UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No.: 0-23434
HIRSCH INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
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Delaware 11-2230715
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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200 Wireless Boulevard, Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 436-7100
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the 6,203,942 shares of Class A Common Stock
held by non-affiliates of the Company as of April 20, 1998 is $51,958,014.
Indicate the number of shares outstanding of each of the registrant's
classes of common equity, as of the latest practicable date:
Class of Number of
Common Equity Shares
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Class A Common Stock 6,764,880
par value $.01
Class B Common Stock 2,668,139
par value $.01
The information required by Part III of this Form 10-K is incorporated by
reference from the Registrant's definitive proxy statement to be filed with the
Commission on or before May 20, 1998.
<PAGE>
PART I
Item 1. Business
General
Hirsch International Corp. ("Hirsch" or the "Company"), a Delaware
Corporation, was founded in 1970 and has become a leading single source provider
of electronic computer-controlled embroidery machinery and related value-added
products and services. The Company offers a complete line of technologically
advanced single- and multi-head embroidery machines, proprietary application
software, a diverse line of embroidery supplies, accessories and proprietary
embroidery products, and a range of equipment financing options. In addition,
Hirsch provides a comprehensive customer service program, user training and
software support. The Company believes its wide-range of product offerings
together with its related value-added products and services place it in a
competitively advantageous position within its marketplace.
The application of new technologies has transformed the embroidery industry
from one which was labor-intensive, utilizing machinery with limited production
capabilities to an industry where investment in electronic, computer-controlled
machinery and related application software has increased labor efficiencies and
production capacities while expanding the flexibility and complexity of
embroidery designs. These developments have not only resulted in the expansion
of existing markets but have also led to the creation of new markets for
embroidery. Moreover, industry has benefited from the growth in consumer demand
for licensed products carrying the names, logos and designs of professional and
collegiate sports teams, entertainment companies and their characters, as well
as branded merchandise and related goods. These trends and others have
contributed to the increase in demand for machinery, software and services
provided by Hirsch.
The Company's customer base includes large operators who run numerous
machines as well as individuals who customize products on a single machine.
Principal customer groups include: (i) contract embroiderers, who serve
manufacturers that outsource their embroidery requirements; (ii) manufacturers,
who use embroidery to embellish their apparel, accessories, towels, linens and
other products with decorative appeal; and (iii) embroidery entrepreneurs, who
produce customized products for individuals, sports leagues, school systems,
fraternal organizations, promotional advertisers and other groups.
Hirsch has certain exclusive United States rights to sell new embroidery
machines manufactured by Tajima Industries Ltd. ("Tajima"). Tajima, located in
Nagoya, Japan, is one of the world's leading manufacturers of embroidery
machines, and is regarded as a technological innovator and producer of high
quality, reliable and durable embroidery equipment. The Company has exclusive
right to distribute Tajima small (one through six-head "FX" models) machines in
the continental United States and Hawaii and large (six-head "DC" models through
thirty-head models) machines in 39 states. In the states of Arizona, California,
Idaho, Montana, Nevada, Oregon, Utah, Washington, Wyoming, and Hawaii, Hirsch
has semi-exclusive rights to distribute Tajima large machines.
The Company has a solid relationship with Tajima for more than 20 years.
Hirsch is Tajima's largest distributor in the world and collaborates with Tajima
in the development of new embroidery equipment and enhancements to existing
equipment. Until recently, all Tajima equipment was assembled in Japan. Last
year, Hirsch announced the formation of a new subsidiary, Tajima USA, Inc
("TUI"), which currently assembles two-four- and six- head Tajima machines in
the United States. In December 1997, Hirsch sold a forty-five (45%) percent
interest in TUI to Tokai Industrial Sewing Machine Company, Ltd. ("Tokai"). The
Company believes that the venture with Tokai, which is Tajima's manufacturing
arm, will act to further strengthen its relationship with Tajima.
<PAGE>
In addition to offering a complete line of technologically-advanced
embroidery machines and customer training, support and service, Hirsch provides
an array of value-added products to its customers. The Company's software
subsidiary, Pulse Microsystems Ltd. ("Pulse"), develops and supplies application
software programs which enhance and simplify the embroidery process, as well as
enabling the customization of designs and reduced production costs. The majority
of Pulse's proprietary application software programs are designed to operate in
the Microsoft(R) Windows 95 (TM) environment, which Hirsch believes will further
simplify usage and enhance user flexibility.
The Company's leasing subsidiary, HAPL Leasing Co., Inc. ("HAPL Leasing"),
provides a wide range of financing options to customers wishing to finance their
purchases of embroidery equipment. Hirsch also sells a broad range of embroidery
supplies, accessories and proprietary embroidery products through the Company's
Embroidery Supply Warehouse Division ("ESW").
On March 27, 1997, the Company acquired substantially all of the assets of
Equipment Connection, Inc. ("ECI"), a Denver-based corporation which specialized
in purchasing, refurbishing, selling and servicing used embroidery machines and
their related parts and accessories. The Company believes that this transaction
will enable it to market and sell the increasing number of used embroidery
machines it acquires on a trade-in basis as the result of the sale of new
embroidery machinery.
The Company's equipment and value-added products are marketed and sold by
sales and marketing personnel, whose efforts are augmented by trade journal
advertising, informational "open house" seminars and trade shows. Hirsch
believes its reputation, knowledge of the marketplace, exclusive Tajima
distribution rights, industry expertise and innovation will enable it to
continue to increase the overall size of the embroidery equipment market and its
market share.
The Embroidery Industry
The development of electronic computer-controlled embroidery machines has
led to new embroidery applications and markets, cost savings, higher profit
margins and production efficiencies and has transformed the embroidery industry
from being extremely labor-intensive to an industry characterized by rapid
growth and technological change. Recent innovations to embroidery machines offer
superior design flexibility and increased speed and provide the manufacturer
with the ability to embroider finished products, the ability to efficiently
embroider up to twelve colors at a time, automatic thread trimming, and other
labor-saving improvements. The embroidery industry also benefited from the
sudden growth, beginning in the late 1980s, in the use of licensed products by
apparel and other manufacturers. Licensed names, logos and designs provided by,
among other sources, professional and collegiate sports teams and the
entertainment industry appear on caps, shirts, outerwear, luggage and other
softgoods for sale at affordable prices. In addition, the intricacy of the
designs capable of being embroidered and the availability of tandem applications
began to attract broad fashion appeal and more recently commercial appeal for
special event promotional marketing. Embroidery equipment may contain single or
multiple sewing heads, each sewing head consisting of a group of needles which
are fed by spools of thread attached to the equipment. The design and production
capabilities of the sewing heads are enhanced through the application and
integration of computers and specialized software.
<PAGE>
Business Strategy
The Company's objective is to establish and maintain long-term
relationships with its customers by providing them with a single source solution
for their embroidery equipment and related services and financing needs. To
achieve this goal, the Company has developed a comprehensive approach under
which it (i) assembles and sells a broad range of Tajima embroidery machines,
(ii) develops and supplies proprietary application software programs for
embroidery machines, (iii) provides leasing options to customers to finance
equipment purchases, (iv) sells a broad range of embroidery supplies,
accessories and proprietary products, (v) reconditions, remanufactures and sells
used embroidery equipment, and (vi) provides comprehensive customer training,
support and service for these embroidery machines. The Company believes that
this comprehensive approach positions it to become its customers' preferred
vendor for their embroidery equipment and related services and financing needs.
To complement its comprehensive approach effectively and efficiently, the
Company's business strategy includes the following:
Comprehensive Embroidery Machine Selection. The Company believes that
offering Tajima embroidery equipment provides it with a competitive advantage
because Tajima produces technologically advanced embroidery machines that are of
high quality, reliable and durable. The Company markets and distributes over 80
models of embroidery machines, ranging in size from 1-head per machine, suitable
for sampling and small production runs, to 30-heads per machine, suitable for
high production runs for embroidered patches and small piece goods which become
parts of garments of other soft goods.
Pulse Microsystem Software. The Company's Pulse subsidiary offers a wide
range of proprietary application software which enhances and simplifies the
embroidery process. A majority of the Company's proprietary application software
products are designed to operate in the Microsoft(R) Windows 95 (TM) environment
which the Company believes will enhance creativity, ease of use and user
flexibility. It is the Company's established practice to aggressively market its
software with embroidery equipment and as an upgrade to its installed base of
approximately 12,000 embroidery machines. The Company believes that these
products have broad appeal to purchasers of single-head and multi-head
embroidery machines and present opportunities for the Company to increase sales
of embroidery equipment and software as the Company continues to emphasize
marketing activities. Pulse intends to continue to automate the process of
creating embroidery applications in order to open new markets, reduce costs and
increase production efficiencies. Pulse has increased the number of its software
developers and will continue to work closely with Hirsch and Tajima to develop
software that enhances new features in the embroidery machines being introduced.
Financing Options. The Company's HAPL Leasing subsidiary offers its
customers the option to lease embroidery equipment. The Company believes that
HAPL Leasing's programs increase opportunities to sell equipment by reducing the
initial capital commitment required of a potential purchaser. HAPL Leasing's
programs are attractive to purchasers who desire to begin or expand embroidery
operations while limiting their initial capital investment.
Embroidery Supplies, Accessories and Proprietary Products. The Company's
ESW division offers a broad range of embroidery supplies, accessories and
proprietary products. ESW is an integral part of the Company's single source
strategy. The Company has expanded ESW's product line with the introduction of
proprietary products. Moreover, the expansion of the Company's marketing efforts
is directed toward telemarketing, trade publication, advertising, catalog
mailers and trade show participation. ESW offers proprietary products together
with a full line of consumable supplies, parts and materials utilized in the
embroidery process and continues to develop special purpose embroidery
replacement parts and products that are more durable and which act to simplify
the embroidery process.
<PAGE>
Customer Support. The Company provides comprehensive customer training,
support and service for the embroidery machines and software that it sells. The
Company's customer service department includes service technicians operating out
of its headquarters and 23 regional offices. After the Company delivers an
embroidery machine to a customer, its trained personnel assist in the
installation of the machine and with setup and operation. The Company employs a
staff of service representatives who provide assistance to its customers by
telephone. Most customer problems or inquiries can be handled by telephone, but
when necessary the Company dispatches one of its service technicians to the
customer. In addition, the Company provides at its facilities introductory and
advanced training programs developed by the Company to assist customers in the
use and operation of the embroidery machines it sells. During the last year, the
Company has undertaken a program to significantly upgrade its technical support
staff and operations on the West Coast due to increasing sales activity in this
area and resulting demand for technical support services. This will continue as
the Company has been granted semi-exclusive rights to distribute large Tajima
embroidery machines to the West Coast.
Growth Strategy
The Company has developed a number of complementary growth strategies,
including the following:
Grow with Embroidery Equipment Customers. The continuing growth of the
embroidery industry and the increasing number of embroidery entrepreneurs who
sell customized products into specialized niche markets presents the Company
with the opportunity to grow with its customers. The Company believes that
purchasers of smaller embroidery machines are a significant source of repeat
business for larger multi-head machines as their operations expand. The
Company's customer support personnel work with customers to assist them in
expanding their operations. By establishing a relationship through the sale of a
smaller embroidery machine, the Company strives to establish itself as the
customers' preferred vendor for larger multi-head machines. New uses for
embroidery machines in the sewing of apparel also present the Company with an
opportunity to grow with its customers and sell to new customers.
Increase Penetration in Recently Acquired New Equipment Distribution
Markets. The Company believes that it has excellent opportunities for growth in
new distribution markets. The Company anticipates that its approach to
marketing, customer training, support and service will allow further penetration
of the potential customer base in these markets. In June and December 1996, the
Company consummated two acquisitions which expanded the territory in which the
Company distributes embroidery machines to 50 states. In January 1997, the
Company was granted the exclusive right to distribute Tajima one through
six-head "FX" model embroidery machines in nine western states and Hawaii. In
March 1998 Hirsch was granted semi-exclusive rights to distribute large Tajima
embroidery machines, six-head "DC" models through thirty-head models, to the
West Cost states of Arizona, California, Idaho, Montana, Nevada, Oregon, Utah,
Washington, Wyoming and Hawaii. The Company invested in the West Coast
infrastructure during fiscal 1998. This expansion included establishing
additional sales offices, hiring of technical service and support staff as well
as investment in demo equipment and inventory. With the addition of large
machines to our repertoire, there will be incremental costs to support these
additional sales, however they are not expected to be significant.
<PAGE>
Expand Sales of Value-Added Product and Services. Because of the higher
profit margins realized through sales of Pulse, ESW and HAPL Leasing as opposed
to new equipment sales, part of the Company's growth strategy is to increase
these sales. Once a relationship with a customer is established by the sale of a
new or used embroidery machine, the Company seeks to increase its sales by
supplying software developed by Pulse and a broad range of embroidery supplies
and equipment through ESW. The leasing options offered through HAPL leasing also
present the Company with opportunities for increased revenues not only for new
embroidery equipment sales, but also of value-added products and services. In
those regions of the United States where the Company has recently expanded
through acquisitions and obtaining the right to distribute small Tajima
machines, the Company believes that it has an additional opportunity to expand
sales of its value-added products and services. Historically, the Company's
sales of software products, leasing activities and sales of ESW products have
been concentrated in the states where it has had the exclusive right to
distribute embroidery machines. The Company believes that the expansion of this
area will allow it to better market its value-added products and services. To
facilitate this growth, the Company established ESW warehouses at the same
locations as certain sales offices. In addition, ESW's product line also is
offered to all users of embroidery equipment in the United States through trade
publications, print advertising, catalogue mailers and trade show participation.
Ability to Accept Used Equipment on a Trade-In Basis. As part of its sales
and marketing efforts, the Company may accept used embroidery equipment from a
customer to whom it is providing new machinery. As a result of this trend, the
industry as a whole has seen an increase in the number of used machines in the
market. The Company's March 1997 acquisition of substantially all of the assets
of Equipment Connection, Inc. ("ECI") has greatly increased its ability to offer
a customer value for its used embroidery equipment by giving the Company the
ability to recondition and resell such used equipment in the open market.
Assembly Operations Established. During the third and fourth quarters of
fiscal 1998, the Company's Tajima USA, Inc. ("TUI") subsidiary significantly
increased its manufacturing operations at its assembly facility located in
Ronkonkoma, New York which is located near the Company's headquarters. As a
result, TUI's Net Sales during the fiscal year ended January 31, 1998 were
approximately $10,900,000.
In early January 1998, Tokai Industries, which is Tajima's manufacturing
arm, purchased a forty-five (45%) percent interest in TUI for $900,000 in cash.
The Company's initial investment in TUI was $2,000,000 in June 1997. The
purchase price was initially paid to TUI and then subsequently remitted to the
Company to bring the Company's net contribution to $1,100,000 or fifty-five
(55%) percent. The Company expects that this investment in TUI will further
solidify its relationship with Tajima and will become a vital component in the
Company's future success.
<PAGE>
Embroidery Equipment
Embroidery equipment may contain single or multiple sewing heads. The
selling prices of these machines range from approximately $15,000 to $180,000.
Each sewing head consists of a group of needles which are fed by spools of
thread attached to the equipment. The needles operate in conjunction with each
other to embroider the thread into the cloth or other surface in such
configuration as to produce the intended design. Thread flowing to each needle
can be of the same or varying colors. Each head creates a design and heads
operating at the same time create the same size and shape designs, although
designs created at the same time can differ in color. Thus, a 30-head machine
with all heads operating simultaneously creates an identical design on thirty
surfaces. The design and production capabilities are enhanced through the
integration of computers and specialized software applications.
