UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ________________.
Commission File No.: 0-23434
HIRSCH INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2230715
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
200 Wireless Boulevard, Hauppauge, New York 11788
(Address of principal executive offices)
Registrant's telephone number, including area code: (516) 436-7100
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of December 11, 1998
Class of Number of
Common Equity Shares
Class A Common Stock, 6,815,180
par value $.01
Class B Common Stock, 2,668,139
par value $.01
<PAGE>
HIRSCH INTERNATIONAL CORP. and SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
Part I. Financial Information
Item 1. Consolidated Financial Statements
<S> <C>
Consolidated Balance Sheets - October 31, 1998
and January 31, 1998 3-4
Consolidated Statements of Income for the Nine and
Three Months Ended October 31, 1998 and 1997 5
Consolidated Statements of Cash Flows for the Nine
Months Ended October 31, 1998 and 1997 6-7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-16
Part II. Other Information 17
Signatures 18
</TABLE>
2
<PAGE>
Part I - Financial Information
Item 1. Consolidated Financial Statements
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $2,531,000 $2,956,000
Accounts Receivable, Net 31,026,000 34,427,000
Net investment in sales-type leases,
current portion (Note 7) 2,168,000 2,180,000
Inventories, net (Note 6) 44,350,000 34,166,000
Prepaid taxes 396,000 -
Other current assets 2,898,000 3,284,000
---------- ----------
Total current assets 83,369,000 77,013,000
---------- ----------
NET INVESTMENT IN SALES-TYPE LEASES,
noncurrent portion (Note 7) 11,968,000 12,055,000
EXCESS OF COST OVER NET ASSETS ACQUIRED,
net of accumulated amortization of
approximately $2,517,000 and $1,581,000,
respectively (Note 4) 15,164,000 15,979,000
PURCHASED TECHNOLOGIES, net of accumulated
amortization of approximately $893,000
and $749,000, respectively 446,000 590,000
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 8,064,000 7,193,000
OTHER ASSETS 1,709,000 2,002,000
--------- ---------
TOTAL ASSETS $120,720,000 $114,832,000
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
1998 1998
----------- -----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade acceptances payable $9,103,000 $15,286,000
Accounts payable and accrued expenses 18,322,000 20,592,000
Current maturities of long-term debt (Note 8) 252,000 231,000
Income taxes payable - 735,000
----------- -----------
Total current liabilities 27,677,000 36,844,000
LONG-TERM DEBT, less current
maturities (Note 8) 15,202,000 1,421,000
----------- -----------
Total liabilities 42,879,000 38,265,000
----------- -----------
MINORITY INTEREST (Note 1) 1,261,000 944,000
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (Notes 2 and 3)
Preferred stock, $.01 par value; authorized:
1,000,000 shares; issued: none - -
Class A common stock, $.01 par value; authorized:
20,000,000 shares, outstanding: 6,815,000
and 6,811,000 shares, respectively 68,000 68,000
Class B common stock, $.01 par value; authorized:
3,000,000 shares, outstanding: 2,668,000 shares 27,000 27,000
Additional paid-in capital 41,397,000 41,377,000
Retained Earnings 35,916,000 34,151,000
---------- ----------
77,408,000 75,623,000
Less: Treasury stock, at cost; 90,000 shares
at October 31, 1998 828,000 -
---------- ----------
Total stockholders' equity 76,580,000 75,623,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $120,720,000 $114,832,000
========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
October 31, October 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES:
Net Sales $98,092,000 $115,392,000 $29,505,000 $37,266,000
Interest income related to sales-type leases 4,320,000 3,976,000 1,770,000 1,841,000
