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, 1999
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 13, 1999
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
<TABLE>
<CAPTION>
Page No.
--------
Part I. Financial Information
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - July 31, 1999 and
January 31, 1999 3-4
Consolidated Statements of Operations for the Six and
Three months Ended July 31, 1999 and 1998
5
Consolidated Statements of Cash Flows for the Six
Months Ended July 31, 1999 6-7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
12-15
Part II. Other Information 16
Signatures 17
</TABLE>
<PAGE>
Part I - Financial Information
------------------------------
Item 1. Consolidated Financial Statements
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, January 31,
----------- -----------
1999 1999
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $5,415,000 $3,078,000
Accounts receivable, net 18,475,000 22,956,000
Net investment in sales-type leases,
current portion (Note 4) 2,718,000 2,254,000
Inventories, net (Note 3) 35,552,000 36,335,000
Prepaid income taxes 3,340,000 1,786,000
Other current assets 5,193,000 5,284,000
---------- ----------
Total current assets 70,693,000 71,693,000
---------- ----------
NET INVESTMENT IN SALES-TYPE LEASES,
non-current portion (Note 4) 10,421,000 11,256,000
EXCESS OF COST OVER NET ASSETS ACQUIRED,
net of accumulated amortization of approximately
$3,268,000 and $2,686,000, respectively 13,557,000 14,139,000
PURCHASED TECHNOLOGIES, net of accumulated
amortization of approximately $1,036,000 and
$940,000, respectively 303,000 399,000
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 7,076,000 7,602,000
OTHER ASSETS 1,742,000 1,846,000
------------ ------------
TOTAL ASSETS $103,792,000 $106,935,000
============ ============
See notes ot consolidated statements.
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, January 31,
---------- -----------
1999 1999
---- ----
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade acceptances payable $3,225,000 $2,164,000
Accounts payable and accrued expenses 13,909,000 17,338,000
Current maturities of long-term debt 280,000 252,000
---------- ----------
Total current liabilities 17,414,000 19,754,000
LONG-TERM DEBT, less current maturities (Note 5) 17,629,000 15,640,000
---------- ----------
Total liabilities 35,043,000 35,394,000
---------- ----------
MINORITY INTEREST (Note 1) 1,534,000 1,334,000
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (Note 2)
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
shares 68,000 68,000
Class B common stock, $.01par value; authorized:
3,000,000 shares, outstanding: 2,668,000 shares 27,000 27,000
Additional paid-in capital 41,397,000 41,397,000
Retained earnings 26,551,000 29,543,000
---------- ----------
68,043,000 71,035,000
Less: Treasury stock, at cost; 90,300 shares 828,000 828,000
---------- ----------
Total stockholders' equity 67,215,000 70,207,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $103,792,000 $106,935,000
============ ============
See notes to consolidated financial statements.
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
July 31, July 31,
---------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Net Sales $41,777,000 $68,587,000 $16,879,000 $31,389,000
Interest income related to sales-type leases 1,405,000 2,550,000 527,000 1,279,000
----------- ----------- ----------- -----------
Total revenue 43,182,000 71,137,000 17,406,000 32,668,000
----------- ----------- ----------- -----------
COST OF SALES 27,771,000 45,190,000 11,530,000 20,959,000
----------- ----------- ----------- -----------
GROSS PROFIT 15,411,000 25,947,000 5,876,000 11,709,000
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 19,171,000 22,607,000 9,275,000 10,963,000
----------- ----------- ----------- -----------
OPERATING (LOSS) INCOME (3,760,000) 3,340,000 (3,399,000) 746,000
----------- ----------- ----------- -----------
OTHER EXPENSE (INCOME)
Interest expense 704,000 540,000 380,000 336,000
Other (income) expense (80,000) 212,000 154,000 222,000
------- ------- ------- -------
Total other expense 624,000 752,000 534,000 558,000
------- ------- ------- -------
(LOSS) INCOME BEFORE INCOME TAX (BENEFIT)
PROVISION AND MINORITY INTEREST IN NET