Recent Product Developments. The Company often collaborates with Tajima in
the development of embroidery products. Over the past few years, Tajima has
introduced the following embroidery products: (i) machines with faster operating
speeds and a wider variety of color selections; (ii) wide cap embroidery system,
which expands the small sewing field on finished caps to a 270 degree continuous
arc; (iii) the multi-color chenille embroidery machine, which enables
embroiderers to create more elaborate and colorful designs with chenille
stitches; (iv) single head chenille embroidery machine which enables the
embroidery entrepreneur the opportunity to enhance their products at an
affordable price; (v) the tandem chenille and embroidery machine, making it
possible to incorporate both chenille and embroidery into the same design; and
(vi) the Emblaser machine, which incorporates embroidery and laser technology
into one system, reduces production time and increases production efficiencies.
The Company believes that these machines will allow new applications for the use
of embroidery machines which will impact the sportswear market. Additionally,
Tajima develops customized applications to address specific customers needs.
Value Added Products
Software
Pulse, a strategic acquisition in 1994, is a developer and supplier of a
wide range of application software programs which enhance and simplify the
embroidery process. All Tajima machines can be networked through Pulse software.
The computerization of the embroidery industry has led to a demand for more
advanced application software. Pulse's computer-aided design software packages
target the different functions performed by embroiderers, and are contained in
an integrated product line. These products range from a basic lettering package
that permits the embroiderer to design names and letters for use on the product
to be embroidered to sophisticated packages that permit the creation and editing
of intricate designs, logos and insignias through the use of scanners and
computers.
Pulse also offers database products and business management tools to its
customers, including its Passport Embroidery Network which allows a single user
to network embroidery machines of any make or model. Additionally, it is a
production management system that provides users with the ability to monitor
production, diagnostic information and operator efficiency in real time.
Pulse recently released the newest product in its Passport Embroidery
Network product line. The Passport Librarian is a state of the art embroidery
design database software. Among its features are the ability to centralize
designs, security features to access levels, internet support and a powerful
search engine. These tools offer the small and large embroiderer the latest
technology to more effectively manage their design database software. In
addition, Pulse has developed a program to develop customized products for
specific customer needs. This allows for creative solutions to the customers'
unique problems.
<PAGE>
Leasing
In order to become a single source provider to the embroidery industry, the
Company formed HAPL Leasing in 1990. The Company believes that it is the only
embroidery equipment distributor with a captive leasing subsidiary providing the
Company with a unique competitive advantage.
Approximately 36.8% of the Company's machine sales were financed through
HAPL Leasing for the year ended January 31, 1998, compared to 34.8% for the year
ended January 31, 1997. Historically, HAPL Leasing has minimized its leasing
risk by selling substantially all of its sales-type leases to financial
institutions on a non-recourse basis. This continued in fiscal 1998.
Additionally, during the third quarter of fiscal 1998, HAPL entered into an
Ultimate Net Loss ("UNL") Limited Liability Recourse Agreement with a
third-party financial institution. The maximum exposure is limited to 10% of the
minimum lease payments receivable, for which the Company recorded a reserve. The
Company has funded approximately $14.2 million pursuant to the terms of this
agreement which represents approximately 25% of the fundings for fiscal 1998. We
anticipate funding between 20-25% of leases on a go forward basis under the
terms of this agreement. The selling price of the leases to financial
institutions generally will be a lump sum equal to the sales price of the
embroidery equipment leased, plus a portion of the finance charges paid by the
lessee. In addition, at the end of the lease term, the residual value of the
embroidery equipment may revert to HAPL Leasing or HAPL Leasing sells the
equipment to the lessee at terms agreed upon in the original lease agreement.
Each lease generally has a term of 3-5 years. As of January 31, 1998, HAPL
Leasing had sold approximately 91% of its leases.
In some cases, third party funding sources condition their purchase of
leases on the establishment of a payment history. HAPL Leasing also retains
selected leases for which it has not obtained a purchase commitment from its
funding sources. In each case where a lease is retained, HAPL Leasing applies
its policies and procedures and knowledge of the industry to determine whether
to enter into the lease, including an evaluation of the purchaser's business
prospects and the creditworthiness of the principals. HAPL Leasing sells these
leases if financing becomes available at a later date.
HAPL Leasing is continuing to increase the number of funding sources and
works with its funding sources to develop new lease programs attractive to the
embroidery industry.
Used Embroidery Machinery
Although the Company has previously accepted used embroidery machines from
customers as a condition to the sale of a new machine on a case by case basis,
the March 1997 acquisition of the assets of ECI enables the Company to more
readily accommodate such customers. The Company believes that its ability to
accept used machines is an important sales tool and necessary element in the
Company's aggressive pricing strategy. In addition, the Company believes that
the market for reconditioned and remanufactured embroidery machines is steadily
growing and will be a steady source of revenue in the future.
<PAGE>
Embroidery Supply Warehouse
ESW offers a broad range of embroidery supplies including threads, needles,
thread cone winders, embroidery hoops, embroidery backings and embroiderable
products such as caps, t-shirts, jackets, sweat suits, sweatshirts and canvas
bags. In addition, ESW develops embroidery products based on the recommendations
of embroiderers. ESW also distributes the Universal Hooper, a manual hooping
device, a machine thread rack upgrade called "Quick Thread" and specially sized
embroidering hoops for unusual applications.
ESW markets "Hoopless Air Claims," a proprietary product that allows
manufacturers to apply embroidery to unfinished flat pieces without the need for
a hoop. The Company anticipates that this product will benefit clothing
manufacturers by reducing labor costs and production time.
In addition, ESW distributes the following products: "Power Hoops;" Tajima
Hoops; 3-D Embroidery Foam, which allows embroiderers to add new multi-media,
multi-dimensional embroidery to a design using existing equipment; steamers,
which remove wrinkles and hoop marks, cleaning guns which remove stains that
occur during the embroidery process; and Peggy's Stitch Eraser, an electric
stitch remover that allows embroiderers to quickly and efficiently remove bobbin
thread from sewn garments.
Following the Company's recent machine sales expansion to the West Coast,
ESW has expanded the hours of its telemarketing operations, making it easier for
customers across the United States to place an order. In addition, ESW
frequently updates its catalog to ensure customers have up-to-date information
on its product lines.
Marketing and Customer Support
The Company has been selling embroidery equipment since 1976 and believes
it is the leading distributor of Tajima equipment in the world. The Company
reinforces recognition of its name through trade journal advertising and
participation in seminars and over 25 trade shows annually. The Company's
growing sales staff is headed by Paul Levine, Executive Vice President of the
Company, and currently consists of salespeople who maintain frequent contact
with customers in order to understand each customer's needs. Through its
reputation, knowledge of the marketplace, investment in infrastructure and
experience in the industry, the Company believes it is increasing its market
share for both machinery and value-added products and services.
The Company believes that a key element in its success has been focus on
customer service, and investment in sales support and training, infrastructure
and technology to support operations. The Company provides at its facilities
extensive two to five day training programs developed by the Company to assist
customers in the use and operation of the embroidery machines it sells.
Customers are trained in the operation of embroidery machines as well as in
embroidery techniques and the embroidery industry in general. The Company
provides proprietary videotapes and manuals as training tools. Company personnel
also provide technical and software support by telephone, field maintenance
services and quality control testing, as well as advice with respect to matters
generally affecting embroidery operations.
<PAGE>
The Company maintains an internal training center for its employees at its
Cleveland training center. The program educates employees about the embroidery
industry, the history of embroidery and the Company, embroidery techniques and
the operation of embroidery machines. Service technicians receive an intensive
training program in addition to the aforementioned program. Senior service
technicians also receive formal training from Tajima in addition to technical
updates throughout the year. The Company will continue to dedicate resources to
education and training as the foundation for providing the highest level of
customer service.
In addition, the Company collaborates with its customers and Tajima in
connection with the development of new embroidery equipment and applications to
meet the specialized needs of the Company's customers. Current projects include
the development of embroidery applications for a major automobile manufacturer,
collaborations with high end designer clothing manufacturers to reduce
production costs and increase efficiency and further development of Pulse
software to be integrated with the Tajima chenille and laser machines.
The Company provides its customers with a one-year warranty against
malfunctions from defects in material or workmanship on the Tajima machines it
distributes. The warranty covers parts and labor. Tajima provides the Company
with a six month warranty. As a consequence, the Company absorbs a portion of
the cost of providing warranty service on Tajima products.
Supplier Relationships with Tajima
The Company has three separate distributorship agreements with Tajima
which, collectively, provide the Company the exclusive right to distribute
Tajima's complete line of standard embroidery, chenille embroidery and certain
specialty embroidery machines in 39 States. The main agreement (the "East
Coast/Midwest Agreement") which covers 33 States, became effective on February
21, 1991 and has a term of 20 years. The East Coast/Midwest Agreement is
terminable by Tajima and/or the Company on not less than two years' prior notice
except that Tajima cannot terminate the East Coast/Midwest Agreement prior to
February 20, 1998. The second agreement (the "Southwest Agreement") covers six
states, became effective on February 21, 1997 and has a term of five years.
Under the third distributorship agreement, which covers nine western states and
Hawaii, the Company is the exclusive distributor of Tajima's single, two, four
and six-head "FX" model machines as well as chenille or chenille/standard
embroidery machines with less than four heads or two stations, respectively (the
"West Coast Agreement"). The West Coast Agreement, which has a term of five
years initially, terminates on February 20, 2002, and contains a renewal
provision which permits successive five year renewals upon mutual agreement of
the parties.
Each of the agreements may be terminated if the Company fails to achieve
certain minimum purchase quotas. Furthermore, the East Coast/Midwest Agreement
may be terminated if Henry Arnberg and Paul Levine (or in certain circumstances,
their spouses and children) fail to own a sufficient number of shares of voting
stock to elect a majority of the Company's Board of Directors. The Southwest
Agreement may be terminated if the Company fails to remain the sole shareholder
of its subsidiary that is the party to the Southwest Agreement. The West Coast
Agreement may be terminated should any material change occur in the current
Class B shareholders, directors or officers of the Company.
<PAGE>
Although there can be no assurance, management of the Company believes that
the likelihood of the loss of Tajima as a source of supply is remote because:
(i) the Company has a 20 year relationship with Tajima and is Tajima's largest
distributor; (ii) Tajima's success in the United States is, in large part,
attributable to the Company's knowledge of the marketplace as well as the
Company's reputation for customer support; (iii) the Company and Pulse support
Tajima's development activities and the Pulse software enhances the Tajima
product line; and (iv) the acquisition by Tokai of a forty-five (45%) percent
interest in the TUI venture.
Other Supplier Relationships
The Company purchases personal computers which are integrated with the
embroidery machines it distributes. ESW obtains its supplies from many different
sources. The Company believes that alternate sources of supply are readily
available.
Customers
The Company's customers range from large operators utilizing numerous
machines to individuals who customize products on a single machine. Principal
customer groups include: (i) contract embroiderers, who serve manufacturers that
outsource their embroidery requirements; (ii) manufacturers, who use embroidery
to embellish their apparel, accessories, towels, linens and other products with
decorative appeal; and (iii) embroidery entrepreneurs, who produce customized
products for individuals, sports leagues, school systems, fraternal
organizations, promotional advertisers and other groups. The Company's customers
include: Fruit of the Loom, Russell Licensed Products, Logo 7, Healthtex, Five
B's, Osh Kosh B'Gosh, Avanti Lines and William Carter Company.
Competition
The Company competes with distributors such as Macpherson, Inc., a
subsidiary of Willcox & Gibbs, Inc., a distributor of Barudan multi-head
embroidery machines and Meistergram single-head embroidery machines, as well as
with smaller distributors. The Company believes it competes against these
distributors on the basis of knowledge, experience, name recognition, customer
service and the quality of the embroidery equipment it distributes. The Company
also competes with original equipment manufacturers, such as Brother
International and Melco Industries, which distribute products directly into the
Company's markets.
Further, the Company's customers are subject to competition from importers
of embroidered products, which could affect the Company's operations.
The Company's success is dependent, in part, on the ability of Tajima to
continue producing products which are technologically superior and price
competitive with those of other manufacturers.
<PAGE>
Pulse's software products compete against products developed by several
companies from around the world. The primary competitors are Wilcom Pty., an
Australian corporation, Gunold & Stickma GmbH, a German corporation and Melco
Industries, Inc., a United States-based subsidiary of Sauer Textile Machinery
Group, a Swiss corporation. The Company believes that Pulse competes on the
basis of ease of use, functionality and the range of software applications it
markets.
HAPL Leasing competes principally with equipment leasing brokers
specializing in the embroidery industry. The Company believes that it competes
on the basis of HAPL Leasing's favorable pricing and because the Company is a
single source provider of embroidery equipment, customer service and support and
value added products.
ESW competes with a division of Melco Industries and other vendors of
embroidery supplies. The Company believes that the market for embroidery
supplies is fragmented and that ESW will benefit from the breadth of its product
line, development of proprietary products and the fact that the Company is a
single source provider.
Patents and Copyrights
The Pulse software has copyright protection under Canadian law and the
Berne Convention which also affords it protection in the United States. Certain
of the Pulse software has also been granted United States copyright
registrations. The following patents have been granted in the United States:
"Method For Modifying Embroidery Design Programs", "Embroidery Design Systems",
"Method For Creating Self-Generating Embroidery Pattern" and "Method for
Automatically Generating Chain Stitches and two patents entitled "Method for
Automatically Generating A Chenille-Filled Embroidery Stitch Pattern." Pulse
also has several other patents pending in the United States Patent and Trademark
Office. Pulse also has the following patents pending in the Japanese and
European Patent Offices: "Method for Modifying Embroidery Design Programs," and
the following additional patents pending in the Japanese Patent office: "Method
for Automatically Generating Chain Stitches" and "Method For Automatically
Generating A Chenille-Filled Embroidery Stitch Pattern." Pulse believes these
protections are sufficient to prevent unauthorized third party uses of such
property rights. Neither Pulse nor the Company is aware of any patents or other
intellectual property rights of third parties which would prevent the use of
Pulse's intellectual property. The Company continues to seek intellectual
property protection for Pulse products.
<PAGE>
Employees
As of March 31, 1998, the Company employed approximately 450 persons
engaged in sales, customer service and supplies, product development, finance
administration and management for the Company, ESW, Pulse, TUI and HAPL Leasing.
None of the Company's employees is represented by unions. The Company believes
its relationship with employees is good.
