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, 1998
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 June 12, 1998:
Class of Number of
Common Equity Shares
--------------- ----------
Class A Common Stock, 6,815,180
par value $.01
Class B Common Stock, 2,668,139
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 - April 30, 1998
and January 31, 1998 3-4
Consolidated Statements of Income for the
Three Months Ended April 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the
Three Months Ended April 30, 1998 and 1997 6-7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-14
Part II. Other Information 15
Signatures 16
2
<PAGE>
Part I - Financial Information
Item 1. Consolidated Financial Statements
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30, January 31,
1998 1998
---------- ----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $8,118,000 $2,956,000
Accounts Receivable, Net 35,519,000 34,427,000
Net investment in sales-type leases,
current portion (Note 7) 1,928,000 2,180,000
Inventories, net (Note 6) 43,655,000 34,166,000
Other current assets 3,014,000 3,284,000
---------- ----------
Total current assets 92,234,000 77,013,000
---------- ----------
NET INVESTMENT IN SALES-TYPE LEASES,
noncurrent portion (Note 7) 11,864,000 12,055,000
EXCESS OF COST OVER NET ASSETS ACQUIRED,
net of accumulated amortization of
approximately $1,891,000 and $1,581,000,
respectively (Note 4) 15,784,000 15,979,000
PURCHASED TECHNOLOGIES, net of accumulated
amortization of approximately $797,000
and $749,000, respectively 542,000 590,000
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 7,260,000 7,193,000
OTHER ASSETS 1,886,000 2,002,000
------------ -----------
TOTAL ASSETS $129,570,000 $114,832,000
============ ===========
See notes to consolidated financial statements.
3
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, January 31,
1998 1998
--------- -----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade acceptances payable $13,619,000 $15,286,000
Accounts payable and accrued expenses 22,210,000 20,592,000
Current maturities of long-term debt 231,000 231,000
Income taxes payable 661,000 735,000
----------- -----------
Total current liabilities 36,721,000 36,844,000
LONG-TERM DEBT, lease current
maturities (Note 8) 15,360,000 1,421,000
----------- ----------
Total liabilities 52,081,000 38,265,000
----------- ----------
MINORITY INTEREST (Note 1) 1,015,000 944,000
----------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (Notes 2 and 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: 6,815,000
and 6,811,000 shares, respectively 68,000 68,000
Class B common stock, $.01 par value; authorized:
3,000,000 shares, outstanding: 2,668,000 shares 27,000 27,000
Additional paid-in capital 41,397,000 41,377,000
Retained Earnings 35,460,000 34,151,000
------------ ----------
76,952,000 75,623,000
Less: Treasury stock, at cost; 50,000 shares
at April 30, 1998 478,000 -
------------ ----------
Total stockholders' equity 76,474,000 75,623,000
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $129,570,000 $114,832,000
============ ===========
See notes to consolidated financial statements.
4
<PAGE>
HIRSCH INTERNATINOAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED
April 30,
-------------------------
1998 1997
---- ----
REVENUES:
Net Sales $37,198,000 $37,145,000
Interest income related to sales-type leases 1,271,000 928,000
---------- ----------
Total revenue 38,469,000 38,073,000
---------- ----------
EXPENSES:
Cost of goods sold 24,231,000 24,317,000
Selling, general and administrative expenses 11,644,000 8,911,000
Interest expense 204,000 338,000
Other expense (10,000) (39,000)
---------- ----------
Total expenses 36,069,000 33,527,000
---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND MINORITY INTEREST IN NET EARNINGS
OF CONSOLIDATED SUBSIDIARY 2,400,000 4,546,000
PROVISION FOR INCOME TAXES 1,020,000 1,932,000
MINORITY INTEREST IN NET EARNINGS
OF CONSOLIDATED SUBSIDIARY (Note 1) 71,000 -
---------- ----------
NET INCOME $1,309,000 $2,614,000
========== ==========
EARNINGS PER SHARE:
Basic $0.14 $0.32
========= ==========
Diluted $0.14 $0.32
========= ==========
WEIGNTED AVERAGE NUMBER OF SHARES
IN THE CALCULATION OF EARNINGS
PER SHARE (Note 2)
Basic 9,459,000 8,050,000
========= ==========
Diluted 9,524,000 8,281,000
========= ==========
See notes to consolidated financial statements.