EARNINGS OF CONSOLIDATED SUBSIDIARY (4,384,000) 2,588,000 (3,933,000) 188,000
INCOME TAX (BENEFIT) PROVISION (1,592,000) 1,100,000 (1,500,000) 80,000
MINORITY INTEREST IN NET EARNINGS
OF CONSOLIDATED SUBSIDIARY (Note 1) 200,000 129,000 29,000 58,000
----------- ----------- ----------- -----------
NET (LOSS) INCOME ($2,992,000) $1,359,000 ($ 2,462,000) $ 50,000
=========== =========== =========== ===========
(LOSS) EARNINGS PER SHARE:
Basic ($ 0.32) $ 0.14 ($ 0.26) $ 0.01
======= ======= ======= =======
Diluted ($ 0.32) $ 0.14 ($ 0.26) $ 0.01
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF SHARES
IN THE CALCULATION OF (LOSS)
EARNINGS PER SHARE
Basic 9,392,000 9,434,000 9,392,000 9,409,000
========= ========= ========= =========
Diluted 9,392,000 9,485,000 9,392,000 9,449,000
========= ========= ========= =========
</TABLE>
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
July 31,
----------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ($2,992,000) $1,359,000
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Depreciation and amortization 1,916,000 1,745,000
Provision for reserves 1,644,000 695,000
Deferred income taxes - (127,000)
Minority interest 200,000 129,000
Changes in assets and liabilities:
Accounts receivable 3,347,000 1,260,000
Net investment in sales-type leases 521,000 (606,000)
Inventories 273,000 (10,474,000)
Prepaid taxes (1,554,000) (201,000)
Other assets (84,000) 523,000
Trade acceptances payable 1,061,000 (7,078,000)
Accounts payable and accrued expenses (3,429,000) (1,094,000)
Income taxes payable - (735,000)
---------- -----------
Net cash provided by (used in) operating
activities 903,000 (14,604,000)
---------- -----------
See notes to consolidated financial statements.
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
July 31,
----------------
1999 1998
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (583,000) (641,000)
---------- --------
Net cash used in investing activities (583,000) (641,000)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank financing 6,643,000 21,000,000
Repayments of long-term debt (4,626,000) (131,000)
Proceeds from exercise of stock options and - 20,000
Purchase of treasury shares - (828,000)
--------- ----------
Net cash provided by financing
activities 2,017,000 20,061,000
--------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 2,337,000 4,816,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,078,000 2,956,000
--------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $5,415,000 $7,772,000
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $752,000 $540,000
======== ========
Income taxes paid $948,000 $2,190,000
======== ==========
See notes to consolidated financial statements.
<PAGE>
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Six and Three Months Ended July 31, 1999 and 1998
1. Organization and Basis of Presentation
The accompanying consolidated financial statements as of and for the six and
three month periods ended July 31, 1999 and 1998 include the accounts of Hirsch
International Corp. ("Hirsch"), HAPL Leasing Co., Inc. ("HAPL"), Pulse
Microsystems Ltd. ("Pulse"), Hirsch Equipment Connection, Inc. ("HECI"), HJ
Grassroots, LLC ("HJ") and Tajima USA, Inc. ("TUI") (collectively, the
"Company").
On January 6, 1998, Tokai Industrial Sewing Machine Company ("Tokai") purchased
a 45 percent interest in TUI for $900,000. For financial purposes, the assets,
liabilities and earnings of TUI are consolidated in the Company's financial
statements. Tokai's 45 percent interest in TUI has been reported as minority
interest in the Company's Consolidated Balance Sheet and the earnings from
January 6, 1998 have been reported as minority interest in the Company's
Consolidated Statements of Income.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all the adjustments, consisting of normal accruals, necessary
to present fairly the results of operations for each of the six and three month
periods ended July 31, 1999 and 1998, the financial position at July 31, 1999
and cash flows for the six month periods ended July 31, 1999 and 1998,
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, 1999 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. 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, 1999 and 1998.