Risk Factors
Dependence on Tajima
For the fiscal year ending January 31, 1998, approximately 80% of the
Company's revenues resulted from the sale or lease of embroidery equipment
supplied by Tajima and substantially all of the Company's sales were to users of
Tajima embroidery equipment. Three separate distributorship agreements
(collectively, the "Tajima Agreements") govern the Company's rights to
distribute Tajima embroidery equipment in the United States. Two of the
distributorship agreements with Tajima collectively provide the Company with the
exclusive rights to distribute Tajima's complete line of standard embroidery,
chenille embroidery and certain specialty embroidery machines in 39 states. The
main agreement (the "East Coast/Midwest Agreement"), which now covers 33 states
first became effective on February 21, 1991, has a term of 20 years and contains
a renewal provision which permits successive five year renewals upon mutual
agreement of the parties. The East Coast/Midwest Agreement is terminable by
Tajima and/or the Company on not less than two years' prior notice. The second
agreement (the "Southwest Agreement") which covers six states, became effective
on February 21, 1997, and has a term of five years. Under the third
distributorship agreement, (the "West Coast Agreement") which covers nine
western states and Hawaii, the Company is the exclusive distributor of Tajima's
small machines, as well as chenille and tandem chenille/standard embroidery
machines with less than four heads or two stations, respectively. The West Coast
Agreement, which covers nine states and Hawaii has a term of five years, became
effective on February 21, 1997, and contains a renewal provision which permits
successive five year renewals upon mutual agreement of the parties Each of the
Tajima Agreements may be terminated is the Company fails to achieve certain
minimum purchase quotas. Furthermore, the East Coast/Midwest Agreement may be
terminated if Henry Arnberg and Paul Levine (or in certain circumstances, their
spouses and children) fail to own a sufficient number of shares of voting stock
to elect a majority of the Company's Board of Directors or in the event of the
death, physical or mental disability of a duration of six months or longer, or
incapacity of both Henry Arnberg and Paul Levine. The Southwest Agreement may be
terminated if the Company fails to remain the sole shareholder of its subsidiary
that is the party to the Southwest Agreement. The West Coast Agreement may be
terminated should any material change occur in the current Class B shareholders,
directors or officers of the Company or should there occur any change in control
of the Company. The termination of the Tajima Agreements would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Importing Tajima's equipment from Japan subjects the Company to risks
of engaging in business overseas, including international political and economic
conditions, tariffs, foreign regulation of trade with the United States, and
work stoppages. The interruption of supply or a significant increase in the cost
of Tajima equipment for any reason could have a material adverse effect on the
Company's business, financial condition and results of operation. In addition,
Tajima manufactures its embroidery machines in one location in Japan. The
Company could be adversely affected should this facility be seriously damaged as
a result of a natural disaster or otherwise. Further, the Company could be
adversely affected by adverse business or financial developments at Tajima.
Embroidery machines produced by Tajima are subject to technological
advances and new product introductions. Current competitors or new market
entrants could introduce products with features that render products sold by the
Company and products developed by Tajima less marketable. The Company relies on
Tajima's embroidery equipment to be high quality and state of the art. The
Company's future success will depend, to a certain extent, on the ability of
Tajima to adapt to technological change and address market needs. There can be
no assurance that Tajima will be able to keep pace with technological change in
the embroidery industry or the current demands of the marketplace.
Foreign Currency Risks
The Company pays for its Tajima embroidery machinery in Japanese Yen. Any
devaluation of the U.S. Dollar compared to the Japanese Yen increases the cost
to the Company of its embroidery machine inventory. The Company has generally
been able to recover these increased costs through price increases to its
customers or, in limited circumstances, price reductions from Tajima. However
there can be no assurance that the Company will be able to recover such
increased costs in the future.
<PAGE>
Assembly Facility
The Company assembles Tajima embroidery machines in the United States
through its subsidiary Tajima USA, initially in configuration of up to six heads
per machine. Tajima provides the Company with technical assistance and support,
since the Company has no prior experience in the assembly of embroidery
machines. The commencement of assembly operations could require longer
implementation times or greater start up and other expenditures than
anticipated. Additional problems could be encountered and greater than projected
expenses. Furthermore, there can be no assurances that the Company will be able
to establish profitable assembly operations in the long-term.
Expansion
Since June 1996, the Company has acquired four (4) companies (the "Recent
Acquisitions"). These acquisitions (i) increased the area in which the Company
is the exclusive distributor of the complete line of Tajima embroidery equipment
from 26 states to 39 states; and (ii) increased the Company's ability to offer a
customer value for its used embroidery equipment. In January 1997, Tajima
granted the Company the exclusive right to distribute small (one through six
head) Tajima embroidery machines in nine western states and Hawaii. In March
1998, the Company was granted certain rights to distribute large Tajima
embroidery machines, six-head "DC" models through thirty-head models throughout
the West Coast, and the Company has invested substantial assets to support the
West Coast expansion. There can be no assurance that the Company will be able to
successfully integrate the operations of the Recent Acquisitions with the
Company's operations without substantial costs, delays or problems or that the
Company will be able to profitably sell equipment or the Company's value-added
products in the new territories.
The past growth and planned expansion of the Company's business have
resulted in new and increased responsibilities for management and have placed
increased demands upon the Company's operating, financial and technical
resources. The Company's ability to successfully manage its expansion will
require continued enhancement of its management and operational, financial and
technical resources. The Company will also need to attract and retain qualified
personnel to support the expansion of its operations. The Company's failure to
manage successfully its expansion or attract and retain qualified personnel
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Embroidery Industry
The Company's growth has resulted in part from the increase in demand for
embroidered products and the growth of the embroidery industry. A decrease in
consumer preferences for embroidered products, a general economic downturn or
other events having an adverse effect on the embroidery industry would also have
an adverse effect on the Company.
<PAGE>
Leasing Operations
HAPL Leasing provides a range of equipment financing options to customers
wishing to finance equipment purchases. HAPL Leasing retains selected leases for
which it has not obtained a purchase commitment from its funding sources.
Although the UNL Limited Liability Recourse Agreement reduces the Company's
exposure, there can be no assurance that it will continue to be able to sell its
leases to third party funding sources. Unfunded leases create the risk of
nonpayment by lessees, including the risk that foreclosure could be hampered by
bankruptcy or other legal proceedings, and the risk that foreclosed equipment
cannot be released or sold due to market conditions or the physical condition of
the equipment. The operations of HAPL Leasing are interest rate sensitive. If
interest rates rise, there can be no assurances that profit margins can be
maintained, and, consequently, the operations of HAPL Leasing could be adversely
affected.
HAPL Leasing's strategy is to enter into leases that qualify as sales-type
leases for which revenue is recognized immediately in an amount equal to the
present value of minimum lease payments. However, high interest rates, weakness
of the U.S. dollar, poor general economic conditions, market conditions, or
other factors could result in HAPL Leasing having to enter into operating leases
resulting in deferral of revenue recognition. Unlike sales-type leases, revenue
relating to operating leases is recognized over the term of the lease, resulting
in a deferral in the recognition of revenue.
Inventory
The Company maintains inventory of approximately one month's sales of new
Tajima embroidery machines and its ordering cycle is approximately four to five
months prior to delivery to the Company. Since the Company generally delivers
new Tajima embroidery machines to its customers within one week of receiving
orders, it orders inventory based on experience and forecasted demand. To date,
the Company has been able to manage its inventory effectively, but any failure
to do so in the future could have an adverse effect on the Company's business,
financial condition and results of operations.
Competition
The Company competes with distributors of embroidery machines produced by
manufacturers other than Tajima and with manufacturers who distribute their
embroidery machines directly as well as with other providers of embroidery
products and services. The Company believes that competition in the embroidery
industry is based on technological capability and quality of embroidery
machines, price and service. The Company has been able to compete effectively in
part because of the relatively advanced technological capabilities and excellent
quality of Tajima embroidery machines. However, if other manufacturers develop
more technologically advanced embroidery machines or the quality of Tajima
embroidery machines diminishes, the Company would not be able to compete as
effectively which could have a material adverse effect on its business,
financial condition and results of operations. The Company also faces
competition in selling software, embroidery supplies, accessories and
proprietary products as well as providing leasing and customer training, support
and services. The Company's failure to compete effectively in these areas could
have an adverse affect on its business, financial condition and results of
operations.
The Company also faces competition in its sales of software, embroidery
supplies, accessories and proprietary products as well as in providing leasing
and customer training, support and services. The Company's failure to compete
effectively in these areas could have an adverse effect on its business,
financial condition and results of operations.
<PAGE>
Software
The software industry is characterized by the rapid development of new
programs with increased capabilities. Other producers of software for embroidery
machines could produce new software programs that would make the software
developed by the Company's Pulse Microsystem subsidiary less marketable or
obsolete. The failure by Pulse to continue to develop and upgrade its software
products could have a material adverse effect on its business, financial
condition and results of operations.
Pulse's software products, like software programs generally, may contain
undetected errors when introduced or when new versions are released. To date,
Pulse has not experienced significant adverse financial or operational problems
due to post release software errors, although there can be no assurance that
this will not occur in the future, particularly if these software programs
continue to become more complex and sophisticated. Defective software could
result in loss of or delay in market acceptance of the Company's software
products, warranty liability or product recalls.
The Company has been granted patent and copyright protection for Pulse's
software products. Although the Company does not believe that the ownership of
such patents or copyrights is a significant factor in Pulse's business or that
its success is materially dependent upon the ownership, validity or
enforceability of such patents or copyrights, existing intellectual property
laws afford limited protection of patents and copyrights and unauthorized
parties may obtain and use information that the Company regards as proprietary.
The Company intends to enforce its intellectual property rights in Pulse's
products, but there can be no assurance that it will be successful in doing so.
Dependence on Existing Management
The Company's continued success will depend to a significant extent upon
the abilities and continued efforts of Henry Arnberg, Chairman of the Board,
President and Chief Executive Officer of the Company; Paul Levine, Executive
Vice President, Chief Operating Officer, Secretary and a Director of the
Company; and Kenneth Shifrin, Vice President-Finance and Chief Financial Officer
of the Company. Pulse's continued success will depend to a significant extent
upon the abilities and continued efforts of Tas Tsonis, Vice President and a
Director of the Company and President of Pulse; Brian Goldberg, Vice President
of the Company and Executive Vice President of Pulse; and Ron Krasnitz, Vice
President-Manufacturing and a Director of the Company. Although the Company has
entered into five year employment agreements with Messrs. Arnberg, Levine,
Shifrin, Tsonis, and Krasnitz, the loss of their services or the services of
other key management personnel could have a material adverse effect upon the
Company's business, financial condition and results of operations.
<PAGE>
ITEM 2. Properties
The Company's corporate headquarters is in Hauppauge, New York in a 50,000
square foot facility. This property houses the Company's executive offices, the
Northeast sales office, customer service, software support and warehouse space.
Additionally, both HAPL Leasing and ESW operate out of this facility. On October
27, 1994, the Company entered into a ten year, $2,295,000 Mortgage agreement
with a bank 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 Company's obligations under the Mortgage are secured by a lien on
the premises and the related improvements thereon.
In March 1997, the Company entered into a five year lease for a 25,000
square foot factory facility in Bohemia, New York where Tajima USA, Inc.,
operates a machine assembly facility. The lease provides for lease payments of
approximately $132,000 per annum.
In addition to the Company's headquarters, the Company leases 23 regional
satellite offices, as well as a location in Mississauga, Ontario, Canada for the
Pulse headquarters. These offices consist of regional sales offices, training
centers, repair centers and warehouse and showroom space.
ITEM 3. Legal Proceedings
There are no material legal proceedings pending against the Company.
ITEM 4. Submission of Matters to a Note of Security Holders.
The Company did not submit any matters to a vote of Security holders during
the fourth quarter of its most recent fiscal year.
<PAGE>
PART II
ITEM 5. Market For Common Equity and Related Stockholder Matters
(a) The Company's outstanding Common Stock consists of two classes, Class A
Common Stock and Class B Common Stock. The Class A Common Stock, par
value $.01 per share, trades on the NASDAQ Stock Market under the
symbol HRSH. The following table sets forth for each period indicated
the high and low closing bid prices for the Class A Common Stock as
reported on the NASDAQ National Market. Trading began in the Class A
Common Stock on February 17, 1994.
Fiscal 1997 High Low
First Quarter ended April 30, 1996.................$13 13/64 $11 13/64
Second Quarter ended July 31, 1996.................$16 51/64 $12 19/32
Third Quarter ended October 31, 1996...............$18 1/2 15 1/2
Fourth Quarter ended January 31, 1997........... ..$22 1/2 $17 1/2
Fiscal 1998
First Quarter ended April 30, 1997............... .$22 3/4 $16 1/2
Second Quarter ended July 31, 1997.................$24 3/4 $16 1/2
Third Quarter ended October 31, 1997...............$26 1/4 $17 1/4
Fourth Quarter ended January 31, 1998..............$22 $17
The foregoing over-the-counter market quotations represent inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
The bid prices have been adjusted to reflect a 5-for-4 stock split paid in
the form of a 25% stock divided effected July 22, 1996.
(b) As of April 20, 1998, the Company believes that there were
approximately 4,188 beneficial owners of its Class A Common Stock.
(c) The Company intends to retain earnings for use in operations and
expansion of its business and therefore does not anticipate paying cash
dividends on the Class A Common Stock or the Class B Common Stock in the
foreseeable future. The future payment of dividends is within the discretion of
the Board of Directors and will be dependent, among other things, upon earnings,
capital requirements, financing agreement covenants, the financial condition of
the Company and applicable law. The Class A Common Stock and Class B Common
Stock share ratably in any dividends declared by the Company on its Common
Stock. Any stock dividends on the Class A Common Stock and the Class B Common
Stock will be paid in shares of Class A Common Stock.
<PAGE>
PART III
ITEM 6. Selected Financial Data
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere herein. The consolidated financial statement data as of
January 31, 1998 and 1997 and for the fiscal years ended January 31, 1998, 1997
and 1996 are derived from, and qualified by reference to, the audited
Consolidated Financial Statements included elsewhere herein and should be read
in conjunction with those Consolidated Financial Statements and the Notes
thereto. The consolidated financial statement data as of January 31, 1996, 1995,
and 1994 and for the fiscal years ended January 31, 1995 and 1994 are derived
from audited Consolidated Financial Statements not included herein.
<TABLE>
<CAPTION>
Year Ended January 31,
(in thousands of dollars, except per share amounts)
Hirsch International Corp. and Subsidiaries 1998 1997 1996 1995 1994
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net Sales .......... $147,045 $122,195 $ 87,974 $ 70,709 $49,959
Interest income related to sales-type leases.......... 5,432 3,243 3,022 1,617 571
Cost of goods sold.................................... 96,099 80,820 58,836 47,881 35,452
Selling, general and administrative expenses.......... 41,055 29,070 20,638 16,155 10,520
Income before income taxes............................ 14,255 15,170 11,402 8,159 4,272
Income taxes.......................................... 6,059 6,402 4,837 3,355 1,663(1)
Net income............................................ 8,196 8,768 6,565 4,823 2,609(1)
Basic net income per share (2), (3)................... $ 0.92 $ 1.13 $ 1.10 $ 0.66 $ 0.49
Diluted net income per share (2), (3)................. $ 0.89 $ 1.10 $ 1.09 $ 0.66 $ 0.49(1)
net income per share (2), (3)....................... 8,953 7,782 5,960 7,332 5,332
Shares used in the calculation of diluted
net income per share (2), (3)....................... 9,236 7,967 6,002 7,335 5.332
</TABLE>
(1) Income taxes, net income and income per share for the fiscal year ended
January 31, 1994 reflect, on a pro forma basis, the federal and regular state
income taxes which would have been incurred if the Company had been taxed as a C
Corporation under the Code and applicable state statutes during such period.
(2) Basic and diluted net income per share figures and shares used in the
calculation of diluted net income per share have been retroactively adjusted to
reflect 25% stock dividends which were paid in July 1996 and 1995, respectively
and a 5% stock dividend which was paid in August 1994.
(3) Basic and diluted net income per share figures and shares used in the
calculation of diluted net income per share for Fiscal years 1994 through 1997
have been retroactively adjusted to reflect the adoption of SFAB No. 128,
"Earnings per Share".
