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 July 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Wireless Boulevard, Hauppauge, New York 11788
(Address of principal executive offices)
Registrant's telephone number, including area code: (516) 436-7100
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of September 10, 1998:
Class of Number of
Common Equity Shares
------------- ---------
Class A Common Stock, 6,724,880
par value $.01
Class B Common Stock, 2,668,139
par value $.01
<PAGE>
HIRSCH INTERNATIONAL CORP. and SUBSIDIARIES
FORM 10-Q
INDEX
Page No.
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - July 31, 1998
and January 31, 1998 3-4
Consolidated Statements of Income for the Six and
Three Months Ended July 31, 1998 and 1997 5
Consolidated Statements of Cash Flows for the Six
Months Ended July 31, 1998 and 1997 6-7
Notes to Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-14
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 15-16
Item 6 Exhibits 16
Signatures 17
2
<PAGE>
Part I - Financial Information
Item 1. Consolidated Financial Statements
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, January 31,
-------- -----------
1998 1998
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents $7,772,000 $2,956,000
Accounts Receivable, Net 32,820,000 34,427,000
Net investment in sales-type leases,
current portion (Note 7) 2,161,000 2,180,000
Inventories, net (Note 6) 43,303,000 34,166,000
Prepaid taxes 201,000 -
Other current assets 2,911,000 3,284,000
---------- ----------
Total current assets 89,168,000 77,013,000
---------- ----------
NET INVESTMENT IN SALES-TYPE LEASES
noncurrent portion (Note 7) 12,440,000 12,055,000
EXCESS OF COST OVER NET ASSETS ACQUIRED,
net of accumulated amortization of
approximately $2,204,000 and $1,581,000,
respectively (Note 4) 15,477,000 15,979,000
PURCHASED TECHNOLOGIES, net of accumulated
amortization of approximately $845,000
and $749,000, respectively 494,000 590,000
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 8,218,000 7,193,000
OTHER ASSETS 1,800,000 2,002,000
--------- ----------
TOTAL ASSETS $127,597,000 $114,832,000
============ ============
See notes to consolidated financial statements.
3
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, January 31,
-------- -----------
1998 1998
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade acceptances payable $8,208,000 $15,286,000
Accounts payable and accrued expenses 19,621,000 20,592,000
Current maturities of long-term debt (Note 8) 246,000 231,000
Income taxes payable - 735,000
---------- ----------
Total current liabilities 28,075,000 36,844,000
LONG-TERM DEBT, less current
maturities (Note 8) 22,275,000 1,421,000
---------- ----------
Total liabilities 50,350,000 38,265,000
---------- ----------
MINORITY INTEREST (NOTE 1) 1,073,000 944,000
---------- ----------
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 35,510,000 34,151,000
---------- ----------
77,002,000 75,623,000
Less: Treasury stock, at cost; 90,000 shares
at July 31, 1998 828,000 -
---------- ----------
Total stockholders' equity 76,174,000 75,623,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $127,597,000 $114,832,000
============ ===========
See notes to consolidated financial statements.