----------- ----------- ---------- ----------
Total revenue 102,412,000 119,368,000 31,275,000 39,107,000
----------- ----------- ---------- ----------
EXPENSES:
Cost of goods sold 64,788,000 75,240,000 19,598,000 24,308,000
Selling, general and administrative expenses 32,648,000 29,597,000 10,041,000 10,623,000
Interest expense 1,017,000 733,000 477,000 139,000
Other expense (income) 337,000 (8,000) 125,000 (5,000)
---------- ----------- ---------- ----------
Total expenses 98,790,000 105,562,000 30,241,000 35,065,000
---------- ----------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES AND MINORITY INTEREST IN NET
EARNINGS OF CONSOLIDATED SUBSIDIARY 3,622,000 13,806,000 1,034,000 4,042,000
PROVISION FOR INCOME TAXES 1,540,000 5,862,000 440,000 1,713,000
MINORITY INTEREST IN NET EARNINGS
OF CONSOLIDATED SUBSIDIARY (Note 1) 317,000 - 188,000 -
---------- ---------- --------- ----------
NET INCOME $1,765,000 $7,944,000 $406,000 $2,329,000
========== ========== ========= ==========
EARNINGS PER SHARE:
Basic $0.19 $0.90 $0.04 $0.25
Diluted $0.19 $0.88 $0.04 $0.24
========== ========== ========= ==========
WEIGHTED AVERAGE NUMBER OF SHARES
IN THE CALCULATION OF EARNINGS
PER SHARE (Note 2)
Basic 9,420,000 8,778,000 9,392,000 9,464,000
========== ========== ========= =========
Diluted 9,454,000 9,040,000 9,392,000 9,769,000
========== ========== ========= =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
October 31,
--------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $1,765,000 $7,944,000
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 2,771,000 2,165,000
Provision for reserves 960,000 100,000
Deferred income taxes (127,000) -
Minority interest 317,000 -
Changes in assets and liabilities:
Accounts receivable 2,989,000 (19,732,000)
Net investment in sales-type leases (341,000) (2,677,000)
Inventories (11,521,000) (8,687,000)
Prepaid taxes (396,000) -
Other assets 534,000 (555,000)
Trade acceptances payable (6,183,000) (692,000)
Accounts payable and accrued expenses (2,391,000) 7,177,000
Income taxes payable (735,000) (347,000)
------------ ------------
Net cash used in operating activities (12,358,000) (15,304,000)
------------ ------------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
October 31,
1998 1997
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,061,000) (1,427,000)
Acquisition of Equipment Connection, Inc.(Note 4) - (553,000)
Sales of short-term investments - 2,583,000
----------- ------------
Net cash (used in) provided by
investing activities (1,061,000) 603,000
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank financing 21,000,000 11,729,000
Repayments of long-term debt (7,198,000) (25,800,000)
Proceeds from public offering - 24,315,000
Purchase of treasury shares (828,000) -
Issuance of stock and exercise of stock
options and warrants 20,000 1,111,000
----------- -----------
Net cash provided by financing activities 12,994,000 11,355,000
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (425,000) (3,346,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,956,000 7,865,000
----------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $2,531,000 $4,519,000
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest Paid $1,019,000 $741,000
========== ==========
Income Taxes Paid $2,828,000 $6,264,000
========== ==========
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Nine and Three Months Ended October 31, 1998 and 1997
1. Organization and Basis of Presentation
The accompanying consolidated financial statements as of and for the nine
and three month periods ended October 31, 1998 and 1997 include the accounts of
Hirsch International Corp. ("Hirsch"), HAPL Leasing Co., Inc. ("HAPL"), Pulse
Microsystems Ltd. ("Pulse"), Hirsch Equipment Connection, Inc. ("HECI"), and
Tajima USA, Inc. ("TUI") (collectively, the "Company").