<PAGE>
<TABLE>
<CAPTION>
January 31, 1998
(in thousands of dollars)
1998 1997 1996 1995 1994
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital...................... $40,169(7) $22,004 $16,847(5) $10,363(4) $ 1,674
Total assets.......................... 114,832(7) 83,696 47,872(5) 37,504(4) 21,349
Long-term debt, less current
maturities............................ 1,421 13,194(6) 1,779 2,696 776
</TABLE>
(4) In February, 1994, in connection with its Initial Public Offering (the
"IPO"), the Company received net proceeds of approximately $7,373,000 (after
deducting expenses of the IPO).
(5) In January 1996, in connection with its Secondary Offering (the "Second
Offering"), the Company received net proceeds of $1,906,000 (after deducting
expenses of the Second Offering).
(6) Included in long-term debt, less current maturities at January 31, 1997
is $11,645,000 of debt relating to the acquisitions of SMX and Sedeco.
(7) In June 1997, in connection with a Secondary Offering (the "Secondary
Offering"), the Company received net proceeds of approximately $24,300,000 after
deducting expenses of the Secondary Offering).
<PAGE>
ITEM 7. 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.
General
Hirsch International Corp. ("Hirsch" or the "Company") is a leading single
source supplier of electronic computer-controlled embroidery machinery and
related value-added products and services to the embroidery industry. The
Company offers a complete line of technologically advanced single- and
multi-head embroidery machines, proprietary application software and a diverse
line of embroidery supplies and accessories. Hirsch believes its comprehensive
customer service, user training, software support and broad product offerings
combine to place the Company in a superior competitive position within its
marketplace. The Company sells embroidery machines manufactured by Tajima
Industries Ltd. ("Tajima").
The Company's focus during the past several years has been on growth and
expansion. The acquisitions of SMX and Sedeco increased the area in which the
Company is the exclusive distributor of Tajima embroidery equipment from 26
states to 39 states. In January 1997, Tajima granted the Company the exclusive
right to distribute small (1-6 head) Tajima embroidery machines in nine western
states and Hawaii. With this expansion of the Company's small machine territory
to the West Coast, Hirsch now has the exclusive right to distribute Tajima small
machines in the continental United States and Hawaii. Hirsch also announced the
formation of its newest subsidiary, Tajima USA, Inc. ("TUI") which has been
created for the purpose of assembling Tajima embroidery machines in the United
States. Production at Tajima USA consists of models in configurations of up to
six heads per machine. In January 1998 Tokai Industries (Tajima's manufacturing
arm) purchased a 45 percent interest in TUI. This investment reflects their
continuing confidence in this endeavor and will be a contributing factor in the
long range growth of TUI.
The Company's growth has been fueled by rapid technological advances in
software and hardware, the continued strong demand for embroidered products, the
creation of new embroidery applications and the continued strength of the
"embroidery entrepreneur" as a growing segment of the marketplace. The Company
believes that the purchasers of smaller embroidery machines are a significant
source of repeat business for the sale of multihead embroidery machines as the
entrepreneurs' operations expand.
The Company's revenues have increased at a compound annual growth rate of
29.4% from $90,966,000 in fiscal 1996 to $152,477,000 in fiscal year 1998.
Revenue growth from fiscal 1996 to fiscal 1998 has benefited from an increase in
revenue from the sale of embroidery machinery of approximately $44,197,000 from
$76,363,000 in fiscal year 1996 to $120,560,000 in fiscal year 1998.
<PAGE>
Results of Operations
The following table presents certain income statement items expressed
as a percentage of total revenue for the fiscal years ended January 31, 1998,
1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales 96.4% 97.4% 96.7%
Interest income related 3.6% 2.6% 3.3%
------ ------ ----
to sales-type leases
Total revenue 100.0% 100.0% 100.0%
Costs of goods sold 63.0% 64.4% 64.7%
Selling, general and 26.9% 23.2% 22.7%
administrative expenses
Interest expense, net 0.6% 0.7% 0.4%
Other expense(income), net 0.1% (0.4%) (0.3%)
----- ------- ------
Income before minority 9.4% 12.1% 12.5%
interest and income taxes
Minority interest 0.0% 0.0% 0.0%
---- ---- ----
Income before income taxes 9.4% 12.1% 12.5%
Provision for income taxes 4.0% 5.1% 5.3%
---- ---- ----
Net income 5.4% 7.0% 7.2%
==== ==== ====
</TABLE>
<PAGE>
Fiscal Year 1998 as Compared to Fiscal Year 1997
Net Sales. Net sales for fiscal year 1998 were $147,045,000, an increase of
$24,850,000, or 20.3%, compared to $122,195,000 for fiscal year 1997.
Approximately $18,850,000 of such increase was due to the sale of embroidery
machinery for fiscal year 1998. The sale of embroidery machinery represented
approximately $120,560,000 or 82.0%, and $101,710,000, or 83.2%, of net sales
for fiscal years 1998 and 1997, respectively. The Company believes that this
increase is the result of the continued strong demand for embroidered products,
the growth in unit sales of the single-head embroidery machine, the expansion
into new territories acquired through acquisitions (See Note 3 of Notes to
Consolidated Financial Statements), 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.
Revenue from the sale of the Company's computer hardware and software,
parts, service, used machines, application software and embroidery supplies for
fiscal year 1998 aggregated approximately $26,485,000, as compared to
$20,485,000 for fiscal year 1997, which represents an increase of approximately
29.3%. This increase is directly attributable to the increase in machine
revenues.
Small embroidery machines (one through six-head "FX" models) and large
embroidery machines (six-head "DC" models through thirty-head models)
represented approximately $51,376,000 and $69,184,000, respectively of total
embroidery machine sales during fiscal year 1998 as compared to approximately
$33,749,000 and $67,961,000 for fiscal year 1997, respectively.
Interest income related to sales-type leases. HAPL's interest income
increased 67.5% to $5,432,000 for fiscal year 1998 from $3,243,000 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. This limited
liability recourse agreement provides for more favorable terms than the
non-recourse agreements.
Cost of Goods Sold. For fiscal year 1998, cost of goods sold increased
$15,279,000, or 18.9%, to $96,099,000 from $80,820,000 for fiscal year 1997. 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 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 fiscal 1998 as compared to
fiscal 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 fiscal year 1998, the revenue contribution of the
Company's value-added products was approximately 12.5% of total revenue, an
increase of 45.4% as compared to 8.56% for fiscal 1997.
<PAGE>
Selling, General and Administrative ("SG&A") Expenses. For fiscal year 1998
SG&A increased $11,985,000, or 41.2%, to $41,055,000 from $29,070,000 for fiscal
year 1997. SG&A expenses increased as a percentage of revenues to 26.9% from
23.2%. 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
as well as start-up costs incurred in connection with the commencement of the
assembly operation at TUI.
Interest Expense. Interest expense for fiscal year 1998 increased $102,000,
or 12.3%, from $832,000 in fiscal year 1997 to $934,000 in fiscal year 1998.
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 fiscal year 1998 as compared to
42.2% for fiscal year 1997. 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 fiscal year 1998 is attributable to
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 permanent difference since it is not deductible
for tax purposes. The principle 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 fiscal year 1998 decreased $572,000, or 6.5%, to
$8,196,000 from $8,768,000 for fiscal year 1997. The net margin decreased to
5.4% in fiscal year 1998 from 7.0% in fiscal year 1997. These decreases are
attributable to the increase in SG&A expenses.
<PAGE>
Fiscal Year 1997 as Compared to Fiscal Year 1996
Net Sales. Net sales for fiscal year 1997 were $122,195,000, an increase of
$34,221,000, or 38.9%, compared to $87,974,000 for fiscal year 1996.
Approximately $25,347,000, or 74.1% of such increase was due to the sale of
embroidery machinery for fiscal year 1997. The sale of embroidery machinery
represented approximately $101,710,000 or 83.2%, and $76,363,000, or 86.8%, of
net sales for fiscal years 1997 and 1996, respectively. The Company believes
that this increase is the result of the continued strong demand for embroidered
products, the expansion into new territories acquired through acquisitions (See
Note 3 of Notes to Consolidated Financial Statements), 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 single-head embroidery machine. Single-head embroidery
machines and multi-head embroidery machines represented 45.6% and 54.4%,
respectively, of the number of embroidery machines sold during fiscal year 1997
as compared to 39.8% and 60.2% for fiscal year 1996, respectively.
The Company had previously sold embroidery machines manufactured by Brother
Industries Ltd. ("Brother") and, through the acquisition of SMX, Melco
Embroidery Systems ("Melco"). However, effective October 16, 1996, the Company
discontinued the distribution of Brother embroidery machines. In addition, the
Company came to a mutual agreement with Melco effective December 31, 1996 in
which the Company exited the Melco product line.
Revenue from the sale of the Company's proprietary application software,
embroidery supplies, accessories and proprietary embroidery products and used
machines for fiscal year 1997 aggregated approximately $20,485,000, which
represents an increase of approximately 76.4% as compared to $11,611,000 for
fiscal year 1996. This increase is primarily attributable to the increase in
revenues from sale of embroidery machines.
Interest income related to sales-type leases. HAPL Leasing's interest
income increased 7.3% to $3,243,000 for fiscal year 1997 from $3,022,000 for the
comparable period of the prior year. This increase is a result of the continued
expansion of HAPL Leasing 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 revenues from the sale of embroidery
machines.
<PAGE>
Cost of Goods Sold. For fiscal year 1997, cost of goods sold increased
$21,984,000, or 37.4%, to $80,820,000 from $58,836,000 for fiscal year 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 generally
reflected in pricing adjustments in order to maintain consistent gross margins
on machine revenues.
Selling, General and Administrative ("SG&A") Expenses. For fiscal year 1997
SG&A increased $8,432,000, or 40.9%, to $29,070,000 from $20,638,000 for fiscal
year 1996. SG&A expenses increased as a percentage of revenues to 23.2% from
22.7%. This increase in SG&A Expenses as a percentage of revenues is primarily
attributable to the following factors:
The Company made a significant investment in its infrastructure as it
relates to its growth strategy and the West Coast Expansion. Additional sales,
marketing, training, administrative and technical support personnel were hired
to support this growth. The Company also entered into leases for several new
sales offices and incurred start up costs related to these offices, and also
increased expenditures for participation in trade shows, and
The incremental expenses incurred in connection with the acquisitions of
SMX and Sedeco.
Interest Expense. Interest expense for fiscal year 1997 increased $435,000,
or 109.7%, from $397,000 in fiscal year 1996 to $832,000 in fiscal year 1997.
This increase is directly attributable to the increased interest costs related
to the additional debt incurred in connection with the recent acquisitions.
Provision for income taxes. The provision for income taxes reflected an
effective tax rate of approximately 42.2% for fiscal year 1997 as compared to
42.4% for fiscal year 1996. 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
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 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.
<PAGE>
Net Income. Net Income for fiscal year 1997 increased $2,203,000, or 33.6%,
to $8,768,000 from $6,565,000 for fiscal year 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. The net margin decreased to
7.0% in fiscal year 1997 from 7.2% in fiscal year 1996. This decrease in the net
margin is attributable to the increase in SG&A expenses.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $40,169,000 at January 31, 1998,
increasing $18,165,000 or 82.6%, from $22,004,000 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 Secondary Offerings completed in June 1997 and January 1996 (See Note 1 of
Notes to Consolidated Financial Statements). The 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 Company's Revolving Credit Facility
(See Note 8E of Notes to Consolidated Financial Statements) although all of
these aforementioned borrowings were repaid in June 1997 with the proceeds of
the June 1997 Secondary Offering.
During fiscal year 1998, the Company's cash and cash equivalents and
short-term investments available-for-sale decreased by $7,505,000 to $2,956,000.
Net cash of $16,974,000 was used in the Company's operating activities. Cash
provided by increases in the balance of trade acceptances payable and accounts
payable and accrued expenses aggregating approximately $10,208,000 was offset by
cash used to increase inventory, accounts receivable, net investment in
sales-type leases and other assets aggregating approximately $37,973,000 and a
decrease in income taxes payable of approximately $807,000. These changes
resulted from expansion of the Company's business and the acquisitions during
fiscal year 1998.
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 11B of Notes to Consolidated
Financial Statements).
<PAGE>
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
$15,286,000 at January 31, 1998. During the fourth quarter ended January 31,
1998, the Company borrowed $5,500,000 as working capital loans against the
Facility. There were no working capital or acquisition loans outstanding against
this Facility at January 31, 1998.
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 was repayable in twenty equal quarterly installments of principal and
interest (as defined in the Term Loan Agreement) commencing September 30, 1996.
The loan was guaranteed by Hirsch, Pulse and SMX and required the Company to
maintain, among others, certain minimum tangible net worth, quick asset ratio
and fixed charge coverage ratio levels, as defined. In June 1997 the Company
paid the total outstanding balance of the loan with proceeds from the June 1997
Secondary Offering (See Note 1 of Notes to Consolidated Financial Statements).
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 approximately $143,089,000 in lease agreements
as of January 31, 1998. To date, approximately $136,063,000, or 90.8%, 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.
Future Capital Requirements
The Company believes that the net proceeds from the June 1997 Secondary
Offering (See Note 1 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.
<PAGE>
Year 2000 Date Conversion
The year 2000 issue exists because many computer systems and applications
use two-digit date 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 had 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.
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.
Recent Pronouncements of the Financial Accounting Standards Board
Earnings Per Share and Capital Structure. 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. 129, "Disclosure of Information about Capital Structure" ("SFAS No.
129") and SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 129 and
128 specify guidelines as to the method of computation as well as presentation
and disclosure requirements for earnings per share ("EPS"). The objective of
these statements is to simplify the calculation and to make the U.S. standard
for computing EPS more compatible with the EPS standards of other countries and
with that of the International Accounting Standards Committee. These statements
are effective for fiscal years ending after December 15, 1997 and earlier
application is not permitted. The effects thereof, which were not material, have
been reflected in the Consolidated Financial Statements and related Footnotes.
Reporting Comprehensive Income. SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") is effective for fiscal years beginning after December
15, 1997. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in the financial statements and that comprehensive income be displayed
with the same prominence as net income. Additionally, the statement requires
disclosure of the related tax effects allocated to each component of other
comprehensive income as well as the accumulated balances of the each component
of other comprehensive income. When comparative financial statements are
provided for earlier periods, those financial statements shall be reclassified
to reflect the provisions of this statement. SFAS No. 130 does not require a
specific format for the display of comprehensive income within the financial
statements, but does require that an amount representing total comprehensive
income for the period be displayed within the financial statements. Although the
Company does not expect SFAS 130 to have a material impact on the Consolidated
Financial Statements, management cannot estimate the effects of adoption at this
time.
<PAGE>
Disclosures about Segments of an Enterprise. SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS No. 131")
requires that public enterprises disclose financial and descriptive information
about segments of their operations that meet certain quantitative thresholds as
defined therein. The required disclosures involve reporting financial
information on the basis used internally by management to evaluate segment
performance and decide how resources are allocated to segments. This information
is required for complete sets of financial statements as well as condensed
financial statements of interim periods issued to shareholders. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. The Company
intends to comply with the disclosure requirements of SFAS 131 and does not
expect SFAS 131 to have a material impact on the Consolidated Financial
Statements.