4
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
July 31, July 31,
--------------------- -------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES:
Net Sales $68,587,000 $78,126,000 $31,389,000 $40,981,000
Interest income related to sales-type leases 2,550,000 2,135,000 1,279,000 1,207,000
---------- ---------- ---------- ---------
Total revenue 71,137,000 80,261,000 32,668,000 42,188,000
---------- ---------- ---------- ---------
EXPENSES:
Cost of goods sold 45,190,000 50,932,000 20,959,000 26,615,000
Selling, general and administrative expenses 22,607,000 18,974,000 10,963,000 10,063,000
Interest expense 540,000 594,000 336,000 256,000
Other expense (income) 212,000 (3,000) 222,000 36,000
---------- --------- --------- ---------
Total expenses 68,549,000 70,497,000 32,480,000 36,970,000
---------- ---------- ---------- ---------
INCOME BEFORE PROVISION FOR INCOME
TAXES AND MINORITY INTEREST IN NET
EARNINGS OF CONSOLIDATED SUBSIDIARY 2,588,000 9,764,000 188,000 5,218,000
PROVISION FOR INCOME TAXES 1,100,000 4,149,000 80,000 2,217,000
MINORITY INTEREST IN NET EARNINGS
OF CONSOLIDATED SUBSIDIARY (Note 1) 129,000 - 58,000 -
---------- ---------- --------- ---------
NET INCOME $1,359,000 $5,615,000 $50,000 $3,001,000
========== ========== ========= ==========
EARNINGS PER SHARE:
Basic $0.14 $0.67 $0.01 $0.34
===== ===== ===== =====
Diluted $0.14 $0.65 $0.01 $0.33
===== ===== ===== =====
WEIGHTED AVERAGE NUMBER OF SHARES
IN THE CALCULATION OF EARNINGS
PER SHARE (Note 2)
Basic 9,434,000 8,429,000 9,409,000 8,796,000
========= ========= ========= =========
Diluted 9,485,000 8,680,000 9,449,000 9,105,000
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
July 31,
---------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $1,359,000 $5,615,000
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,745,000 1,362,000
Provision for reserves 695,000 -
Deferred income taxes (127,000) -
Minority interest 129,000 -
Changes in assets and liabilities:
Accounts receivable 1,260,000 (12,653,000)
Net investment in sales-type leases (606,000) (6,212,000)
Inventories (10,474,000) (7,203,000)
Prepaid taxes (201,000) -
Other assets 523,000 (809,000)
Trade acceptances payable (7,078,000) 2,842,000
Accounts payable and accrued expenses (1,094,000) 1,398,000
Income taxes payable (735,000) 97,000
---------- ----------
Net cash used in operating activities (14,604,000) (15,563,000)
---------- ----------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
July 31,
---------------------
1998 1997
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (641,000) (728,000)
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 (641,000) 1,302,000
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank financing 21,000,000 3,761,000
Repayments of long-term debt (131,000) (17,800,000)
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 1,023,000
----------- ----------
Net cash provided by financing activities 20,061,000 11,299,000
----------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,816,000 (2,962,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,956,000 7,865,000
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $7,772,000 $4,903,000
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest Paid $540,000 $604,000
========== ==========
Income Taxes Paid $2,190,000 $4,066,000
========== ==========
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Six and Three Months Ended July 31, 1998 and 1997
1. Organization and Basis of Presentation
The accompanying consolidated financial statements as of and for the six
and three month periods ended July 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 six and
three month periods ended July 31, 1998 and 1997, the financial position at July
31, 1998 and cash flows for the six month periods ended July 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.
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.
<PAGE>
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 six and three months
ended July 31, 1998 and 1997.