On January 6, 1998, Tokai Industrial Sewing Machine Company ("Tokai")
purchased a 45 percent interest in TUI for $900,000. For financial statement
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 Sheets and
the earnings from January 6, 1998 have been reported as minority interest in the
Company's Consolidated Statements of Income.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all the adjustments, consisting of normal accruals,
necessary to present fairly the results of operations for each of the nine and
three month periods ended October 31, 1998 and 1997, the financial position at
October 31, 1998 and cash flows for the nine month periods ended October 31,
1998 and 1997, respectively. Such adjustments consisted only of normal recurring
items. The consolidated financial statements and notes thereto should be read in
conjunction with the Company's Annual Report on Form 10-K for the fiscal year
ending January 31, 1998 as filed with the Securities and Exchange Commission.
The interim financial results are not necessarily indicative of the results
to be expected for the full year.
2. Earnings Per Share
The Company has adopted Financial Accounting Standards No. 128 "Earnings
Per Share" ("SFAS No. 128") which requires dual presentation of basic and
diluted earnings per share on the face of the income statement. Basic earnings
per share are based on the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share are based on the
weighted average number of shares of common stock and common stock equivalents
(options and warrants) outstanding during the period, computed in accordance
with the treasury stock method.
3. Secondary Public Offering
On June 6, 1997, the Company consummated a secondary public offering of
Class A common stock (the "Secondary Offering"). The Company sold 1,210,528
shares at $20.00 per share. Another 750,022 shares were sold by certain
stockholders of the Company ("Selling Stockholders'). On July 7, 1997, the
underwriters exercised their over-allotment option to purchase an additional
294,082 shares of Class A common stock, 122,592 shares of which were sold by the
Company and 171,490 shares sold by the selling stockholders. Net proceeds of
approximately $24,300,000 were received by the Company after expenses and
underwriting discount.
8
<PAGE>
4. Acquisition
Acquisition of Equipment Connection - On March 26, 1997, the Company
acquired all of the assets of Equipment Connection, Inc. ("ECI"). The
acquisition was accounted for as a purchase in accordance with Accounting
Principles Board Opinion No. 16, "Business Combinations" ("APB 16") and,
accordingly, the acquired assets and assumed liabilities have been recorded at
their estimated fair market values at the date of acquisition. The cost in
excess of fair value of ECI is being amortized over a 10-year period. The
purchase price was $805,000, paid in the form of $605,000 in cash and $200,000
in the company's Class A Common Stock. Concurrent with the acquisition, the
Company entered into five-year employment contracts with ECI's two former
principals.
5. Comprehensive Income
Effective February 1, 1998, the Company has adopted Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("SFAS No. 130") which
requires all items that are required to be recognized under accounting standards
as components of comprehensive income be reported on the financial statements.
Prior periods must also be restated, as required. The adoption of SFAS No. 130
has not impacted the Company's financial statements for the nine and three
months ended October 31, 1998 and 1997.
6. Inventories, Net
<TABLE>
<CAPTION>
October 31, 1998 January 31, 1998
<S> <C> <C>
Machines......................................... $38,038,000 $29,613,000
Parts............................................ 8,675,000 6,808,000
------------- -------------
46,713,000 36,421,000
Less: Reserve................................... (2,363,000) (2,255,000)
------------- -------------
Inventories, net.................................. $44,350,000 $34,166,000
============= =============
</TABLE>
9
<PAGE>
7. Net Investment in Sales-Type Leases
<TABLE>
<CAPTION>
October 31, 1998 January 31, 1998
<S> <C> <C>
Total minimum lease payments
receivable..................................... $11,578,000 $13,051,000
Estimated residual value of leased property
(unguaranteed)................................. 6,544,000 5,224,000
Reserve for estimated uncollectible lease
payments....................................... (1,028,000) (588,000)
Less: Unearned income............................ (2,958,000) (3,452,000)
-------------- -------------
Net investment................................... 14,136,000 14,235,000