Disclosures about Pensions and Other Postretirement Benefits. SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS
No. 132") revises employers' disclosure requirements for pensions and other
postretirement benefit plans. The statement standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures deemed no longer useful.
Additionally, the statement suggests combined formats for presentation of
pension and other postretirement benefit disclosures. SFAS No. 132 is effective
for fiscal years beginning after December 15, 1997. The Company intends to
comply with the disclosure requirements of SFAS 132 and does not expect SFAS 132
to have a material impact on the Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS IN SUPPLEMENTARY DATA
The information contained in pages F-1 through F-23 hereof.
ITEM 9. CHANGES IN A DISAGREEMENT WITH ACCOUNTANT ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS PAGE(S)
<S> <C>
Index to Consolidated Financial Statements..........................................................F-1
Independent Auditors' Report........................................................................F-2
Consolidated Balance Sheets.........................................................................F-3
Consolidated Statements of Income ..................................................................F-5
Consolidated Statements of Stockholders' Equity.....................................................F-6
Consolidated Statements of Cash Flows...............................................................F-7
Notes to Consolidated Financial Statements...................................................F-8 - F-23
(a)(2) FINANCIAL STATEMENT SCHEDULE
....................................................................................................S-1
</TABLE>
(a)(3) 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
^10.1 $60,000,000 Revolving Credit Facility and $10,000,000 Credit Facility
Dated as of September 26, 1997 among Hirsch International Corp., HAPL Leasing
Co., Inc., Sewing Machine Exchange, Inc., Pulse Microsystems, Ltd., Sedeco,
Inc., The Bank of New York, Mellon Bank, N.A. and Fleet Bank, N.A.
**10.2 $2,295,000 Mortgage Note from Hirsch International Corp. to Chemical
Bank
**10.3 Mortgage between Hirsch International Corp. and Chemical Bank
**10.4 Guaranty of Payment of HAPL Leasing Co, Inc. and Pulse Microsystems
Ltd. to Chemical Bank
****10.5 Stock Purchase Agreement, dated June 7, 1996 by and among Hirsch
International Corp. and Ronald H. Krasnitz and Martin Krasnitz
*****10.6 Stock Purchase Agreement, Dated December 20, 1996 by and between
Hirsch International Corp. and Jimmy L. Yates
*10.7 Employment Agreement between Henry Arnberg and the Registrant
*10.8 Employment Agreement between Paul Levine and the Registrant
<PAGE>
*10.9 Employment Agreement between Kenneth Shifrin and the Registrant
*10.10 Employment Agreement between Tas Tsonis and Pulse Microsystems,
Ltd.
*10.11 Employment Agreement between Brian Goldberg and Pulse Microsystems,
Ltd.
***10.12 Employment Agreement between Ronald H. Krasnitz and Sewing Machine
Exchange, Inc.
***10.13 Employment Agreement between Martin Krasnitz and Sewing Machine
Exchange, Inc.
@10.14 Employment Agreement between Jimmy L. Yates and Sedeco, Inc.
10.15 Amendment to Employment Agreement between Tas Tsonis and Pulse
Microsystems, Ltd.
10.16 Amendment to Employment Agreement between Brian Goldberg and Pulse
Microsystems, Ltd.
10.17 Distributorship Agreement Dated February 21, 1991 together with
Supplements and Amendments Thereto, among Tajima Industries, Ltd., Nomura
Trading Co. Ltd., Nomura (America) Corp. and Hirsch International Corp. ("Hirsch
Distributorship Agreement")
@10.18 Amendment Number Two to Hirsch Distributorship Agreement, Dated June
7, 1996
@10.19 Distributorship Agreement, Dated February 21, 1991, together with
Supplement Dated February 21, 1996, among Tajima Industries, Ltd., Nomura
Trading Co. Ltd., Nomura (America) Corp., and Sedeco, Inc.
@10.20 West Coast Distributorship Agreement, Dated February 21, 1997, among
Tajima Industries, Ltd., Nomura Trading Co. Ltd. and Nomura (America) Corp., and
Hirsch International Corp.
%10.21 Stock Option Plan, as Amended
#10.22 1994 Non-Employee Director Stock Option Plan
@10.23 Registration Rights Agreement, Dated December 20, 1996, between
Hirsch International Corp. and Jimmy L. Yates
@10.24 Non-Qualified Stock Option Agreement between Hirsch International
Corp. and Jimmy L. Yates, Dated December 6, 1996
@10.25 Non-Qualified Stock Option Agreement between Hirsch International
Corp. and Ronald H. Krasnitz, Dated June 7, 1996
@10.26 Non-Qualified Stock Option Agreement between Hirsch International
Corp. and Martin Krasnitz, Dated June 7, 1996
10.27 Agreement dated as of December 20, 1997 between the Registrant and
Tokai Industrial Sewing Machine Company, Ltd. for sale of a forty-five (45%) per
cent interest in Tajima USA, Inc.
21.1 List of Subsidiaries of the Registrant
23 Consent of Auditors
27.1 Financial Data Schedule
<PAGE>
----------------------
%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
Forms S-1, Registration Number 33-72618.
**Incorporated by reference from the Registrant's From 10-K filed for the
fiscal year ended January 21, 1995.
#Incorporated by reference from the Registrant's Registration Statement on
Form S-1, Registration No. 33-80563.
***Incorporated by reference from the Registrant's Form 10-Q filed for the
quarter ended July 31, 1996.
****Incorporated by reference from Registrant's Form 8-K filed with the
Commission on June 19, 1996.
*****Incorporated by reference from Registrant's From 8-K filed with the
Commission on January 3, 1997.
@Incorporated by reference from the Registrant's Form 10-K filed for the
year ended January 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Dated: April 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
\s\ Henry Arnberg Chairman of the Board of Directors, President and April 30, 1998
- ----------------------------- Chief Executive Officer (Principal Executive
Henry Arnberg Officer)
\s\ Paul Levine Executive Vice President, Chief Operating Officer April 30, 1998
- ----------------------------- and Secretary (Principal Operating Officer)
Paul Levine
s\s Tas Tsonis Vice President and Director April 30, 1998
- -----------------------------
Tas Tsonis
s/s Kenneth Shifrin Vice President-Finance and Chief Financial Officer April 30, 1998
- ----------------------------- (Principal Accounting and Financial Officer)
Kenneth Shifrin
s/s Ronald Krasnitz Vice President and Director April 30, 1998
- -----------------------------
Ronald Krasnitz
s/s Marvin Broitman Director April 30, 1998
- -----------------------------
Marvin Broitman
s/s Herbert M. Gardner Director April 30, 1998
- -----------------------------
Herbert M. Gardner
s\s Douglas Schenendorf Director April 30, 1998
- -----------------------------
Douglas Schenendorf
</TABLE>
<PAGE>
Hirsch International Corp. and Subsidiaries
Consolidated Financial Statements for the
Years Ended January 31, 1998 and 1997, and
Independent Auditors' Report
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS
ENDED JANUARY 31, 1998 AND 1997:
Consolidated Balance Sheets 2-3
Consolidated Statements of Income 4
Consolidated Statements of Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7-22
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Hirsch International Corp.
Hauppauge, New York
We have audited the accompanying consolidated balance sheets of Hirsch
International Corp. and Subsidiaries as of January 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended January 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also include
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Hirsch
International Corp. and Subsidiaries as of January 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 31, 1998 in conformity with generally
accepted accounting principles.
March 11, 1998
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS - JANUARY 31, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------------------------
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,956,000 $ 7,865,000
Short-term investments available-for-sale - 2,596,000
Accounts receivable, net of an allowance for
doubtful accounts of approximately $3,160,000
and $2,578,000, respectively 34,427,000 20,806,000
Net investment in sales-type leases -
current portion (Note 5) 2,180,000 1,715,000
Inventories, net (Notes 4 and 11) 34,166,000 15,769,000
Other current assets (Note 9) 3,284,000 2,073,000
-------------------- ---------------
Total current assets 77,013,000 50,824,000
-------------------- ---------------
NET INVESTMENT IN SALES-TYPE LEASES, Noncurrent
portion (Note 5) 12,055,000 9,180,000
EXCESS OF COST OVER NET ASSETS ACQUIRED, Net
of accumulated amortization of approximately
$1,581,000 and $383,000, respectively (Note 3) 15,979,000 14,998,000
PURCHASED TECHNOLOGIES, Net of accumulated
amortization of approximately $749,000 and $559,000,
respectively 590,000 781,000
PROPERTY, PLANT AND EQUIPMENT, Net of accumulated
depreciation and amortization (Notes 6 and 8) 7,193,000 6,242,000
OTHER ASSETS (Note 9) 2,002,000 1,671,000
-------------------- --------------
TOTAL ASSETS $ 114,832,000 $ 83,696,000
================== =============
</TABLE>
See notes to consolidated financial statements. (Continued)
- 2 -
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - JANUARY 31, 1998 AND 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
<S> <C> <C>
CURRENT LIABILITIES:
Trade acceptances payable (Note 11) $ 15,286,000 $ 13,332,000
Accounts payable and accrued expenses (Note 7) 20,592,000 11,517,000
Current maturities of long-term debt (Note 8) 231,000 2,430,000
Income taxes payable (Note 9) 735,000 1,541,000
--------------------- --------------
Total current liabilities 36,844,000 28,820,000
LONG-TERM DEBT, Less current maturities (Note 8) 1,421,000 13,194,000
-------------------- --------------
Total liabilities 38,265,000 42,014,000
-------------------- --------------
MINORITY INTEREST (Note 1) 944,000 -
--------------------- --------------
COMMITMENTS AND CONTINGENCIES (Notes 8 and 11)
STOCKHOLDERS' EQUITY (Notes 1 and 10):
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,
6,811,000 and 5,313,000 shares, respectively 68,000 53,000
Class B common stock, $.01 par value;
authorized: 3,000,000 shares, outstanding:
2,668,000 and 2,732,000 shares, respectively 27,000 27,000
Additional paid-in capital 41,377,000 15,626,000
Unrealized holding gain (loss) on short-term
investments available-for-sale - 21,000
Retained earnings 34,151,000 25,955,000
-------------------- -------------
Total stockholders' equity 75,623,000 41,682,000
-------------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 114,832,000 $ 83,696,000
================== =============
</TABLE>
See notes to consolidated financial statements. (Concluded)
- 5 -
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME - THREE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
REVENUES:
Net sales $ 147,045,000 $ 122,195,000 $ 87,974,000
Interest income related to sales-type leases 5,432,000 3,243,000 3,022,000
------------------- ---------------- ---------------
Total revenue 152,477,000 125,438,000 90,996,000
------------------- ---------------- ---------------
EXPENSES:
Cost of goods sold (note 11) 96,099,000 80,820,000 58,836,000
Selling, general and administrative
expenses 41,055,000 29,070,000 20,638,000
Interest expense (note 8) 934,000 832,000 397,000
Other expenses 90,000 (454,000) (277,000)
------------------- ---------------- --------------
Total expenses 138,178,000 110,268,000 79,594,000
------------------- ---------------- --------------
INCOME BEFORE MINORITY INTEREST IN
NET EARNINGS OF CONSOLIDATED
SUBSIDIARY AND PROVISION FOR
INCOME TAXES 14,299,000 15,170,000 11,402,000
MINORITY INTEREST IN NET EARNINGS
OF CONSOLIDATED SUBSIDIARY (Note 1) 44,000 - -
---------------------- ---------------- --------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 14,255,000 15,170,000 11,402,000
PROVISION FOR INCOME TAXES (Note 9) 6,059,000 6,402,000 4,837,000
-------------------- ---------------- --------------
NET INCOME $ 8,196,000 $ 8,768,000 $ 6,565,000
==================== =============== ==============
BASIC EARNINGS PER SHARE:
Net income $0.92 $1.13 $1.10
===== ===== =====
DILUTED EARNINGS PER SHARE:
Net income $0.89 $1.10 $1.09
===== ===== =====
WEIGHTED AVERAGE NUMBER OF SHARES
IN THE CALCULATION OF BASIC NET
INCOME PER SHARE (Note 12) 8,953,000 7,782,000 5,960,000
==================== ============== =============
WEIGHTED AVERAGE NUMBER OF SHARES
IN THE CALCULATION OF DILUTED NET
INCOME PER SHARE (Note 12) 9,236,000 7,967,000 6,002,000
==================== ============== =============
</TABLE>
See notes to consolidated financial statements.
- 6 -
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - THREE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Class A Class B
Common Stock Common Stock Additional Unrealized
(Note 10) (Note 10) Paid-In Holding Retained
----------------- --------------- Capital Gain (Loss) Earnings Total
Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 1, 1995 1,831,000 $18,000 2,934,000 $29,000 $ 9,972,000 $(32,000) $10,649,000 $20,636,000
Proceeds from public offering of
common stock, net (Note 1) 265,000 3,000 (65,000) (1,000) 1,906,000 - - 1,908,000
Stock dividend (25%) (Note 10D) 1,191,000 12,000 - - - - (12,000) -
Exercise of stock options 1,000 - - - 8,000 - - 8,000
Unrealized holding gain (Note 2C) - - - - - 17,000 - 17,000
Net income - - - - - - 6,565,000 6,565,000
---------- ------- -------- ------- ---------- -------- ---------- ----------
Balance, January 31, 1996 3,288,000 33,000 2,869,000 28,000 11,886,000 (15,000) 17,202,000 29,134,000
Issuance of shares in connection
with acquisitions (Note 3) 143,000 2,000 - - 2,636,000 - - 2,638,000
Transfer of Class B stock to
Class A stockholder 137,000 1,000 (137,000) (1,000) - - - -
Stock dividend (25%) (Note 10D) 1,542,000 15,000 - - - - (15,000) -
Exercise of stock options and warrants 203,000 2,000 - - 1,104,000 - - 1,106,000
Unrealized holding gain (Note 2C) - - - - - 36,000 - 36,000
Net income - - - - - - 8,768,000 8,768,000
--------- ------ -------- ------ --------- ------- --------- ---------
Balance, January 31, 1997 5,313,000 53,000 2,732,000 27,000 15,626,000 21,000 25,955,000 41,682,000
Proceedings from public offering
of common stock, net (Note 1) 1,333,000 13,000 - - 24,289,000 - - 24,302,000
Issuance of shares in connection
with acquisitions (Note 3) 20,000 - - - 392,000 - - 392,000
Transfer of Class B stock to
Class A stockholder 64,000 - (64,000) - - - - -
Exercise of stock options and warrants 32,000 1,000 - - 251,000 - - 252,000
Unrealized holding loss (Note 2C) - - - - - (21,000) - (21,000)
Issuance of Class A stock 49,000 1,000 - - 819,000 - - 820,000
Net income - - - - - - 8,196,000 8,196,000
--------- ------ -------- ------- --------- ------- ---------- ----------
Balance, Janauary 31, 1998 6,811,000 $ 68,000 2,668,000 $27,000 $41,377,000 $ - $34,151,000 $75,623,000
========= ======= ========= ======= =========== ======== ========== ==========
</TABLE>
See notes to consolidated financial statements.