6. Inventories, Net
<TABLE>
<CAPTION>
July 31, 1998 January 31, 1998
------------- ----------------
<S> <C> <C>
Machines........................................ $35,670,000 $29,613,000
Parts........................................... 9,996,000 6,808,000
---------------------- ----------------------
45,666,000 36,421,000
Less: Reserve.................................. (2,363,000) (2,255,000)
---------------------- ----------------------
Inventories, net................................ $43,303,000 $34,166,000
====================== ======================
7. Net Investment in Sales-Type Leases
July 31, 1998 January 31, 1998
------------- ----------------
Total minimum lease payments
receivable.................................... $12,802,000 $13,051,000
Estimated residual value of leased
property (unguaranteed)....................... 6,169,000 5,224,000
Reserve for estimated uncollectible lease
payments...................................... (828,000) (588,000)
Less: Unearned income........................... (3,542,000) (3,452,000)
---------------------- ----------------------
Net investment.................................. 14,601,000 14,235,000
Less: Current portion........................... (2,161,000) (2,180,000)
---------------------- ----------------------
Non-current portion............................. $12,440,000 $12,055,000
====================== ======================
</TABLE>
<PAGE>
8. Long-term Debt
<TABLE>
<CAPTION>
July 31, 1998 January 31, 1998
------------- ----------------
<S> <C> <C>
Revolving credit facility (A).................. $21,000,000 $ -
Mortgage (B)................................... 1,434,000 1,549,000
Other.......................................... 87,000 103,000
------------------ ------------------
Total.......................................... 22,521,000 1,652,000
Less: Current maturities....................... (246,000) (231,000)
------------------- -------------------
Long-term maturities $22,275,000 $1,421,000
=================== ====================
</TABLE>
(A) In September 1997 the Company amended its existing Revolving Credit
Facility to provide for a $60,000,000 Revolving Credit Facility for Hirsch and a
$10,000,000 Revolving Credit Facility for HAPL (the "Facility"). The Facility is
for working capital loans, letters of credit, and deferred payment letters of
credit and bear interest as defined in the Facility. The terms of the Facility,
among other things, restrict additional borrowings by the Company and require
the Company to maintain certain minimum tangible net worth, quick asset ratio
and fixed charge coverage levels, as defined. The Facility also provides a
$20,000,000 sub-limit to finance acquisitions (as defined therein). In addition
to the working capital borrowings illustrated above, this Facility has been used
for letters of credit and deferred payment letters of credit aggregating
approximately $8,208,000 at July 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.
<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.
Six and Three months ended July 31, 1998 as compared to the Six and Three
months ended July 31, 1997
Net Sales. Net sales for the six and three months ended July 31, 1998 were
$68,587,000 and $31,389,000, a decrease of $9,539,000 and $9,592,000, or 12.2%
and 23.4%, compared to $78,126,000 and $40,981,000 for the six and three months
ended July 31, 1997. The Company believes that the reduction in the sales level
for the six and three months ended July 31, 1998 is attributable to a weakening
in the apparel industry. In addition, there was a significant reduction in sales
dollars as a result of the strong dollar/yen exchange rate.
The sale of new embroidery machinery represented approximately $53,098,000,
or 77.4% and $24,468,000, or 78.0%, and $63,500,000, or 81.3% and $32,287,000,
or 78.8%, of net sales for the six and three months ended July 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 $24,857,000 and its $28,241,000, and $11,603,000 and
$12,865,000, respectively of total embroidery machine sales during the six and
three months ended July 31, 1998 as compared to approximately $25,537,000 and
$37,963,000, and $14,000,000 and $18,287,000 for the six and three months ended
July 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
six and three months ended July 31, 1998 aggregated approximately $15,489,000
and $6,921,000, as compared to $14,626,000 and $8,694,000 for the six and three
months ended July 31, 1997.
Interest income related to sales-type leases. HAPL's interest income
increased 19.4% and 6.0% to $2,550,000 and $1,279,000 for the six and three
months ended July 31, 1998 from $2,135,000 and $1,207,000 for the comparable
periods of the prior year. This increase is a result of the continued expansion
of HAPL's operations. Their diversified leasing programs have resulted in a
21.5% and 24.3% increase in the percentage of equipment deals leased to 46.4%
and 45.5% of equipment sales for the six and three month period ended July 31,
1998 from 38.2% and 36.6% of equipment sales for the comparable period of the
prior year, respectively. 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.
<PAGE>
Cost of Goods Sold. For the six and three months ended July 31, 1998, cost
of goods sold decreased $5,742,000 and $5,656,000, or 11.3% and 21.3%, to
$45,190,000 and $20,959,000 from $50,932,000 and $26,615,000 for the six and
three months ended July 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. However, the
recent devaluation of the yen as compared to the U.S. dollar has resulted in
tighter margins as Hirsch has lowered sales prices in order to remain
competitive. The Company will continue to purchase forward exchange contacts to
hedge this potential risk.