5
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
April 30,
------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $1,309,000 $2,614,000
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 832,000 662,000
Provision for reserves 100,000 -
Loss on disposal of assets - 3,000
Gain on sale of short-term investments - (13,000)
Minority interest 71,000 -
Changes in assets and liabilities:
Accounts receivable (1,092,000) (6,294,000)
Net investment in sales-type leases 343,000 (1,445,000)
Inventories (9,489,000) (2,367,000)
Other assets 296,000 (1,011,000)
Trade acceptances payable (1,667,000) 2,459,000
Accounts payable and accrued expenses 1,503,000 974,000
Income taxes payable (74,000) 1,108,000
--------- ---------
Net cash used in operating activities (7,868,000) (3,310,000)
--------- ---------
See notes to consolidated financial statements.
6
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
April 30,
------------------
1998 1997
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (451,000) (538,000)
Acquisition of Equipment Connection, Inc.(Note 4) - (553,000)
Sales of short-term investments - 2,583,000
-------- ---------
Net cash (used in) provided by
investing activities (451,000) 1,492,000
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank financing 14,000,000 760,000
Repayments of long-term debt (61,000) (809,000)
Purchase of treasury shares (478,000) -
Proceeds from exercise of stock options and 20,000 4,000
---------- --------
Net cash provided by (used in) financials 13,481,000 (45,000)
---------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,162,000 (1,863,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,956,000 7,865,000
---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $8,118,000 $6,002,000
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest Paid $203,000 $344,000
========= ========
Income Taxes Paid $1,243,000 $718,000
========= ========
See notes to consolidated financial statements.
7
<PAGE>
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Three Months Ended April 30, 1998 and 1997
1. Organization and Basis of Presentation
The accompanying consolidated financial statements as of and for the three
month periods ended April 30, 1998 and 1997 include the accounts of Hirsch
International Corp. ("Hirsch"), HAPL Leasing Co., Inc. ("HAPL"), Pulse
Microsystems Ltd. ("Pulse"), Hirsch Equipment Connection, Inc. ("HECI"), and
Tajima USA, Inc. ("TUI") (collectively, the "Company").
On January 6, 1998, Tokai Industrial Sewing Machine Company ("Tokai")
purchased a 45 percent interest in TUI for $900,000. For financial purposes, the
assets, liabilities and earnings of TUI are consolidated in the Company's
financial statements. Tokai's 45 percent interest in TUI has been reported as
minority interest in the Company's Consolidated Balance Sheet and the earnings
from January 6, 1998 have been reported as minority interest in the Company's
Consolidated Statements of Income.
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, 1998 and 1997, the financial position at April 30,
1998 and cash flows for the three month periods ended April 30, 1998 and 1997,
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, 1998 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. Earnings Per Share
The Company has adopted Financial Accounting Standards No. 128 "Earnings
Per Share" ("SFAS No. 128") which requires dual presentation of basic and
diluted earnings per share on the face of the income statement. Basic earnings
per share are based on the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share are based on the
weighted average number of shares of common stock and common stock equivalents
(options and warrants) outstanding during the period, computed in accordance
with the treasury stock method.
3. Secondary Public Offering
On June 6, 1997, the Company consummated a secondary public offering of
Class A common stock (the "Secondary Offering"). The Company sold 1,210,528
shares at $20.00 per share. Another 750,022 shares were sold by certain
stockholders of the Company ("Selling Stockholders'). On July 7, 1997, the
underwriters exercised their over-allotment option to purchase an additional
294,082 shares of Class A common stock, 122,592 shares of which were sold by the
Company and 171,490 shares sold by the selling stockholders. Net proceeds of
approximately $24,300,000 were received by the Company after expenses and
underwriting discount.
8
<PAGE>
4. Acquisition
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 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.
5. Comprehensive Income
Effective February 1, 1998, the Company has adopted Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("SFAS No. 130") which
requires all items that are required to be recognized under accounting standards
as components of comprehensive income be reported on the financial statements.
Prior periods must also be restated, as required. The adoption of SFAS No. 130
has not impacted the Company's financial statements for the three months ended
April 30, 1998 and 1997.
6. Inventories, Net
</TABLE>
<TABLE>
<CAPTION>
April 30, 1998 January 31, 1998
-------------- ----------------
<S> <C> <C>
Machines.......................... $36,518,000 $29,613,000
Parts............................. 9,392,000 6,808,000
--------------- ----------------
45,910,000 36,421,000
Less: Reserve......................