Less: Current portion............................ (2,168,000) (2,180,000)
-------------- -------------
Non-current portion.............................. $11,968,000 $12,055,000
============== =============
</TABLE>
8. Long-term Debt
<TABLE>
<CAPTION>
October 31, 1998 January 31, 1998
<S> <C> <C>
Revolving credit facility (A)................... $14,000,000 $ -
Mortgage (B).................................... 1,377,000 1,549,000
Other........................................... 77,000 103,000
------------- -------------
Total........................................... 15,454,000 1,652,000
Less: Current maturities........................ (252,000) (231,000)
------------- --------------
Long-term maturities $15,202,000 $1,421,000
============= ===============
</TABLE>
10
<PAGE>
(A) In September 1997 the Company amended its existing Revolving Credit
Facility to provide for a $60,000,000 Revolving Credit Facility for Hirsch and a
$10,000,000 Revolving Credit Facility for HAPL (the "Facility"). The Facility is
for working capital loans, letters of credit, and deferred payment letters of
credit and bear interest as defined in the Facility. The terms of the Facility,
among other things, restrict additional borrowings by the Company and require
the Company to maintain certain minimum tangible net worth, quick asset ratio
and fixed charge coverage levels, as defined. The Facility also provides a
$20,000,000 sub-limit to finance acquisitions (as defined therein). In addition
to the working capital borrowings illustrated above, this Facility has been used
for letters of credit and deferred payment letters of credit aggregating
approximately $9,103,000 at October 31, 1998.
(B) On October 27, 1994, Hirsch entered into a ten year, $2,295,000
mortgage agreement with a bank (the "Mortgage") for its new corporate
headquarters. The Mortgage bears interest at a fixed rate of 8.8 percent and is
payable in equal monthly principal installments of approximately $19,000. The
terms of the Mortgage, among other things, restrict additional borrowings by the
Company, and require the Company to maintain certain debt service coverage ratio
levels, as defined in the Mortgage. The obligation under the Mortgage is secured
by a lien on the premises and the related improvements thereon.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. When used herein, the words "anticipate",
"believe", "estimate" and "expect" and similar expressions as they relate to the
Company or its management are intended to identify such forward-looking
statements. The Company's actual results, performance or achievements could
differ materially from the results expressed in or implied by these
forward-looking statements. Factors that could cause or contribute to such
differences should be read in conjunction with, and is qualified in its entirety
by, the Company's Consolidated Financial Statements, including the Notes
thereto. Historical results are not necessarily indicative of trends in
operating results for any future period. As used herein, "fiscal year" and
"fiscal" refers to the applicable fiscal year ending January 31 of the
applicable calendar year.
Nine and Three months ended October 31, 1998 as compared to the Nine and
Three months ended October 31, 1997
Net Sales. Net sales for the nine and three months ended October 31, 1998
were $98,092,000 and $29,505,000, a decrease of $17,300,000 and $7,761,000, or
15.0% and 20.8%, compared to $115,392,000 and $37,266,000 for the nine and three
months ended October 31, 1997. The Company believes that the reduction in the
sales level for the nine and three months ended October 31, 1998 is attributable
to a softening of demand for new large (six-head "DC" models through thirty-head
models) machines. In addition, there was a significant reduction in sales
dollars during the second quarter of fiscal 1999 as a result of the strong
dollar/yen exchange rate.
The sale of new embroidery machinery represented approximately $74,609,000,
or 76.1% and $21,511,000, or 72.9%, and $96,231,000, or 83.4% and $32,731,000,
or 87.8%, of net sales for the nine and three months ended October 31, 1998 and
1997, respectively. Small embroidery machines (one through six-head "FX" models)
and large embroidery machines (six-head "DC" models through thirty-head models)
represented approximately $36,804,000 and $37,805,000 and $11,947,000 and
$9,564,000, respectively of total embroidery machine sales during the nine and
three months ended October 31, 1998 as compared to approximately $39,266,000 and
$56,965,000, and $13,728,000 and $19,003,000, respectively for the nine and
three months ended October 31, 1997, respectively.