3. Inventories
<TABLE>
<CAPTION>
July 31, 1999 January 31, 1999
------------- ----------------
<S> <C> <C>
Machines $ 33,435,000 $ 32,465,000
Parts 5,140,000 6,383,000
------------ ------------
38,575,000 38,848,000
Less: Reserve (3,023,000) (2,513,000)
------------ ------------
Inventories, net $ 35,552,000 $ 36,335,000
============ ============
</TABLE>
4. Net Investment in Sales-Type Leases
July 31, 1999 January 31, 1999
------------- ----------------
Total minimum lease payments
receivable $ 8,994,000 $ 9,944,000
Estimated residual value of leased
property (unguaranteed) 7,605,000 7,360,000
Reserve for estimated uncollectible
lease payment (1,100,000) (1,100,000)
Less: Unearned income (2,360,000) (2,694,000)
------------ ------------
Net investment 13,139,000 13,510,000
Less: Current portion (2,718,000) (2,254,000)
------------ ------------
Non-current portion $ 10,421,000 $ 11,256,000
============ ============
5. Long-Term Debt
July 31, 1999 January 31, 1998
------------- ----------------
Revolving credit facility (A) $ 16,500,000 $ 14,500,000
Mortgage (B) 1,205,000 1,320,000
Other 204,000 72,000
------------ ------------
Total 17,909,000 15,892,000
Less: Current maturities (280,000) (252,000)
------------- ------------
Long-term maturities $ 17,629,000 $ 15,640,000
============= =============
(A) In February 1999 the Company amended its existing Revolving Credit
Facility (the "Facility") to, among other things, reduce the total commitment
from $60,000,000 to $40,000,000 for Hirsch and from $10,000,000 to $6,500,000
for HAPL. The Facility is 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, 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. In
addition to the working capital borrowings described above, this Facility has
been used for letters of credit and deferred payment letters of credit
aggregating approximately $3,225,000 at July 31, 1999. The Company was in
default of certain financial covenants at July 31, 1999 and has entered into a
Forebearance Agreement with the banks. Under the terms of the Forebearance
Agreement, the banks agreed to a limited forebearance from taking any action on
such defaults under the Company's Facility through a future date. The Company is
in the process of finalizing financing with an alternative bank and anticipates
this financing will be in place prior to the future date indicated in the
Forebearance Agreement.
(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. From October 27, 1994 through April 29, 1999, the Mortgage bore
interest at a fixed annual rate of 8.8 percent. In April 1999, the Mortgage was
amended such that, effective April 30, 1999, it bears interest at a fixed annual
rate of 9.3 percent. The Mortgage 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. The Company was in default of the
financial covenant contained in the Mortgage at July 31, 1999 and has received a
waiver of such default from the bank.
6. Industry Segments
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
established standards for the way in which public business enterprises report
information about operating segments in annual financial statements.
The Company operates in two reportable segments; embroidery equipment and
leasing. The Embroidery segment consists principally of the sale of new used
embroidery equipment and value added products such as parts, accessories and
software. The Leasing segment provides leasing services to customers of the
Company.
Summarized financial information concerning the Company's reportable segments is
shown in the following table. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. The "Corporate" Column includes corporate related items not
allocated to reportable segments and the elimination of intercompany
transactions. Identifiable assets are those tangible and intangible assets used
in operations in each reportable segment. Corporate assets are principally the
Company's land and building and the excess of cost over fair value of net assets
acquired.
<TABLE>
<CAPTION>
Embroidery Leasing Corporate Consolidated
---------- ------- --------- ------------
Six Months Ended July 31, 1999
- ------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 41,383,000 $ 1,799,000 $ - $ 43,182,000
Transfers between segments 12,966,000 - (12,966,000) -
------------ ----------- ------------- ------------
Total revenues $ 54,349,000 $ 1,799,000 $ (12,966,000) $ 43,182,000
============ =========== ============= ============
Interest expense $ 687,000 $ 17,000 $ - $ 704,000
============ =========== ============= ============
Depreciation and amortization expense $ 1,006,000 $ 196,000 $ 714,000 $ 1,916,000
============ =========== ============= ============
(Loss) income before income tax
(benefit) provision $ (4,524,000) $ 77,000 $ 63,000 $ (4,384,000)
============ =========== ============= ============
Income tax (benefit) provision $ (1,623,000) $ 31,000 $ - $ (1,592,000)
============ =========== ============= ============
Identifiable assets $ 68,233,000 $18,867,000 $ 16,692,000 $103,792,000
============ =========== ============= ============
Six Months Ended July 31, 1998
- ------------------------------
Sales to unaffiliated customers $ 66,263,000 $ 4,874,000 $ - $ 71,137,000
