
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. In certain cases, HAPL retains
leases for which it cannot obtain commitments from financing sources. HAPL
Leasing, which was fully activated in May 1993, has closed $84.3 million in
lease agreements as of October 31, 1996. To date, approximately $75.8
16
<PAGE>
million, or 90%, of the leases have been sold to third party financial
institutions on a non-recourse basis.
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% 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.
The Company believes that its existing cash and funds generated from
operations, together with its existing financing agreements, 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 customer's orders are
received, and as a result, backlog is not meaningful as an indicator of future
sales.
Inventory at October 31, 1996 of new Tajima and Brother embroidery machines
was $6,314,000 and $727,000, respectively, representing approximately one
month's sales which is comparable to historical inventory levels. Inventory of
approximately $3,026,000 consisted of computer software, used machines and other
equipment.
Recent Pronouncements of the Financial Accounting Standards Board
Recent pronouncements of the Financial Accounting Standards Board ("FASB"),
which are not required to be adopted at this date, include Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS No.
125") which is effective for transactions occurring after December 15, 1996,
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") and
SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of," ("SFAS No. 121") which are effective for fiscal
years beginning December 15, 1995. The Company adopted SFAS No. 121 in the third
quarter of fiscal 1996. The adoption did not have material impact on the
Company's Consolidated Financial Statements. SFAS No. 125 and SFAS No. 123 are
not expected to have a material impact on the Company's Consolidated Financial
Statements.
17
<PAGE>
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.
18
<PAGE>
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: December 12, 1996
19
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<NAME> Hirsch International Corporation
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<PERIOD-START> Aug-1-1996
<PERIOD-END> Oct-31-1996
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