Revenue from the sale of the Company's computer hardware and software, used
machines, parts, service, application software and embroidery supplies for the
nine and three months ended October 31, 1998 aggregated approximately
$23,483,000 and $7,994,000, as compared to $19,161,000 and $4,535,000 for the
nine and three months ended October 31, 1997.
Interest income related to sales-type leases. HAPL's interest income
increased 8.7% and decreased 3.9% to $4,320,000 and $1,770,000 for the nine and
three months ended October 31, 1998 from $3,976,000 and $1,841,000 for the
comparable periods of the prior year. This nine month increase is a result of
the continued expansion of HAPL's operations. Their diversified leasing programs
have resulted in a 31.4% and 55.5% increase in the percentage of equipment deals
leased to 45.2% and 41.2% of equipment sales for the nine and three month period
ended October 31, 1998 from 34.4% and 26.5% of equipment sales for the
comparable period of the prior year. This is primarily attributable to HAPL'S
increasing use of a limited liability recourse agreement consummated with third
party funding source in the third quarter of fiscal 1998. This limited liability
recourse agreement provides for more favorable terms than non-recourse
agreements.
12
<PAGE>
Cost of Goods Sold. For the nine and three months ended October 31, 1998,
cost of goods sold decreased $10,452,000 and $4,710,000, or 13.9% and 19.4%, to
$64,788,000 and $19,598,000 from $75,240,000 and $24,308,000 for the nine and
three months ended October 31, 1997. Historically, the fluctuation of the dollar
against the yen has had a limited effect on new Tajima equipment gross margins
since currency fluctuations are generally reflected in pricing adjustments in
order to maintain consistent gross margins on machine revenues.
The Company's gross margin for the nine months ended October 31, 1998 has
remained consistent as compared to the nine months ended October 31, 1997. The
small decrease in the Company's gross margin for the three months ended October
31, 1998 to 37.3% as compared to 37.8% for the three months ended October 31,
1997 is primarily attributable to an increase in sales of used embroidery
machines, which typically yields lower gross margins than those obtained in the
sale of new embroidery machines.
Selling, General and Administrative ("SG&A") Expenses. For the nine months
ended October 31, 1998 SG&A expenses increased $3,051,000, or 10.3%, to
$32,648,000 from $29,597,000 for the nine months ended October 31, 1997. For the
three months ended October 31, 1998 SG&A expenses decreased $582,000, or 5.5%,
to $10,041,000 from $10,623,000 for the three months ended October 31, 1997.
SG&A expenses increased as a percentage of revenues to 31.9% and 32.1% for the
nine and three months ended October 31, 1998 from 24.8% and 27.2% for the nine
and three months ended October 31, 1997. The increase in SG&A as a percentage of
revenues for the nine and three months ended October 31, 1998 as compared to the
nine and three months October 31,1997 is attributable to the Company's
investment in its infrastructure to support anticipated sales levels. Based upon
the decrease in actual results, the Company has developed and implemented a
cost-containment plan. The purpose of the plan is to reduce costs through the
consolidation of our support and back office infrastructure and reduction of our
overhead. This will bring the Company's expenses more in line with revised sales
expectations. The decrease in SG&A for the three months ended October 31, 1998
as compared to the three months ended October 31, 1997 is reflective of the
initiation of this cost-containment plan.
Interest Expense. Interest expense for the nine and three months ended
October 31, 1998 increased $284,000 and $338,000, or 38.7% and 243.2%, to
$1,017,000 and $477,000 from $733,000 and $139,000 for the nine and three months
ended October 31, 1997. This increase in interest expense is the result of
working capital borrowings outstanding against the Company's Revolving Credit
Facility during the nine and three months ended October 31, 1998.
Provision for income taxes. The provision for income taxes reflected an
effective tax rate of approximately 42.5% and 42.6% for the nine and three
months ended October 31, 1998 as compared to 42.5% and 42.4% for the nine and
three months ended October 31, 1997. Differences from the federal statutory rate
consisted primarily of provisions for state income taxes net of Federal tax
benefit. The principal components of the deferred income tax assets result from
allowances and accruals which are not currently deductible for tax purposes and
differences in amortization periods between book and tax bases. The Company has
not established any valuation allowances against these deferred tax assets as
management believes it is more likely than not that the Company will realize
these assets in the future based upon the historical profitable operations of
the Company.