Transfers between segments 19,426,000 - (19,426,000) -
------------ ----------- ------------- ------------
Total revenues $ 85,689,000 $ 4,874,000 $ (19,426,000) $ 71,137,000
============ =========== ============= ============
Interest expense $ 528,000 $ 12,000 $ - $ 540,000
============ =========== ============= ============
Depreciation and amortization expense $ 884,000 $ 106,000 $ 755,000 $ 1,745,000
============ =========== ============= ============
Income (loss) before income tax provision $ 2,718,000 $ 452,000 $ (582,000) $ 2,588,000
============ =========== ============= ============
Income tax provision $ 920,000 $ 180,000 $ - $ 1,100,000
============ =========== ============= ============
Identifiable assets $ 89,565,000 $19,158,000 $ 18,874,000 $127,597,000
============ =========== ============= ============
Embroidery Leasing Corporate Consolidated
---------- ------- --------- ------------
Three Months Ended July 31, 1999
- --------------------------------
Sales to unaffiliated customers $ 16,673,000 $ 733,000 $ - $ 17,406,000
Transfers between segments 4,338,000 - (4,338,000) -
------------ ---------- ------------ ------------
Total revenues $ 21,011,000 $ 733,000 $ (4,338,000) $ 17,406,000
============ =========== ============= ============
Interest expense $ 378,000 $ 2,000 $ - $ 380,000
============ =========== ============= ============
Depreciation and amortization expense $ 568,000 $ 93,000 $ 375,000 $ 1,036,000
============ =========== ============= ============
(Loss) income before income tax
(benefit) provision $ (3,791,000) $ (58,000) $ (84,000) $ (3,933,000)
============ =========== ============= ============
Income tax (benefit) provision $ (1,477,000) $ (23,000) $ - $ (1,500,000)
============ =========== ============= ============
Three Months Ended July 31, 1998
- --------------------------------
Sales to unaffiliated customers $ 29,683,000 $ 2,985,000 $ - $ 32,668,000
Transfers between segments 9,478,000 - (9,478,000) -
------------ ----------- ------------ ------------
Total revenues $ 39,161,000 $ 2,985,000 $ (9,478,000) $ 32,668,000
============ =========== ============= ============
Interest expense $ 324,000 $ 12,000 $ - $ 336,000
============ =========== ============= ============
Depreciation and amortization expense $ 436,000 $ 101,000 $ 375,000 $ 912,000
============ =========== ============= ============
Income (loss) before income tax provision $ 414,000 $ 2,000 $ (228,000) $ 188,000
============ =========== ============= ============
Income tax provision $ 80,000 $ 0 $ - $ 80,000
============ =========== ============= ============
</TABLE>
7. Restructuring
In the fourth quarter of fiscal 1999, the Company initiated a restructuring plan
in connection with certain of its operations. The plan was designed to eliminate
certain operating divisions, enhance the interface of operations to meet the
changing needs of the Company's customers and to improve its cost structure and
efficiency. The restructuring initiatives involve the closing of the ECI
operations, the consolidation of the ESW operations with existing Hirsch
operations and the closing of four decentralized sales and training offices. At
January 31, 1999, restructuring costs of $2,377,000 were recorded which
primarily related to severance and related benefits ($454,000), lease
termination costs ($1,012,000), the write down of ECI Goodwill ($711,000) and
other costs ($200,000). Through July 31, 1999, cash payments and non-cash
charges of approximately $1,276,000 have been made for these costs. The Company
anticipates that substantially all of the remaining restructuring costs will be
paid in fiscal 2000.
As an additional part of the plan, the Company wrote-down to net realizable
value used machine and ESW inventories by $3,450,000. This write-down was
included in cost of sales in fiscal 1999.
<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, 1999 as compared to the six and three
months ended July 31, 1998
Net sales. Net sales for the six and three months ended July 31, 1999 were
$41,777,000 and $16,879,000, a decrease of $26,810,000 and $14,510,000, or 39.1%
and 46.2%, compared to $68,587,000 and $31,389,000 for the six and three months
ended July 31, 1998. The Company believes that the reduction in the sales level
for the six and three months ended July 31, 1999 is attributable to a decrease
in overall demand for new embroidery machines, coupled with increased
competition.
The sale of new embroidery machinery represented approximately $29,812,000
and $11,082,000, or 71.4% and 65.7%, and $54,137,000 and $25,507,000, or 78.9%
and 81.3%, of net sales for the six and three months ended July 31, 1999 and
1998, respectively. Small embroidery machines (one through six-head "FX" models)
and large embroidery machines (six-head "DC" models through thirty-head models)
represented approximately $16,935,000 and $12,877,000, and $6,588,000 and
$4,494,000, respectively, of total new embroidery machine sales during the six
and three months ended July 31, 1999 as compared to approximately $25,299,000
and $28,838,000, and $12,045,000 and $13,462,000 for the six and three months
ended July 31, 1998, respectively.