The Company's gross margin for the six months ended July 31, 1998 have
remained consistent as compared to the six months ended July 31, 1997. However,
the Company's gross margin has decreased to 35.8% for the three months ended
July 31, 1998 as compared to 36.9% for the three months ended July 31, 1997.
This decrease is primarily attributable to reduced margins obtained on sales of
used machines due to the unfavorable exchange rate.
Selling, General and Administrative ("SG&A") Expenses. For the six and
three months ended July 31, 1998 SG&A increased $3,633,000 and $900,000, or
19.1% and 8.9%, to $22,607,000 and $10,963,000 from $18,974,000 and $10,063,000
for the six and three months ended July 31, 1997. SG&A expenses increased as a
percentage of revenues increased to 31.8% and 33.6% from 23.6% and 23.9%. This
increase in SG&A as a percentage of revenues 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 Company has also retained the services of an outside
consultant to assist in the evaluation of our internal systems and cost
structure.
Interest Expense. Interest expense for the six months ended July 31, 1998
decreased $54,000, or 9.0%, to $540,000 from $594,000 for the six months ended
July 31, 1997. For the three months ended July 31, 1998 interest expense
increased $80,000, or 31.3%, to $336,000 from $256,000 for the three months
ended July 31, 1997. This decrease for the comparative six months and increase
for the comparative three months is the result of the Company paying down its
outstanding debt in June 1997 with proceeds from the June 1997 Secondary
Offering, offset by working capital borrowings outstanding during the six months
ended July 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 six and three months
ended July 31, 1998 as compared to 42.5% for the six and three months ended July
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 six and three months ended July 31, 1998
decreased $4,256,000 and $2,951,000, or 75.8% and 98.3%, to $1,359,000 and
$50,000 from $5,615,000 and $3,001,000 for the six and three months ended July
31, 1997. These decreases are attributable to the decrease in net sales and the
increase in SG&A expenses.
<PAGE>
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $61,093,000 at July 31, 1998, increasing
$20,924,000, or 52.1%, 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 six and three months ended July 31, 1998, the Company's cash and
cash equivalents increased by $4,816,000 to $7,772,000. Net cash of $14,604,000
was used in the Company's operating activities. Cash used to increase inventory,
net investment in sales-type leases and prepaid taxes, aggregating approximately
$11,281,000 and decreases in trade acceptances payable, accounts payable and
accrued expenses and income taxes payable of approximately $8,907,000 was offset
by cash provided by decreases in the balance of accounts receivable and other
assets aggregating approximately $1,783,000. These changes resulted from
expansion of the Company's territories and lines of business during fiscal year
1998 and the six and three months ended July 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
six months ended July 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
$8,208,000 at July 31, 1998. During the six months ended July 31, 1998 the
Company borrowed approximately $21,000,000 as working capital loans against the
Facility, all of which was outstanding against this Facility at July 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 $169,696,000 in lease agreements as of July 31, 1998. To date,
approximately $154,097,000, or 90.8%, 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.
<PAGE>
Future Capital Requirements
The Company believes that the net proceeds from the June 1997 Secondary
Offering (See Note 3 of Notes to Consolidated Financial Statements) its existing
cash and funds generated from operations, together with its existing revolving
credit facility, will be sufficient to meet its working capital and capital
expenditure requirements and to finance planned growth.
Year 2000 Date Conversion
The Year 2000 issue exists because many computer systems and applications
use two-digit fields to designate a year. As the century date change occurs,
date sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to recognize or properly treat the year 2000 may cause systems to
process financial and operational information incorrectly.
Management has initiated a company-wide program to prepare the Company's
computer systems and applications for the year 2000. The program includes a
focus on internal policies, methods and tools, as well as coordination with
customers and suppliers.
The Company expects its year 2000 program to be completed on a timely
basis. Management does not anticipate that the year 2000 program will materially
impact operations or operation results.
Backlog and Inventory
The ability of the Company to fill orders quickly is an important part of
its customer service strategy. The embroidery machines held in inventory by the
Company are generally shipped within a week from the date the customer's orders
are received, and as a result, backlog is not meaningful as an indicator of
future sales.