- 8 -
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS - THREE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,196,000 $ 8,768,000 $ 6,565,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 3,214,000 1,763,000 1,142,000
Provisions for reserves 807,000 663,000 998,000
Deferred income taxes (621,000) (193,000) (289,000)
Gain on disposal of assets (42,000) 18,000 62,000
Minority interest 44,000 - -
Changes in assets and liabilities:
Accounts receivable (14,382,000) (5,012,000) (5,593,000)
Net investments in sales-type leases (3,591,000) (2,287,000) (1,900,000)
Inventories (18,749,000) (2,778,000) (1,244,000)
Other assets (1,251,000) (808,000) (517,000)
Trade acceptances payable 1,954,000 4,676,000 1,347,000
Accounts payable and accrued expenses 8,254,000 (1,797,000) 1,106,000
Income taxes payable (807,000) 409,000 16,000
------------------- -------------- ------------
Net cash (used in) provided by
operating activities (16,974,000) 3,422,000 1,693,000
------------------- -------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,096,000) (1,447,000) (1,123,000)
Acquisition of Sewing Machine Exchange, Inc. - (4,973,000) -
Acquisition of Sedeco, Inc. (4,153,000) -
Acquisition of Equipment Connection, Inc. (553,000) - -
Sales (purchases) of short-term investments 2,570,000 (392,000) 1,227,000
-------------------- -------------- ------------
Net cash (used in) provided by
investing activities (79,000) (10,965,000) 104,000
---------------------- -------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of bank financing 17,260,000 11,946,000 -
Repayments of long-term debt (31,390,000) (4,209,000) (312,000)
Proceeds from public offering 24,302,000 - 2,325,000
Proceeds from issuance of stock and
exercise of stock options and warrants 1,072,000 1,106,000 8,000
Contributions from minority interest 900,000 - -
--------------------- -------------- ------------
Net cash provided by financing
activities 12,144,000 8,843,000 2,021,000
------------------- -------------- ------------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (4,909,000) 1,300,000 3,818,000
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 7,865,000 6,565,000 2,747,000
-------------------- ------------- ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 2,956,000 $ 7,865,000 $ 6,565,000
==================== ============== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 966,000 $ 796,000 $ 387,000
==================== ============== ============
Income taxes paid $ 7,621,000 $ 5,788,000 $ 4,843,000
=================== ============== =============
</TABLE>
See notes to consolidated financial statements.
- 9 -
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Hirsch International Corp. ("Hirsch"), HAPL Leasing Co., Inc. ("HAPL" or "HAPL
Leasing"), Pulse Microsystems Ltd. ("Pulse"), Sewing Machine Exchange, Inc.
("SMX"), Sedeco, Inc. ("Sedeco"), Hirsch Equipment Connection, Inc. ("HECI"),
and Tajima USA, Inc. ("TUI") (collectively, the "Company"). The operations of
SMX, Sedeco, and HECI are included in consolidated operations since their
acquisitions on June 7, 1996, December 20, 1996, and March 26, 1997,
respectively (see Note 3). The operations of TUI have been included in
consolidated operations since inception in June 1997.
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 to January 31, 1998 have been reported as minority interest
in the Company's Consolidated Statements of Income.
The Company is a single source provider of sophisticated equipment and
valued added products and services to the embroidery industry. The embroidery
equipment and value added products sold by the Company are widely used by
contract embroiders, large and small manufacturers of apparel and fashion
accessories, retail stores and embroidery entrepreneurs servicing specialized
niche markets. HAPL Leasing provides leasing services to customers of the
Company.
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-allowance 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.
On January 24, 1996, the Company consummated a secondary public offering of
Class A common stock (the "Second Offering"). The Company sold 200,000 shares at
$12.375 per share. Another 800,000 shares were sold by certain of the Company's
officers. Net proceeds of approximately $1,906,000 were received by the Company.
On February 15, 1996, the underwriters exercised their over-allotment
option to purchase an additional 150,000 shares from certain of the Company's
officers.
Amounts of shares and per share amounts in this note have not been adjusted
to reflect stock dividends or stock splits (see Note 10D).
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, and since
January 1998, the majority interest in the operations of TUI. All intercompany
balances and transactions have been eliminated in consolidation.
B. Revenue Recognition - The Company distributes embroidery equipment which
it offers for sale or lease. Revenue related to the sale of equipment is
recorded at the time of shipment. Lease contracts which meet the criteria of
Statement of Financial Accounting Standards No. 13, "Accounting for Leases" are
accounted for as sales-type leases. Under this method, revenue is recognized as
a sale at the later of the time of shipment or acceptance by the lessee in an
amount equal to the present value of the rental payments and the present value
is amortized over the term of the lease so as to produce a constant periodic
rate of return on the net investment in the lease. To date, all leases issued by
the Company and HAPL Leasing have been sales-type leases. The operating method
of accounting for leases would be followed for lease contracts not meeting the
above criteria. Under this method of accounting, aggregate rental revenue would
be recognized over the term of the lease.
Service revenues and costs are recognized when services are provided. Sales
of computer hardware and software are recognized when shipped provided that no
significant vendor and post-contract and support obligations remain and
collection is probable.
C. Cash Equivalents and Short-Term Investments Available-For-Sale - Cash
equivalents consist of money market accounts with initial maturities of three
months or less. Short-term investments consist primarily of tax-exempt bonds. In
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", the Company has stated
short-term investments available-for-sale at market value.
D. Allowance for Doubtful Accounts - The Company provides an allowance for
doubtful accounts determined by a specific identification of individual accounts
and a general reserve to cover other accounts based on historical experience.
The Company writes off receivables upon determination that no further
collections are probable.
E. Inventories - Inventories consisting of machines and parts are stated at
the lower of cost or market. Cost for machinery is determined by specific
identification and for all other items on a first-in, first-out basis. Reserves
are established to record provisions for slow moving inventories in the period
in which it becomes reasonably evidence that the product is not salable or the
market value is less than cost.
F. Foreign Operations - Assets and liabilities of the Company's foreign
subsidiary are translated at year-end exchange rates. Results of operations are
translated using the average exchange rate prevailing throughout the year. Gains
and losses from foreign currency transactions are included in net income and are
not significant.
The Company makes only limited use of derivative financial instruments and
does not use them for trading purposes. Trade acceptances payable are
denominated by Japanese yen and are related to the purchase of equipment from
the Company's major supplier. The Company purchases foreign currency forward
contracts (which are usually approximately six months in duration) to hedge the
risk associated with fluctuations in foreign currency exchange rates (see Note
11B). The cost of such contracts are included in the cost of the related
machinery in inventory.
<PAGE>
G. Property, Plant and Equipment - Property, plant and equipment are stated
at cost less accumulated depreciation and amortization. Capitalized values of
property under leases are amortized over the life of the lease or the estimated
life of the asset, whichever is less. Depreciation and amortization are provided
on the straight-line or declining balance methods over the following estimated
useful lifes:
Asset Category Lives in Years
Building 39
Furniture and fixtures 5-7
Machinery and equipment 5-7
Automobiles 3-5
Leasehold improvements 5-20
H. Software Development Costs - The development of new software products
and enhancements to existing products are expensed as incurred until
technological feasibility has been established. After technological feasibility
is established, any additional costs would be capitalized in accordance with
Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed". Capitalized
software costs are amortized on a straight-lin basis over the estimated useful
product lives (normally three years) commencing in the month following product
release. During the year ended January 31, 1997, the Company capitalized
approximately $364,000 of software development costs. Such costs are included in
other assets on the accompanying consolidated balance sheets. Amortization
expense for the years ended January 31, 1998, 1997 and 1996 was approximately
$205,000, $84,000, and $21,000, respectively.
I. Impairment of Long-Lived Assets - In accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), the
Company reviews its long-lived assets, including property, plant and equipment,
identifiable intangibles and purchased technologies, for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable. To determine recoverability of its
long-lived assets, the Company evaluates the probability that future
undiscounted net cash flows, without interest charges, will be less than the
carrying amount of the assets. Impairment is measured at fair value. SFAS 121
had no effect on the Company's consolidated financial statements.
J. Leases - Leases (in which the Company is lessee) which transfer
substantially all of the risks and benefits of ownership are classified as
capital leases, and assets and liabilities are recorded at amounts equal to the
lesser of the present value of the minimum lease payments or the fair value of
the leased properties at the beginning of the respective lease terms. Interest
expense relating to the lease liabilities is recorded to effect constant rates
of interest over the terms of the leases. Leases which do not meet such criteria
are classified as operating leases and the related rentals are charged to
expense as incurred.
K. Purchased Technologies - Purchased technologies represent the cost in
excess of the fair value of the assets of Pulse at the date of acquisition.
Purchased technologies are being amortized over a period of seven years using
the straight-line method.
L. Income Taxes - The Company accounts for income taxes pursuant to
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes ("SFAS No. 109"). SFAS No. 109 requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been included in the Company's consolidated financial statements or tax returns.
Under this method, deferred tax assets and liabilities are determined based on
the differences between the financial accounting and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
<PAGE>
M. 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.
N. Stock-Based Compensation - The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees' ("APB 25").
O. Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
P. Fair Value of Financial Instruments - Financial instruments consist
primarily of investments in cash, short-term investments, trade account
receivables, accounts payable and debt obligations. At January 31, 1998 and
1997, the fair value of the Company's financial instruments approximated the
carrying value (see No. 2C).
Q. Reclassifications - Certain reclassifications have been made to the
prior year consolidated financial statements to conform with current-year
presentations.
3. 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 principles.
B. Acquisition of Sewing Machine Exchange - On June 7, 1996 the Company
acquired all of the outstanding capital stock of SMX. 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.
<PAGE>
The purchase price was $8,690,000 paid in the form of promissory note in
the principal amount of $4,250,000 to each of the two former shareholders of SMX
(see Note 8B) and by delivery of an aggregate of 9,375 shares of the Company's
Class A Common Stock. 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 (see Note 10B). 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.
C. Acquisition of Sedeco - On December 20, 1996 the Company acquired all of
the outstanding capital stock of Sedeco. 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 value at
the date of acquisition. the costs 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 (see Note 10B) 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 expire five years from the date of
grant.
On the basis of a pro forma consolidation of the results of operations as
if the acquisitions of ECI, SMX and Sedeco had taken place at the beginning of
fiscal 1997 for ECI and fiscal 1996 for SMX and Sedeco, management believes that
the acquisitions would not have had a material effect on the reported amounts.
Such pro forma amounts are not necessarily indicative of what the actual
consolidated results might have been if the acquisitions had been effective at
the beginning of the respective fiscal year.
4. INVENTORIES
<TABLE>
<CAPTION>
January 31,
1998 1997
<S> <C> <C>
Machines $ 29,613,000 $ 12,245,000
Parts and accessories 6,808,000 5,527,000
Less: Reserve for slow moving inventory (2,255,000) (2,003,000)
------------ ------------
Total $ 34,166,000 $ 15,769,000
============ ===========
5. NET INVESTMENT IN SALES-TYPE LEASES
January 31,
1998 1997
Total minimum lease payments receivable $ 13,051,000 $ 11,142,000
Estimated residual value of leased property (unguaranteed) 5,224,000 3,059,000
Reserve for estimated uncollectible lease payments (588,000) (338,000)
Less: Unearned income (3,452,000) (2,968,000)
----------------- ------------
Net investment 14,235,000 10,895,000
Less: Current portion 2,180,000 1,715,000
----------------- ------------
Non-current portion $ 12,055,000 $ 9,180,000
================= ============
</TABLE>
At January 31, 1998 future annual lease payments receivable (including
estimated residual values) under sales-type leases are as follows:
Fiscal Year Ending January 31,
1999 $ 3,954,000
2000 3,772,000
2001 3,958,000
2002 4,263,000
2003 2,158,000
Thereafter 170,000
-----------------
$ 18,275,000
<PAGE>
6. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
January 31,
1998 1997
<S> <C> <C>
Land and building $ 3,288,000 $ 3,288,000
Machinery and equipment 4,296,000 3,040,000
Furniture and fixtures 1,865,000 1,374,000
Automobiles 450,000 670,000
Leasehold improvements 1,579,000 1,369,000
-------------- -----------
Total at cost 11,478,000 9,741,000
Less: Accumulated depreciation and amortization (4,285,000) (3,238,000)
Reserve for assets held for sale - (261,000)
-------------- ------------
Property, plant and equipment, net $ 7,193,000 $ 6,242,000
=============== ============
</TABLE>
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
January 31,
1998 1997
<S> <C> <C>
Accounts payable $ 14,310,000 $ 4,641,000
Accrued commissions payable 1,519,000 819,000
Accrued payroll costs 693,000 832,000
Accrued warranty costs 626,000 626,000
Customer deposits payable 598,000 1,357,000
Other accrued expenses 2,846,000 3,242,000
--------------- ------------
Total accounts payable and accrued expenses $ 20,592,000 $ 11,517,000
=============== ============
</TABLE>
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
January 31,
1998 1997
<S> <C> <C>
Term Note (A) $ - $ 6,750,000
Promissory Notes (B) - 2,542,000
Acquisitions (C) - 4,446,000
Mortgage (D) 1,549,000 1,779,000
Other 103,000 107,000
----------------- --------------
Total (E) 1,652,000 15,624,000
Less: Current maturities 231,000 2,430,000
----------------- --------------
Long-term maturities $ 1,421,000 $ 13,194,000
================= ==============
</TABLE>
<PAGE>
(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.
In June 1997 the Company paid the total outstanding balance of the loan with
proceeds from the June 1997 Secondary Offering (see Note 1).
(B) In connection with the acquisition of SMX (see Note 3B), the Company
issued promissory notes in the principal amount of $4,250,000 to each of the two
former shareholders of SMX. In June of 1997 the Company paid the remaining
outstanding balances of the notes with proceeds from the June 1997 Secondary
Offering (see Note 1).
(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 bore interest
as defined therein. In June 1997, the Company paid the total outstanding balance
of the ECI and Sedeco debt with proceeds from the June 1997 Secondary offering
(see Note 1).
(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) 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). This
Facility has been used for letters of credit and deferred payment letters of
credit aggregating approximately $15,286,000 at January 31, 1998.
Long-term debt (including capitalized lease obligations) of the Company at
January 31, 1998 matures as follows:
Fiscal Year Ending January 31,
1999 $ 231,000
2000 272,000
2001 265,000
2002 253,000
2003 230,000
Thereafter 401,000
---------------
$ 1,652,000
<PAGE>
9. INCOME TAXES
The provision for income taxes for each of the periods presented herein is
as follows:
<TABLE>
<CAPTION>
January 31,
1998 1997 1996
<S> <C> <C> <C>
Current:
Federal $ 4,978,000 $ 4,842,000 $ 3,855,000
State 1,702,000 1,753,000 1,271,000
----------------- -------------- ------------
Total current 6,680,000 6,595,000 5,126,000
------------------ -------------- ------------
Deferred:
Federal (527,000) (100,000) (224,000)
State (94,000) (93,000) (65,000)
------------------ -------------- ------------
Total deferred (621,000) (193,000) (289,000)
------------------ -------------- ------------
Total provision for income taxes $ 6,059,000 $ 6,402,000 $ 4,837,000
================== ============== ============
</TABLE>
- 2 -
<PAGE>
The tax effects of temporary differences that give rise to deferred income
tax assets at January 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
January 31, 1998 January 31, 1997
Net Net Net Net
Current Long-Term Current Long-Term
Deferred Deferred Deferred Deferred
Tax Assets Tax Assets Tax Assets Tax Assets
<S> <C> <C> <C> <C>
Accounts receivable $ 782,000 $ - $ 589,000 $ -
Inventories 703,000 - 487,000 -
Accrued warranty costs 143,000 - 152,000 -
Other accrued expenses 69,000 - 70,000 -
Purchased technologies - 180,000 - 132,000
Net investments in sales-type leases
(allowance for doubtful accounts) - 237,000 - 140,000
Capitalized software development
costs - (124,000) - (201,000)
------------ ----------- --------- ----------
Total $1,697,000 $ 293,000 $ 1,298,000 $ 71,000
============ =========== ========== ==========
</TABLE>
Valuation allowances for such deferred tax assets have not been
established as 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 current and long-term deferred tax assets are included in other
current assets and other assets, respectively, on the accompanying consolidated
balance sheets.