(2,255,000) (2,255,000)
--------------- ----------------
Inventories, net.................... $43,655,000 $34,166,000
=============== ================
7. Net Investment in Sales-Type Leases
April 30, 1998 January 31, 1998
-------------- ----------------
Total minimum lease payments
receivable........................ $12,233,000 $13,051,000
Estimated residual value of leased
property (unguaranteed)........... 5,632,000 5,224,000
Reserve for estimated uncollectible
lease payments.................... (688,000) (588,000)
Less: Unearned income............... (3,385,000) (3,452,000)
--------------- ---------------
Net investment...................... 13,792,000 14,235,000
Less: Current portion............... (1,928,000) (2,180,000)
--------------- ---------------
Non-current portion................. $11,864,000 $12,055,000
=============== ===============
9
<PAGE>
8. Long-Term Debt
April 30, 1998 January 31, 1998
-------------- ----------------
Revolving credit facility (A)....... $14,000,000 $ -
Mortgage (B)........................ 1,492,000 1,549,000
Other............................... 99,000 103,000
-------------- ---------------
Total............................... 15,591,000 1,652,000
Less: Current maturities........... (231,000) (231,000)
--------------- ---------------
Long-term maturities $15,360,000 $1,421,000
=============== ===============
</TABLE>
(A) In September 1997 the Company amended its existing Revolving Credit
Facility to provide for a $60,000,000 Revolving Credit Facility for Hirsch and a
$10,000,000 Revolving Credit Facility for HAPL (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
$20,000,000 sub-limit to finance acquisitions (as defined therein). In addition
to the working capital borrowings illustrated above, this Facility has been used
for letters of credit and deferred payment letters of credit aggregating
approximately $13,619,000 at April 30, 1998.
(B) 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.
10
<PAGE>
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. As used herein, "fiscal year" and
"fiscal" refers to the applicable fiscal year ending January 31 of the
applicable calendar year.
Three months ended April 30, 1998 as compared to the three months ended
April 30, 1997
Net Sales. Net sales for the three months ended April 30, 1998 were
$37,198,000, an increase of $53,000, or 0.1%, compared to $37,145,000 for fiscal
year 1997. The Company believes that the sales level for the three months ended
April 30, 1998 is indicative of the continued strong demand for embroidered
products, the growth in unit sales of the single-head embroidery machine and the
continued strength of "embroidery entrepreneurs" as an integral segment of the
marketplace..
The sale of embroidery machinery represented approximately $29,689,000 or
79.8%, and $31,214,000, or 84.0%, of net sales for the three months ended April
30, 1998 and 1997, respectively. Small embroidery machines (one through six-head
"FX" models) and large embroidery machines (six-head "DC" models through
thirty-head models) represented approximately $13,744,000 and $15,945,000,
respectively of total embroidery machine sales during the three months ended
April 30, 1998 as compared to approximately $11,538,000 and $19,676,000 for the
three months ended April 30, 1997, respectively.
Revenue from the sale of the Company's computer hardware and software,
parts, service, application software and embroidery supplies for the three
months ended April 30, 1998 aggregated approximately $7,509,000, as compared to
$5,931,000 for the three months ended April 30, 1997, which represents an
increase of approximately 26.6%. This increase is attributable to the Company's
increased penetration into it's recently expanded machine territories.
Additionally, technological advances and innovations in embroidery equipment
have opened up new marketing opportunities.
Interest income related to sales-type leases. HAPL's interest income
increased 37.0% to $1,271,000 for the three months ended April 30, 1998 from
$928,000 for the comparable period of the prior year. This increase is a result
of the continued expansion of HAPL's operations and staff, and HAPL'S
consummation of a limited liability recourse agreement with third party funding
source in the third quarter of fiscal 1998. This limited liability recourse
agreement provides for more favorable terms than the non-recourse agreements.
11
<PAGE>
Cost of Goods Sold. For the three months ended April 30, 1998, cost of
goods sold decreased $86,000, or 0.4%, to $24,231,000 from $24,317,000 for the
three months ended April 30, 1997. The fluctuation of the dollar against the yen
has a minimal effect on Tajima equipment gross margins since currency
fluctuations are generally reflected in pricing adjustments in order to maintain
consistent gross margins on machine revenues. The increase in Company's gross
margin for the three months ended April 30, 1998 as compared to the three months
ended April 30, 1997 is attributable to increases in sales of the Company's
value added products. Gross margins for the Company's value-added products
(i.e., ESW, Pulse, and HAPL) are generally higher than gross margins on the sale
of embroidery machinery. For the three months ended April 30, 1998, the revenue
contribution of the Company's value-added products was approximately 12.0% of
total revenue, an increase of 6.2% as compared to 11.3% for the three months
ended April 30, 1997.