Revenue from the sale of the Company's used machines, computer hardware and
software, parts and service, application software and embroidery supplies for
the six and three months ended July 31, 1999 aggregated approximately
$11,965,000 and $5,797,000, as compared to $14,450,000 and $5,882,000 for the
six and three months ended July 31, 1998.
Interest income related to sales-type leases. HAPL's interest income
decreased 44.9% and 58.8% to $1,405,000 and $527,000 for the six and three
months ended July 31, 1999 from $2,550,000 and $1,279,000 for the comparable
periods of the prior year. This decrease is directly related to the decrease in
new embroidery machine sales. The percentage of new equipment sales which are
leased was 45.1% and 47.4% of total new equipment sales for the six and three
months ended July 31, 1999 as compared to 50.1% and 51.4% for the six and three
months ended July 31, 1998.
Cost of sales. For the six and three months ended July 31, 1999, cost of
sales decreased $17,419,000 and $9,429,000, or 38.6% and 45.0%, to $27,771,000
and $11,530,000 from $45,190,000 and $20,959,000 for the six and three months
ended July 31, 1998. The decrease was a result of the related decrease in net
sales for the six and three months ended July 31, 1999 as compared to the six
and three months ended July 31, 1998. The fluctuation of the dollar against the
yen has historically had 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 Company's
gross margin remained fairly consistent for the six and three months ended July
31, 1999 at 35.7% and 33.8%, as compared to 36.5% and 35.8% for the six and
three months ended July 31, 1998. The small reductions in gross margin are
mainly attributable to increased used machine sales, which typically yield lower
gross margins than new machine sales.
Selling, General and Administrative ("SG&A") Expenses. For the six and
three months ended July 31, 1999, SG&A decreased $3,436,000 and $1,688,000, or
15.2% and 15.4%, to $19,171,000 and $9,275,000 from $22,607,000 and $10,963,000
for the six and three months ended July 31, 1999. SG&A expenses increased as a
percentage of revenues to 44.4% and 53.3% for the six and three months ended
July 31, 1999, from 31.8% and 33.6% for the six and three months ended July 31,
1998. The increase in SG&A expenses as a percentage of revenues for the six and
three months ended July 31, 1999 as compared to the six and three months ended
July 31, 1998 is primarily attributable to the Company's prior investment in its
infrastructure to support anticipated sales levels during fiscal 1999. In
addition, approximately $700,000 and $500,000 of SG&A expenses were incurred in
the six and three months ended July 31, 1999 in connection with the Company's
new HJ Grassroots and Building Blocks divisions. Based upon the decrease in net
sales, the Company continues to implement its cost reduction 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. The Company anticipates
this will bring SG&A expenses in line with revised sales projections.
Interest Expense. Interest expense for the six and three months ended July
31, 1999 increased $164,000 and $44,000, or 30.4% and 13.1%, to $704,000 and
$380,000 from $540,000 and $336,000 for the six and three months ended July 31,
1998. This increase in interest expense is the result of increased working
capital borrowings outstanding against the Company's Revolving Credit Facility
during the six and three months ended July 31, 1999 as compared to the six and
three months ended July 31, 1998.
Income tax (benefit) provision. The income tax benefit reflected an
effective benefit rate of approximately 36.3% and 38.1% for the six and three
months ended July 31, 1999 as compared to an income tax provision reflecting an
effective tax rate of 42.5% and 42.6% for the six and three months ended July
31, 1999. The principal components of the deferred income tax assets result from
allowances and accruals that 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 (Loss) income. The net loss for the six and three months ended July 31,
1999 was $2,992,000 and $2,462,000, a decrease of $4,351,000 and $2,512,000,
compared to net income of $1,359,000 and $50,000 for the six and three months
ended July 31, 1998. The net margin decreased to -6.9% and -14.1% for the six
and three months ended July 31, 1999 from 1.9% and 0.2%for the six and three
months ended July 31, 1998. These decreases are attributable to the decrease in
net sales and the increase in SG&A expenses as a percentage of revenues.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $53,279,000 at July 31, 1999, increasing
$1,340,000, or 2.6%, from $51,939,000, at January 31, 1999. The Company has
financed its operations principally through long-term financing of certain
capital expenditures and working capital borrowings under its Revolving Line of
Credit Agreement.