Net Income. Net Income for the nine and three months ended October 31, 1998
decreased $6,179,000 and $1,923,000, or 77.8% and 82.6%, to $1,765,000 and
$406,000 from $7,944,000 and $2,329,000 for the nine and three months ended
October 31, 1997. These decreases are attributable to the decrease in net sales
for the nine and three months ended October 31, 1998 and the increase in SG&A
expenses for the nine months ended October 31, 1998.
13
<PAGE>
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $55,692,000 at October 31, 1998,
increasing $15,523,000, or 38.6%, from $40,169,000, at January 31, 1998. The
Company has financed its operations principally through long-term financing of
certain capital expenditures, the proceeds from Secondary Offerings completed in
June 1997 (See Note 3 of Notes to Consolidated Financial Statements) and working
capital borrowings under its Revolving Line of Credit Agreement. The acquisition
of ECI was financed through borrowings against the Company's Revolving Credit
Facility (See Note 8 of Notes to Consolidated Financial Statements) although
this borrowing was repaid in June 1997 with the proceeds of the June 1997
Secondary Offering.
During the nine and three months ended October 31, 1998, the Company's cash
and cash equivalents decreased by $425,000 to $2,531,000. Net cash of
$12,358,000 was used in the Company's operating activities. Cash used to
increase inventory, net investment in sales-type leases and prepaid taxes,
aggregating approximately $12,258,000 and decreases in trade acceptances
payable, accounts payable and accrued expenses and income taxes payable of
approximately $9,309,000 was offset by cash provided by decreases in the balance
of accounts receivable and other assets aggregating approximately $3,523,000.
These changes resulted from expansion of the Company's territories and lines of
business during fiscal year 1998 and the nine and three months ended October 31,
1998 and the increase in inventory resulting from the reduced sales levels.
Cash generated from operations was partially used for the purchase of
approximately 90,000 shares of the Company's stock in the open market during the
nine months ended October 31, 1998, at an average cost of approximately $9.20
per share.
The Company purchases foreign currency futures contracts to hedge specific
purchase commitments. Substantially all foreign currency purchases commitments
are matched with specific foreign currency futures contracts. Consequently, the
company believes that no material foreign currency exchange risk exists relating
to outstanding trade acceptances payable. The cost of such contracts are
included in the cost of inventory.
Revolving Credit Facility and Borrowings
In September 1997 the Company's Revolving Credit Facility (the "Facility")
was amended to increase the borrowing level from $30,000,000 to $60,000,000 for
Hirsch and provide a $10,000,000 Revolving Credit Facility for HAPL. The
Facility, which now includes a third bank, is to be used for working capital
loans, letters of credit and deferred payment letters of credit and bear
interest as defined in the Facility. The terms of the Facility restrict
additional borrowings by the Company and require the Company to maintain certain
minimum tangible net worth, quick asset ratio and fixed charge coverage levels
as defined. The Facility also provides a $20,000,000 sub-limit to finance
acquisitions (as defined therein). This Facility has also been used for letters
of credit and deferred payment letters of credit aggregating approximately
$9,103,000 at October 31, 1998. During the nine months ended October 31, 1998
the Company borrowed approximately $21,000,000 as working capital loans against
the Facility, of which $14,000,000 was outstanding at October 31, 1998.
HAPL sells substantially all of its leases to financial institutions on
either a non-recourse basis or a limited-liability recourse basis several months
after the commencement of the lease term thereby reducing its financing
requirements. HAPL Leasing, which was fully activated in May 1993, has closed
approximately $182,364,000 in lease agreements as of October 31, 1998. To date,
approximately $168,578,000, or 92.4%, of the leases consummated 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.