A reconciliation of the differences between the federal statutory tax rate
of 34 percent and the Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended January 31,
1998 1997 1996
<S> <C> <C> <C>
Federal statutory income tax rate 34.0% 34.0% 34.0%
State income taxes, net of Federal benefit 7.9 8.4 7.5
Permanent differences 0.6 (0.2) 0.9
-------- ------- -------
Effective income tax rate 42.5 % 42.2 % 42.4 %
======== ======= =======
</TABLE>
<PAGE>
10. STOCKHOLDERS' EQUITY
(A) Common Stock - The Class A Common Stock and Class B Common Stock has
authorizations of 20,000,000 and 3,000,000 shares, respectively. The Class A
Common Stock and Class B Common Stock are substantially identical in all
respects, except that the holders of Class B Common Stock elect two-thirds of
the Company's Board of Directors (as long as the number of shares of Class B
Common Stock outstanding equals or exceeds 400,000), while the holders of Class
A Common Stock elect one-third of the Company's Board of Directors. Each share
of Class B Common Stock automatically converts into one share of Class A Common
Stock upon transfer to a non-Class B common stockholder. At the same time, the
Board approved the authorization of 1,000,000 shares of preferred stock to be
issued from time to time, in such series and with such designations, rights and
preferences as the Board may subsequently determine. The stock splits and the
changes in authorized capital have been retroactively reflected for all periods
presented herein.
(B) Stock Option Plans - The Company maintains two stock options plans
pursuant to which an aggregate of approximately 1,284,000 shares of Common Stock
may be granted.
The 1993 Stock Option Plan was adopted by the Board of Directors in
December 1993 and was approved by the stockholders of the Company on July 28,
1994 (the "1993 Plan").
The 1993 Plan has 1,050,000 shares of Common Stock reserved for issuance
upon the exercise of options designated as either (i) incentive stock options
("ISOs") under the Internal Revenue Code of 1986, as amended (the "Code"), or
(ii) non-qualified options. ISOs may be granted under the Stock Option Plan to
employees and officers of the Company. Non-qualified options may be granted to
consultants, directors (whether or not they are employees), employees or
officers of the Company.
Stock option transactions during the years ended January 31, 1998, 1997 and
1996 for the 1993 Plan are summarized below:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Options outstanding - February 1, 1995 53,000 $4.88-$5.89 $ 5.43
Options granted 12,000 $9.12 - $10.04 $ 9.73
Options exercised (2,000) $4.88 $ 4.88
------------- -------------- -------------
Options outstanding - January 31, 1996 63,000 $4.88 - $10.04 $ 6.21
Options granted 256,000 $10.20 - $17.05 $ 14.94
Options exercised (5,000) $4.88 $ 4.88
Options canceled (6,000) $14.50 $ 14.50
------------- -------------- -------------
Options outstanding - January 31, 1997 308,000 $4.88 - $17.05 $ 13.23
Options granted 328,000 $17.00 - $24.20 $ 17.10
Options exercised (14,000) $4.88 - $14.50 $ 11.70
Options canceled (11,000) $14.50 - $17.00 $ 15.05
------------ --------------- ------------
Options outstanding - January 31, 1998 611,000 $4.88 - $24.20 $ 13.74
============ =============== ============
Options exercisable at January 31, 1998 134,000 $4.88 - $17.05 $ 16.35
============ =============== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Weighted Avg. Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (yrs) Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$ 4.88 - $ 5.89 43,000 1.5 $ 5.56 43,000 $ 5.56
$ 9.12 - $10.20 12,000 2.5 $ 9.73 8,000 $ 9.73
$14.50 - $17.05 551,000 3.5 $ 16.12 83,000 $22.59
$24.20 5,000 4.5 $ 24.20 - -
---------- ----------
611,000 134,000
========== ==========
</TABLE>
All options granted for the fiscal year ended January 31, 1995 are
exercisable one year from the date of grant and expire five years from the date
of grant. All options issued subsequent to the fiscal year ended January 31,
1995 vest in three annual installments of 33-1/3 percent each on the first,
second, and third anniversary of the date of grant. There are approximately
361,000 shares available for future grants under the 1993 Plan. Approximately
17,000 options have been canceled under this plan.
The 1994 Non-Employee Director Stock Option Plan (the "Directors Plan") was
adopted by the Board of Directors in September 1994, and was approved by the
Stockholders of the Company in June 1995. The Directors Plan has approximately
234,000 shares of Common Stock reserved for issuance. Pursuant to the terms of
the Directors Plan, each independent unaffiliated Director shall automatically
be granted, subject to availability, without any further action by the Board of
Directors or the Stock Option Committee: (i) a non-qualified option to purchase
7,500 shares of Common Stock upon their election to the Board of Directors; and
(ii) a non-qualified option to purchase 2,500 shares of Common Stock on the date
of each annual meeting of stockholders following their election to the Board of
Directors. The exercise price under each option is the fair market value of the
Company's Common Stock on the date of grant. Each option has a five-year term
and vests in three annual installments of 33-1/3 percent each on the first,
second, and third anniversary of the date of grant. Options granted under the
Directors Plan are generally not transferable during an optionee's lifetime but
are transferable at death by will or by the laws of descent and distribution. In
the event an optionee ceases to be a member of the Board of Directors (other
than by reason of death or disability), then the non-vested portion of the
option immediately terminates and becomes void and any vested but unexercised
portion of the option may be exercised for a period of 180 days from the date
the optionee ceased to be a member of the Board of Directors. In the event of
death or permanent disability of an optionee, all options accelerate and become
immediately exercisable until the scheduled expiration date of the option.
Stock option transactions during the years ended January 31, 1998, 1997 and
1996 for the Directors Plan are summarized below:
<TABLE>
<CAPTION>
Weighted
Shares Price Range Average Price
<S> <C> <C> <C>
Options outstanding - February 1, 1995 35,000 $5.36 $ 5.36
Options granted 12,000 $ 9.12 $ 9.12
--------- ----------------- ---------
Options outstanding - January 31, 1996 47,000 $5.36 - $9.12 $ 6.30
Options granted 9,000 $15.50 $15.50
--------- ----------------- ----------
Options outstanding - January 31, 1997 56,000 $5.36 - $15.50 $ 7.83
Options granted 8,000 $22.00 $22.00
Options exercised (17,000) $5.36 $ 5.36
--------- ------------------ ---------
Options outstanding - January 31, 1998 47,000 $5.36 - $22.00 $ 11.09
========= ================== =========
Options exercisable at January 31, 1998 29,000 $5.36 - $15.50 $ 5.60
======== ================== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Avg. Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (yrs) Price Exercisable Price
<S> <C> <C> <C> <C> <C> <C>
$ 5.36 18,000 1.5 $ 5.36 18,000 $5.36
$ 9.12 12,000 2.5 $ 9.12 8,000 $9.12
$ 15.50 9,000 3.5 $ 15.50 3,000 $ 15.50
$ 22.00 8,000 4.5 $ 22.00 - -
----------- ----------
47,000 29,000
=========== ==========
</TABLE>
There are 182,000 shares available for future grants under the Directors
Plan. No options have been cancelled under this plan.
In connection with the acquisitions of ECI, Sedeco, SMX, and Pulse,
approximately 453,000 non-plan options have been issued as follows:
<TABLE>
<CAPTION>
Weighted
Shares Price Range Average Price
<S> <C> <C> <C>
Options granted - Pulse acquisition 36,000 $ 4.88 $ 4.88
--------- ---------- ---------
Options outstanding -
January 31, 1995 and 1996 36,000 $ 4.88 $ 4.88
Options granted - SMX and Sedeco
acquisitions 391,000 $16.20 - $18.25 $16.52
---------- --------------- ---------
Options outstanding -
January 31, 1997 427,000 $ 4.88 - $18.25 $15.54
Options granted - ECI acquisition 26,000 $18.25 $18.25
---------- ----------------- --------
Options outstanding - January 31, 1998 453,000 $ 4.88 - $18.25 $15.69
========== ================= ========
Options exercisable at January 31, 1998 134,000 $ 4.88 - $18.25 $13.39
========== ================= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Avg. Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (yrs) Price Exercisable Price
<S> <C> <C> <C> <C> <C> <C>
$ 4.88 36,000 1.5 $ 4.88 36,000 $4.88
$ 16.20 331,000 3.5 $16.20 83,000 $16.20
$ 18.25 86,000 3.6 $18.25 15,000 $18.25
----------- ----------
453,000 134,000
=========== ==========
</TABLE>
The options issued in connection with the Pulse acquisition are exercisable
and have a life of five years. The options issued in connection with the SMX,
Sedeco and ECI acquisitions vest in four annual installments of 25 percent each
in the first, second, third, and fourth anniversary of the date of grant and
expire five years from the date of grant. No options have been exercised or
canceled.
In addition, pursuant to the IPO, the underwriters received warrants to
purchase from the Company 205,080 shares of Class A Common Stock. The warrants
are exercisable for a period of four years commencing one year after the date of
the IPO at exercise prices ranging from 107 percent to 128 percent of the
initial public offering price. During the fiscal year ended January 31, 1998 and
1997, 2,700 and 198,300 warrants, respectively, were exercised at a price of
$5.56 per share. Approximately 4,080 are exercisable at a price of $5.90 per
share.
(C) Additional Stock Plan Information - As discussed in Note 2, the Company
continues to account for its stock-based awards using the intrinsic value method
in accordance with APB 25 and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial statements for
employee stock arrangements.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", ("SFAS 123") requires the disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method as
of the beginning of fiscal 1996. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions for 1998, 1997 and 1996: expected life,
five years following vesting; stock volatility, 54 percent in 1998 and 28
percent in 1997 and 1996, risk free interest rate of 5.5 percent in 1998 and 6.0
percent in 1997 and 1996 and no dividends during the expected term. The
Company's calculations are based on a multiple option valuation approach and
forfeitures are recognized as they occur.
If compensation cost for the Company's stock options had been determined
consistent with Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation to Employees ("SFAS No. 123"), the Company's net
income and earnings per share would have been the pro forma amounts indicated
above:
<PAGE>
<TABLE>
<CAPTION>
Year Ended January 31,
1998 1997 1996
<S> <C> <C> <C>
Net income:
As reported $ 8,196,000 $ 8,768,000 $ 6,565,000
Pro forma $ 7,597,000 $ 8,494,000 $ 6,565,000
Basic earnings per share:
As reported $ 0.92 $ 1.13 $ 1.10
Pro forma $ 0.85 $ 1.09 $ 1.10
Diluted earnings per share:
As reported $ 0.89 $ 1.10 $ 1.09
Pro forma $ 0.82 $ 1.07 $ 1.09
</TABLE>
However, the impact of outstanding non-vested stock options granted prior
to February 1, 1995 has been excluded from the pro forma calculation;
accordingly, the 1998, 1997 and 1996 pro forma adjustments are not indicative of
future period pro forma adjustments, when the calculation will apply to all
applicable stock options.
(D) Stock Dividend - On June 25, 1996 and June 23, 1995, the Company
declared five-for-four stock splits effected in the form of 25 percent stock
dividends which were paid on July 22, 1996 and July 24, 1995 to stockholders of
record on July 8, 1996 and July 10, 1995, respectively. The par value of the
shares remains unchanged at $.01 per share.
Unless otherwise noted, all numbers of shares, per share amounts and per
share prices in the consolidated financial statements and notes thereto have
been adjusted to reflect the stock dividends and splits.
(E) Profit Sharing Plan - The Company has a voluntary contribution profit
sharing plan (the "Plan"), which complies with Section 401(k) of the Internal
Revenue Code. Employees who have attained the age of 21 and have one year of
continuous service are eligible to participate in the Plan. The Plan permits
employees to make a voluntary contribution of pre-tax dollars to a pension
trust, with a matching contribution by the Company up to a maximum of two
percent of an eligible employee's annual compensation. The Company contributed
approximately $148,000, $78,000 and $59,000, for the years ended January 31,
1998, 1997 and 1996, respectively. The Company funds all amounts when due.
11. COMMITMENTS AND CONTINGENCIES
(A) Minimum Operating Lease Commitments - The Company has operating leases
for various automobiles and sales and service locations. The annual aggregate
rental commitments required under these leases, except for those providing for
month-to-month tenancy, are as follows:
Fiscal Year Ending January 31,
1999 $ 1,432,000
2000 1,327,000
2001 980,000
2002 828,000
2003 400,000
Thereafter 1,276,000
---------------
Total $ 6,243,000
===============
<PAGE>
Rent expense was approximately $1,292,000, $617,000 and $264,000 for the
years ended January 31, 1998, 1997 and 1996, respectively.
(B) Foreign Currency Contracts - In connection with the purchase of
equipment from its major supplier, the Company purchases foreign currency
forward contracts (which usually approximate six months in duration) to hedge
the risk associated with fluctuations in foreign currency exchange rates
relating to all trade acceptances payable and certain firm purchase commitments.
The costs of such contracts are included in the cost of the related machinery in
inventory.
At January 31, 1998, the Company held foreign currency contracts for the
purchase of Japanese yen amounting to approximately $33,000,000.
(C) Litigation - The Company is a defendant in various litigation matters,
all arising in the normal course of business. Based upon discussion with Company
counsel, management does not expect that these matters will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
(D) Employment Agreements - The Company has five-year employment agreements
with the Company's senior executives. These employment agreements provided that
each executive receive minimum annual compensation of $350,000 (adjusted
annually based upon the CPI) for the remainder of the term of the employment
agreement. In addition, each employment agreement provides for an annual bonus
equal to five percent of pre-tax profits of the Company. The Company also
entered into a five-year employment agreement with another officer of the
Company, who will receive annual compensation of $100,000 (adjusted annually
based upon the CPI) with a bonus equal to two percent of pre-tax profits of the
Company. The Company also has five-year employment agreements with the former
shareholders of Pulse, providing each with an annual base salary of $300,000 and
an annual bonus based on annual pre-tax profits of Pulse.
(E) Dependency Upon Major Supplier - During the fiscal years ended January
31, 1998, 1997 and 1996, the Company made purchases of approximately
$90,000,000, $69,000,000 and $47,000,000, respectively, from Tajima Industries
Ltd. ("Tajima"), the manufacturer of the embroidery machines the Company sells.
This amounted to approximately 80, 83 and 86 percent of the Company's total
purchases for the years ended January 31, 1998, 1997 and 1996, respectively.
The Company has two separate distributorship agreements with Tajima which,
collectively, provide the Company the exclusive right to distribute Tajima's
complete line of embroidery machines in 39 states. The main agreement (the "East
Coast / Midwest Agreement") which covers 33 states, including the original
Hirsch territory and the additional states acquired in the SMX territory, became
effective on February 21, 1991 and has a term of 20 years. The East Coast /
Midwest Agreement is terminable by Tajima and/or the Company on not less than
two years' prior notice except that Tajima cannot terminate the East Coast /
Midwest Agreement prior to February 20, 1998. The second agreement (the
"Southwest Agreement") covers the six states acquired in the Sedeco territory,
became effective on February 21, 1997 and has a term of five years.