Selling, General and Administrative ("SG&A") Expenses. For the three months
ended April 30, 1998 SG&A increased $2,733,000, or 30.7%, to $11,644,000 from
$8,911,000 for the three months ended April 30, 1997. SG&A expenses increased as
a percentage of revenues increased to 30.3% from 23.4%. This increase in SG&A as
a percentage of revenues is attributable to the Company's investment in its
infrastructure to support its expanding operations.
Interest Expense. Interest expense for the three months ended April 30,
1998 decreased $134,000, or 39.6%, to $204,000 from $338,000 for the three
months ended April 30, 1997. This decrease is the result of the Company paying
down its outstanding debt in June 1997 with proceeds from the June 1997
Secondary Offering.
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,
1998 as compared to 42.5% for the three months ended April 30, 1997. Differences
from the federal statutory rate consisted primarily of provisions for state
income taxes net of Federal tax benefit. 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, 1998 decreased
$1,305,000, or 49.9%, to $1,309,000 from $2,614,000 for the three months ended
April 30, 1997. The net margin decreased to 3.4% for the three months ended
April 30, 1998 from 6.9% for the three months ended April 30, 1997. These
decreases are attributable to the increase in SG&A expenses.
12
<PAGE>
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $55,513,000 at April 30, 1998, increasing
$15,344,000, or 38.2%, from $40,169,000, at January 31, 1998. The Company has
financed its operations principally through cash generated from operations,
long-term financing of certain capital expenditures and the proceeds from
Secondary Offerings completed in June 1997 and January 1996 (See Note 3 of Notes
to Consolidated Financial Statements). The acquisition of ECI was financed
through borrowings against the Company's Revolving Credit Facility (See Note 8A
of Notes to Consolidated Financial Statements) although this borrowing was
repaid in June 1997 with the proceeds of the June 1997 Secondary Offering.
During the three months ended April 30, 1998, the Company's cash and cash
equivalents increased by $5,162,000 to $8,118,000. Net cash of $7,868,000 was
used in the Company's operating activities. Cash provided by increases in the
balance of accounts payable and accrued expenses and decreases in net investment
in sales-type leases and other assets aggregating approximately $2,142,000 was
offset by cash used to increase inventory and accounts receivable, aggregating
approximately $10,581,000 and a decrease in trade acceptances payable and income
taxes payable of approximately $1,741,000. These changes resulted from expansion
of the Company's territories and lines of business during fiscal year 1998 and
the three months ended April 30, 1998.
Cash generated from operations was partially used for the purchase of
approximately 50,000 shares of the Company's stock in the open market, at an
average cost of approximately $9.50 per share.
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 September 1997 the Company's Revolving Credit Facility (the "Facility")
was amended to increase the borrowing level from $30,000,000 to $60,000,000 for
Hirsch and provide a $10,000,000 Revolving Credit Facility for HAPL. The
Facility, which now includes a third bank, 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 $20,000,000 sub-limit to finance
acquisitions (as defined therein). This Facility has also been used for letters
of credit and deferred payment letters of credit aggregating approximately
$13,619,000 at April 30, 1998. During the first quarter ended April 30, 1998,
the Company borrowed $14,000,000 as working capital loans against the Facility,
all of which was outstanding against this Facility at April 30, 1998.
HAPL sells substantially all of its leases to financial institutions on
either a non-recourse basis or a limited-liability 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
approximately $156,593,000 in lease agreements as of April 30, 1998. To date,
approximately $144,437,000, or 90.5%, of the leases written have been sold to
third-party financial institutions.
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.
13
<PAGE>
Future Capital Requirements
The Company believes that the net proceeds from the June 1997 Secondary
Offering (See Note 3 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.
Year 2000 Date Conversion
The Year 2000 issue exists because many computer systems and applications
use two-digit fields to designate a year. As the century date change occurs,
date sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may cause systems to
process financial and operational information incorrectly.
Management has initiated a company-wide program to prepare the Company's
computer systems and applications for the year 2000. The program includes a
focus on internal policies, methods and tools, as well as coordination with
customers and suppliers.
The Company expects its year 2000 program to be completed on a timely
basis. Management does not anticipate that the year 2000 program will materially
impact operations or operation results.
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.
14
<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
*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
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
----------------------
*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.
15
<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)
/s/Henry Arnberg
-----------------------------
Henry Arnberg
President and Chief Executive Officer
/s/Paul Levine
----------------------------
Paul Levine
Executive Vice President,
Chief Operating Officer and Secretary
Dated: June 15, 1998
16
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<NAME> Hirsch International Corp.
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