Inflation
The Company does not believe that inflation has had, or will have in the
foreseeable future, a material impact upon the Company's operating results.
<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
(a) On June 19, 1998, the Company held its Annual Meeting of Stockholders
(the "Meeting").
(c) At the Meeting, the Stockholders elected Marvin Broitman, Ronald
Krasnitz and Douglas Schenendorf as Class A directors and Henry Arnberg, Herbert
M. Gardner, Paul Levine and Tas Tsonis as Class B directors. The results of the
voting were as follows:
Class A Directors
<TABLE>
<CAPTION>
Number of Votes Number of Votes
Name Cast in Favor Cast Against
<S> <C> <C>
Marvin Broitman 5,234,311 506,682
Ronald Krasnitz 5,234,611 506,382
Douglas Schenendorf 5,238,958 502,035
Class B Directors
Name Number of Votes Number of Votes
Cast in Favor Cast Against
Henry Arnberg 2,543,139 0
Herbert M. Gardner 2,543,139 0
Paul Levine 2,543,139 0
Tas Tsonis 2,543,139 0
</TABLE>
At the Meeting, the Stockholders did not approve the proposal to amend the
Company's Stock Option Plan to increase the number of shares of common stock
reserved for issuance thereunder from 750,000 to 1,050,000. The results of the
voting were as follows:
<TABLE>
<CAPTION>
Number of Votes Number of Votes Number of Votes Number of Broker
Cast in Favor Cast Against Abstained Non-Votes
<S> <C> <C> <C>
1,388,823 1,425,248 2,569,344 2,900,717
</TABLE>
<PAGE>
At the Meeting, the Stockholders approved the appointment of Deloitte &
Touche, LLP as the Company's independent auditors for the fiscal year ending
January 31, 1999. The results of the voting were as follows:
<TABLE>
<CAPTION>
Number of Votes Number of Votes Number of Votes
Cast in Favor Cast Against Abstained
<S> <C> <C>
8,227,687 20,793 35,652
</TABLE>
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*3.1 Restated Certificate of Incorporation of Registrant
**3.2 Amended and Restated By-Laws of Registrant
10.1 Amendment to Martin Krasnitz Employment Agreement
27.1 Financial Data Schedule
- --------
* Incorporated by reference from the Registrant's Form 10-Q filed for the
quarter ended July 31, 1997. ** Incorporated by reference from Registrant's Form
10-Q filed for the quarter ended October 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HIRSCH INTERNATIONAL CORP.
-----------------------------
Registrant
By: /s/Henry Arnberg
-----------------------------
Henry Arnberg, President and
Chief Executive Officer
By: /s/Kenneth Shifrin
-----------------------------
Kenneth Shifrin,
Chief Financial Officer
Dated: September 14, 1998
AMENDMENT
AMENDMENT dated as of the 1st day of June, 1998, by and between SEWING
MACHINE EXCHANGE, INC., an Illinois corporation with offices located at 1231
Ellis Street, Bensonville, Illinois 60106 (the "Company"), and MARTIN KRASNITZ,
residing at 330 West Diversy, Chicago, Illinois (the "Executive").