<PAGE>
In the states of Arizona, California, Hawaii, Idaho, Montana, Nevada,
Oregon, Utah, Washington and Wyoming, the Company is the exclusive distributor
of Tajima's single, two, four, and six-head machines as well as chenille or
chenille/standard embroidery machines with less than four heads or two stations,
respectively (the "West Coast Agreement"). The West Coast Agreement has a term
of five years and contains a renewal provision which permits successive
five-year renewals upon mutual agreement of the parties. Tajima may terminate
the West Coast Agreement or its exclusivity on 30 days written notice or upon a
material change in the current Class B shareholders in which case, the West
Coast Agreement can be terminated earlier.
The minimum quantity of embroidery machines to be sold for 1997 was met.
The minimum quantity to be sold in 1998 is approximately 1,700 machines in
various designations as defined.
There are several manufacturers of multihead embroidery equipment. Although
management of the Company believes that the likelihood of the loss of Tajima as
a supply source is remote, if Tajima terminated the current distributor
relationship with the Company, management believes that it could establish a
similar arrangement with another manufacturer of embroidery equipment.
12. RECONCILIATION OF BASIC EARNINGS PER SHARE
In accordance with SFAS No. 128, basic earnings per common share are
computed based on the weighted-average number of common shares outstanding
during each period. Diluted earnings per common share are computed based on the
weighted-average number of common shares, after giving effect to diluted common
stock equivalents outstanding during each period. The following table provides a
reconciliation between basic and diluted earnings per share:
<TABLE>
<CAPTION>
For the Year Ended
January 31, 1998 January 31, 1997 January 31, 1996
(In Thousands, Except Per Share Amounts)
Income Shares Per Share Income Shares Per Share Income Shares Per Share
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to common
stockholders $ 8,196 8,953 0.92 $ 8,768 7,782 1.13 $ 6,565 5,960 1.10
Effect of dilutive
securities:
Options/warrants - 283 (0.03) - 185 (0.03) - 42 (0.01)
-------------------------- ----------------------------- -----------------------------
Diluted EPS:
Income available to
common stockholders
plus assumed exercises $ 8,196 9,236 0.89 $ 8,768 7,9$7 1.10 $ 6,565 6,002 1.09
========== ======= ===== ======== ======= ==== ====== ===== ====
</TABLE>
Correction to Employment Agreement, by and between Pulse Microsystems,
Ltd., an Ontario corporation (the "Corporation"), and Tas Tsonis (the
"Executive").
WHEREAS, Pulse and the Executive entered into an employment agreement dated
as of February 25, 1994 (the "Employment Agreement"); and
WHEREAS, the parties have discovered an error in Section 2(b) of the
Employment Agreement concerning the amount of the bonus to be paid during the
First Renewal Term (as defined in the Employment Agreement); and
WHEREAS, the parties desire to correct this error.
NOW, THEREFORE, it is hereby agreed:
1. Section 2(b) of the Employment Agreement, as it now exists, is stricken
and instead is replaced by corrected Section 2(b) reading in its entirety as
follows:
First Renewal Option. Subject to the provisions of Section 2(d) hereof,
upon notice given in the manner provided herein not less than one hundred twenty
(120) days prior to the expiration of the Initial Term, the Executive may extend
the Initial Term for an additional three (3) year period (the "First Renewal
Term") upon the same terms and conditions (except the right to renew for three
(3) years) as set forth herein except that the bonus provided for in Section
5(b) of this Agreement shall be 12.5% of the Company's annual pre-tax profits
(as defined in Paragraph 5(b)(iii) hereof) during the First Renewal Term. The
First Renewal Term shall terminate as of the close of business on the eighth
(8th) anniversary of the Effective Date.
2. Except as herein corrected, the Employment Agreement remains in full
force and effect.
Dated: November 4, 1997
PULSE MICROSYSTEMS, LTD.
By: /s/Brian Goldberg
-------------------------------
Brian Goldberg, Vice President
/s/Tas Tsonis
-------------------------------
Tas Tsonis
Consented to:
HIRSCH INTERNATIONAL CORP.
By: /s/Henry Arnberg
----------------------------
Henry Arnberg, President
Correction to Employment Agreement, by and between Pulse Microsystems Ltd.,
an Ontario corporation (the "Corporation"), and Brian Goldberg (the
"Executive").
WHEREAS, Pulse and the Executive entered into an employment agreement dated
as of February 25, 1994 (the "Employment Agreement"); and
WHEREAS, the parties have discovered an error in Section 2(b) of the
Employment Agreement concerning the amount of the bonus to be paid during the
First Renewal Term (as defined in the Employment Agreement); and
WHEREAS, the parties desire to correct this error.
NOW, THEREFORE, it is hereby agreed:
1. Section 2(b) of the Employment Agreement, as it now exists, is stricken
and instead is replaced by corrected Section 2(b) reading in its entirety as
follows:
First Renewal Option. Subject to the provisions of Section 2(d) hereof,
upon notice given in manner provided herein not less than one hundred twenty
(120) days prior to the expiration of the Initial Term, the Executive may extend
the Initial Term for an additional three (3) year period (the "First Renewal
Term") upon the same terms and conditions (except the right to renew for three
(3) years) as set forth herein except that the bonus provided for in Section
5(b) of this Agreement shall be 12.5% of the Company's annual pre-tax profits
(as defined in Paragraph 5(b)(iii) hereof) during the First Renewal Term. The
First Renewal Term shall terminate as of the close of business on the eighth
(8th) anniversary of the Effective Date.
2. Except as herein corrected, the Employment Agreement remains in full
force and effect.
Dated: November 4, 1997
PULSE MICROSYSTEMS LTD.
By: /s/Tas Tsonis
-----------------------------
Tas Tsonis, President
/s/Brian Goldberg
-----------------------------
BRIAN GOLDBERG
Consented to:
HIRSCH INTERNATIONAL CORP.
By:/s/Henry Arnberg
------------------------
Henry Arnberg, President
STOCK TRANSFER AND SHAREHOLDER AGREEMENT
Agreement (AAgreement@) made as of this 20th day of December, 1997, by and
between Tokai Industrial Sewing Machine Company, Ltd. (ATokai@), a Japan
corporation having offices at No. 1800 Ushyama-Cho, Kasugai 486, Aichi Pref.,
Japan, and Hirsch International Corp. (AHirsch@ and, together with Tokai,
collectively referred to herein as the AShareholders@), a Delaware corporation
having offices at 200 Wireless Boulevard, Hauppauge, New York 11788.
W I T N E S S E T H:
WHEREAS, Hirsch is the record and beneficial owner of one hundred (100)
shares of the common stock, without par value, of Tajima USA, Inc. (the
AShares@), a corporation organized under the laws of the State of Delaware and
authorized to do business in the State of New York (ACorporation@); and
WHEREAS, Tokai desires to purchase from Hirsch and Hirsch desires to sell
to Tokai forty-five (45) of the Shares owned by Hirsch on the terms and subject
to the conditions as set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, receipt of which is hereby acknowledged, the parties hereto
agree as follows:
1. Purchase of Shares. Hirsch hereby sells, assigns and transfers to Tokai
and Tokai hereby purchases from Hirsch forty-five of the Shares owned by Hirsch
for and in consideration of Nine Hundred Thousand ($900,000.00) Dollars, payable
in legal tender of the United States, remitted by wire transfer.
2. Transfer of Shares. Hirsch shall deliver its certificate evidencing
ownership of one hundred (100) shares to the Corporation and shall cause the
Corporation to issue new certificates evidencing ownership by Hirsch of
fifty-five (55) Shares and Tokai of forty-five (45) Shares.
3. Board of Directors. So long as the parties are shareholders, each agrees
to vote its shares to elect as members of the Board four (4) persons designated
by Hirsch and one (1) person designated by Tokai. Each party reserves the right,
from time to time, to designate different persons to serve as members of the
Board, provided the proportionate representation of each of the parties is not
modified. Appropriate corporate resolutions shall, from time to time, be
executed by the parties to effect their intent.
4. Restriction on Transfer of Shares.
(a) The Shareholders shall not pledge or otherwise encumber their Shares,
nor will they make any disposition of such Shares except with the prior written
consent of the other Shareholders or as otherwise permitted by this Agreement.
Any purported pledge, encumbrance or disposition in violation of the terms of
this Agreement shall be void from the inception.
(b) The Corporation's share certificates representing the Shares owned by
each of the Shareholders shall have inscribed thereon the following endorsement:
"THE SALE, TRANSFER, PLEDGE OR OTHER ENCUMBRANCE OF SHARES REPRESENTED BY
THIS CERTIFICATE IS SUBJECT TO THE TERMS OF A STOCK TRANSFER AND SHAREHOLDERS
AGREEMENT DATED AS OF DECEMBER 20, 1997, A COPY OF WHICH IS ON FILE AT THE
OFFICE OF THE CORPORATION."
<PAGE>
(c) Notwithstanding the foregoing, if either party wishes to sell its
Shares, notice shall be given and the remaining party shall have the right, but
not the obligation, to purchase the Shares for an amount equal to the book value
of the selling Shareholder=s interest or the fair market value of his interest,
whichever is greater. In the event the remaining party elects not to purchase
the Shares when offered, then the party wishing to sell shall be free to offer
its Shares to a third party for a period of six months, provided, however, the
remaining Shareholder shall have the option to purchase the Shares on the same
terms and conditions as a third party is willing to purchase the Shares by
giving notice within ten (10) business days after receipt of confirmation that a
third party exists and intends to purchase the shares.
5. Sale of Business or Public Offering. Notwithstanding any provision of
law or bylaws of the Corporation to the contrary, the parties agree that, except
with their unanimous consent, there shall be no sale of the business of the
Corporation, all or substantially all of its assets or a public offering of its
securities.
6. Representations and Warranties.
(a) Hirsch represents and warrants to Tokai that (i) it is the record and
beneficial owner of the Shares, (ii) it has full right, power, authority and
capacity to sell, transfer, and deliver such Shares in accordance with the terms
of this Agreement, (iii) upon delivery thereof as herein contemplated Tokai will
receive good and marketable title to the Shares, and (iv) the Shares are free
and clear of any claims, liens, pledges and encumbrances of any kind.
(b) Tokai represents and warrants that (i) its purchase of the Shares of
the Corporation has been duly authorized, (ii) the execution and delivery of
this Agreement, including the terms and conditions contained herein, have been
duly authorized, (iii) each person from time to time designated to serve as a
member of the Board is and shall be duly authorized to act in the best interests
of the Corporation and (iv) the execution and delivery of this Agreement does
not and shall not violate any applicable laws, rules, governmental regulations,
agreements or bylaws to which Tokai is a party.
7. Indemnification. Hirsch and Tokai each hereby agrees to indemnify and
hold the other harmless from and against any and all claims, damages, liability,
cost and expense (including reasonable attorney=s fees) arising out of the
breach of any representation, warranty or covenant of the other party contained
herein or made pursuant hereto.
8. Notices. Any and all notices or other communications required or
permitted to be given under any of the provision of this Agreement shall be in
writing and shall be deemed to have been duly given when personally delivered,
or when mailed by certified or registered mail, return receipt requested,
addressed to the parties at the addresses first written above (or at such other
address as such party may specify by notice to the other party given as
aforesaid).
<PAGE>
9. Governing Law. This Agreement and all amendments hereto shall be
governed by and construed and enforced in accordance with the laws of the State
of New York applicable to contracts made and to be performed therein and to the
Delaware Corporation Law to the extent of matters affecting the governance of
the Corporation.
10. Arbitration. Any dispute or controversy arising out of with or relating
to this Agreement, any document or instrument delivered pursuant to or in
connection with this Agreement, or any breach of this Agreement or any such
document or instrument shall be resolved by arbitration in accordance with the
rules then prevailing of the International Chamber of Commerce (AICC Rules@).
Such arbitration shall take place in Nassau or Suffolk County before a single
arbitrator appointed in accordance with the ICC Rules. Any decision rendered by
the arbitrator shall be final and may be entered as a judgment in the federal or
state courts of the State of New York or any other jurisdiction where
enforcement thereof may be required. Notwithstanding any ICC Rules to the
contrary, the Shareholders agree to exchange any and all documentary materials
relevant to the dispute not less than twenty (20) days prior to the time when
the arbitrator has scheduled hearings for the purpose of resolving the dispute.
The cost associated with the arbitration proceedings, including reasonable
attorneys fees incurred therein, shall be allocated by the arbitrator to the
prevailing party or as may otherwise be deemed appropriate.
11. Exclusive Jurisdiction. Each of the parties hereby submits to and
agrees to the exclusive jurisdiction for all purposes of the Courts of the
United States of America and, specifically, the appropriate federal and state
courts located within the County of Nassau, State of New York, to the extent any
judicial order is required to enforce any rights of the parties.
12. Miscellaneous.
(a) Independent Counsel. The parties hereby acknowledge that each of them
has received the advice of independent counsel in connection with the
transactions contemplated herein.
(b) No Adverse Construction. The rule that a contract is to be construed
against the party drafting the contract is hereby waived, and shall have no
applicability in construing this Agreement or any provision hereof.
(c) Binding Effect. This Agreement shall inure to the benefit of and be
binding on the parties hereto and their respective successors and assigns, heirs
and personal representatives.
(d) Entire Agreement. This Agreement constitutes the entire agreement of
the parties with respect to the subject matter hereof and supersedes all prior
agreements, arrangements or understandings related to the subject matter hereof.
This Agreement may not be modified, amended or terminated except by a written
agreement specifically referring to this Agreement signed by all parties hereto.
<PAGE>
(e) No Waiver. No waiver of any breach or default hereunder shall be
considered valid unless in writing and signed by the party giving such waiver,
and no waiver shall be deemed a waiver of any subsequent breach or default of
the same or similar nature.
(f) Headings. The section headings contained herein are for the purpose of
convenience only and are not intended to define or limit the contents of said
sections.
(g) Severability. If any provisions of this Agreement is determined to be
legally invalid, inoperative or unenforceable, only that particular provision
shall be affected, and the determination shall have no effect whatsoever on any
other provision of this Agreement, and all other provisions shall remain in full
force and effect and fully enforceable.
(h) Further Assurances. Each party hereto shall cooperate, shall take such
further action and shall execute and deliver such further documents as may be
reasonably requested by the other party hereto in order to carry out the
provisions and purposes of this Agreement.
(i) Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall be deemed one original.
13. Translations. The parties acknowledge that this Agreement shall be
prepared and executed in English and Japanese. In the case of any conflict in
interpretation between the different versions of the documents, the parties
agree to be bound by the English translation for all purposes.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
Tokai Industrial Hirsch International Corp.
Sewing Machine Co., Ltd.
By: /s/Ikuo Tajima By: /s/Henry Arnberg
--------------------------- ------------------------
Ikuo Tajima, President Henry Arnberg, President
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Post Effective Amendment
No. 1 to Registration Statement No. 33-94914 on Form S-8, Registration No.
333-30237 on Form S-8 and Registration No. 333-22535 on Form S-3 of Hirsch
International Corp. and Subsidiaries of our report dated March 11, 1998,
appearing in this Annual Report on Form 10-K of Hirsch International Corp. and
Subsidiaries for the year ended January 31, 1998.
DELOITTE & TOUCHE LLP
Jericho, New York
April 29,1998
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