14
<PAGE>
Future Capital Requirements
The Company believes that the net proceeds from the June 1997 Secondary
Offering (See Note 3 of Notes to Consolidated Financial Statements) its existing
cash and funds generated from operations, together with its existing revolving
credit facility, will be sufficient to meet its working capital and capital
expenditure requirements and to finance planned growth.
Year 2000 Compliance
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 not be able to recognize the year 2000 or may
do so incorrectly as the year 1900. This inability to recognize or properly
interpret the year 2000 may result in the incorrect processing of financial and
operational information.
The Company has established a steering committee to address Year 2000
issues, including senior members of the management team, which will report
regularly to the Board of Directors. The committee has initiated a program to
upgrade its internal information systems to address any Year 2000 compliance
issues. This program includes a focus on internal policies, methods and tools,
as well as inquiries of and coordination with customers and suppliers.
The Company expects its Year 2000 program to be completed on a timely
basis, and is currently implementing new computer systems that will
substantially insure that the Company's operating systems are not subject to
Year 2000 transition problems. To the extent current systems that will not be
replaced have been determined to be non-compliant, the Company is working with
the suppliers of such systems to obtain upgrades and/or enhancements to insure
Year 2000 compliance.
The Company has made a thorough review of its software products and
believes that its current products are Year 2000 compliant. Many of the
Company's customers may be, however, using earlier versions of the Company's
software products, which may not be Year 2000 compliant. The Company has
initiated programs to proactively notify such customers of the risks associated
with using these products and to actively encourage such customers to migrate to
the Company's current software products.
Based upon the Company's current estimates, incremental out-of-pocket costs
of its Year 2000 program will aggregate approximately $200,000. These costs are
expected to be incurred primarily in fiscal year 2000 and consist primarily of
remediation of and/or upgrades to existing computer hardware and software. Such
costs do not include internal management time and the deferral of other
projects, the effects of which are not expected to be material to the Company's
results of operations or financial condition. The Company's total Year 2000
project costs include the estimated costs and time associated with the impact of
third party Year 2000 issues based on presently available information. However,
there can be no guarantee that other companies upon which the Company relies
will be able to timely address their Year 2000 compliance issues. A reasonable
worst case Year 2000 scenario would be the failure of key vendors and/or
suppliers to have corrected their own Year 2000 issues which could cause
disruption of the Company's operations, the effects of which may have an adverse
impact on the Company's results of operations. The Company is in the process of
developing contingency plans to address potential worst case Year 2000
scenarios. Such plans are expected to be substantially completed by the end of
fiscal year 1999.
15
<PAGE>
Backlog and Inventory
The ability of the Company to fill orders quickly is an important part of
its customer service strategy. The embroidery machines held in inventory by the
Company are generally shipped within a week from the date the customer's orders
are received, and as a result, backlog is not meaningful as an indicator of
future sales.
Inflation
The Company does not believe that inflation has had, or will have in the
foreseeable future, a material impact upon the Company's operating results.
16
<PAGE>
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*3.1 Restated Certificate of Incorporation of the Registrant
**3.2 Amended and Restated By-Laws of the Registrant
***4.1 Specimen of Class A Common Stock Certificate
***4.2 Specimen of Class B Common Stock Certificate
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
----------------------
*Incorporated by reference from the Registrant's Form 10-Q filed for the
quarter ended July 31, 1997.
**Incorporated by reference from the Registrant's Form 10-Q filed for the
quarter ended October, 31, 1997.
***Incorporated by reference from the Registrant's Registration Statement
on Form S-1, Registration Number 33-72618.
17
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HIRSCH INTERNATIONAL CORP.
(Registrant)
/s/ Henry Arnberg
-------------------------------
Henry Arnberg
Chief Executive Officer and
Acting Chief Financial Officer
Dated: December 15, 1998
18
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