WHEREAS, the Company and Executive entered into an employment agreement
dated as of June 7, 1996 (the "Employment Agreement") pursuant to which, among
other matters, it was agreed that the Executive would provide services to the
Company on a full time basis during the first two (2) years of the Term (as
defined in the Employment Agreement) and on a part time basis during the final
three (3) years of the Term;
WHEREAS, the parties have decided that it is in their best interests to
extend the period during which the Executive provides full time services; and
WHEREAS, the parties desire to amend the Employment Agreement to reflect
the foregoing;
NOW, THEREFORE, it is hereby agreed:
1. Paragraph 3 of the Employment Agreement, as it currently exists, is
hereby amended to read in its entirety as follows:
"3. Duties and Nature of Executive's Services. Executive agrees to serve as
Vice President of the Company and agrees to serve the Company and its Affiliates
faithfully and to the best of his ability. During the first three (3) years of
the Term, Executive shall devote his entire business time, attention, energy,
skill and experience to the performance of his duties hereunder and shall not
engage, directly or indirectly, in any other business, employment or occupation
which is competitive with the business of the Company and its Affiliates. During
the final two (2) years of the Term, Executive shall devote only so much time to
the performance of his duties hereunder as he shall determine, it being intended
that the time committed shall be only so much as shall allow Executive to
qualify for coverage under the Company's then existing medical plan for
executives of Hirsch; provided, however, that the Company or Hirsch shall not be
required to prosecute any claim against its medical insurance carrier that shall
disclaim liability for medical insurance coverage as a result of Executive's
failure to qualify as a full time employee of the Company and Executive agrees
to indemnify and hold the Company harmless from any claim by such insurance
carrier that it paid claims to Executive resulting in damage to such carrier, in
breach of the Company's (or Hirsch's) agreement with the carrier."
2. Paragraph 4.1 of the Employment Agreement, as it currently exists, is
hereby amended to read in its entirety as follows:
"4.1 As full compensation for all services to be rendered by the Executive
to the Company or its Affiliates under or pursuant to the terms of this
Agreement, the Company shall pay to the Executive a base salary (the "Base
Compensation") as follows: Two Hundred Fifty-Five Thousand ($255,000) Dollars
per year during the first and second years of the Term, One Hundred Thirty
Thousand ($130,000) Dollars per year during the third year of the Term and
Thirty Thousand ($30,000) Dollars per year during the fourth and fifth years of
the Term. The Base Compensation shall be payable at such regular times and
intervals as the Company customarily pays its employees from time to time."
<PAGE>
3. Paragraph 4.3 of the Employment Agreement, as it currently exists, is
hereby amended to read in its entirety as follows:
"4.3 During the first three (3) years of the Term, the Executive shall also
be entitled to the full-time use of a Company automobile (same model currently
being used by Executive or its equivalent). The Company shall purchase all
relevant insurance for said automobile (or reimburse Executive for cost of same)
and shall reimburse the Executive for all fuel and repairs to said automobile."
4. Except as herein amended, all other terms and conditions contained in
the Employment Agreement remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have set their hands and executed
this Agreement as of the day and year first above written.
SEWING MACHINE EXCHANGE, INC.
By:/s/Kenneth Shifrin
------------------------
Kenneth Shifrin, Vice President
/s/Martin Krasnitz
------------------------
Martin Krasnitz
THE UNDERSIGNED HEREBY GUARANTEES
PAYMENT OF THE AMOUNTS DUE TO EXECUTIVE
UNDER SECTION 4 OF THIS AGREEMENT.
HIRSCH INTERNATIONAL CORP.
By /s/Henry Arnberg
----------------------------
Henry Arnberg, President
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000915909
<NAME> HIRSCH INTERNATIONAL CORP.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 7,772,000
<SECURITIES> 0
<RECEIVABLES> 36,327,000
<ALLOWANCES> (3,507,000)
<INVENTORY> 43,303,000
<CURRENT-ASSETS> 89,168,000
<PP&E> 13,277,000
<DEPRECIATION> (5,060,000)
<TOTAL-ASSETS> 127,597,000
<CURRENT-LIABILITIES> 28,075,000
<BONDS> 0
0
0
<COMMON> 95,000
<OTHER-SE> 76,079,000
<TOTAL-LIABILITY-AND-EQUITY> 127,597,000
<SALES> 31,389,000
<TOTAL-REVENUES> 32,668,000
<CGS> 20,959,000
<TOTAL-COSTS> 31,922,000
<OTHER-EXPENSES> 222,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 336,000
<INCOME-PRETAX> 188,000
<INCOME-TAX> 80,000
<INCOME-CONTINUING> 50,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,000
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