During the six months ended July 31, 1999, the Company's cash and cash
equivalents increased by $2,337,000 to $5,415,000. Net cash of $903,000 was
provided by the Company's operating activities. Cash provided by decreases in
the balance of accounts receivable, inventory and net investment in sales-type
leases aggregating approximately $4,141,000 and an increase in trade acceptances
payable of approximately $1,061,000 was offset by cash used to increase prepaid
taxes and other assets of approximately $1,638,000 and a decrease in accounts
payable and accrued expenses of approximately $3,429,000.
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 February 1999 the Company amended its existing Revolving Credit Facility
(the "Facility") to, among other things, provide for a reduction in the total
commitment from $60,000,000 to $40,000,000 for Hirsch and from $10,000,000 to
$6,500,000 for HAPL. The Facility is 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 therein. This
Facility has also been used for letters of credit and deferred payment letters
of credit aggregating approximately $3,225,000 at July 31, 1999. Outstanding
working capital borrowings against the Facility aggregated $16,500,000 at July
31, 1999. The Company was in default of certain financial covenants at July 31,
1999 and has entered into a Forebearance Agreement with the banks. Under the
terms of the Forebearance Agreement, the banks agreed to a limited forebearnce
from taking action on such defaults under the Company's Facility through a
future date. The Company is in the process of finalizing financing with an
alternative bank and anticipates this financing will be in place prior to the
future date indicated in the Forebearance Agreement.
HAPL sells most of its leases to financial institutions on either a
non-recourse basis or a limited-liability basis within 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
$205,634,000 in lease agreements through July 31, 1999. As of July 31, 1999,
approximately $185,028,000, or 90.0%, of the leases written have been sold to
third-party financial institutions.
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. From
October 27, 1994 through April 29, 1999, the Mortgage bore interest at a fixed
annual rate of 8.8 percent. In April 1999, the Mortgage was amended such that,
effective April 30, 1999, it bears interest at a fixed annual rate of 9.3
percent. The Mortgage is payable in equal monthly principal installments of
approximately $19,000. The obligation under the Mortgage is secured by a lien on
the premises and the related improvements thereon. The Company was in default of
the financial covenant contained in the Mortgage at July 31, 1999 and has
received a waiver of such default from the bank.
Future Capital Requirements
The Company believes that its existing cash and funds generated from
operations, together with its 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 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 proprietary 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 $300,000. These costs are
expected to be incurred primarily in fiscal year 2000 and consist mainly of
remediation of and/or upgrades to existing computer hardware and software and
telecommunication systems. 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. The Company has initiated a vendor compliance
program and has inquired with its key vendors as to the status of such vendors'
Year 2000 compliance. Based on the responses to date, the Company believes that
its key vendors either currently are Year 2000 compliant, or will complete their
Year 2000 compliance programs on a timely basis. However, there can be no
guarantee that such vendors 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 impact of such disruption cannot be estimated at this
time. In the event the Company believes that any of its key suppliers are
unlikely to be able to resolve their Year 2000 issues, it will endeavour to
obtain an alternative source of supply.
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 25, 1999, 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>
Name Number of Votes Cast in Favor Number of Votes Cast Against
<S> <C> <C>
Marvin Broitman 5,725,324 97,624
Ronald Krasnitz 5,725,574 99,374
Douglas Schenendorf 5,720,651 104,294
</TABLE>
Class B Directors
<TABLE>
<CAPTION>
Name Number of Votes Cast in Favor Number of Votes Cast Against
<S> <C> <C>
Henry Arnberg 2,368,139 0
Herbert M. Gardner 2,368,139 0
Paul Levine 2,368,139 0
Tas Tsonis 2,368,139 0
</TABLE>
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, 2000. The results of the voting were as follows:
<TABLE>
<CAPTION>
Number of Votes Cast in Favor Number of Votes Casts Against Number of Votes Abstain
<S> <C> <C>
8,150,754 25,763 15,570
</TABLE>
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.
<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
Chief Executive Officer
By: /s/ Paul Levine
---------------
Paul Levine
President and Secretary
Dated: September 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000915909
<NAME> HIRSCH INTERNATIONAL CORP.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> MAY-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 5,415,000
<SECURITIES> 0
<RECEIVABLES> 22,748,000
<ALLOWANCES> (4,273,000)
<INVENTORY> 38,575,000
<CURRENT-ASSETS> (3,023,000)
<PP&E> 14,010,000
<DEPRECIATION> (6,934,000)
<TOTAL-ASSETS> 103,792,000
<CURRENT-LIABILITIES> 17,414,000
<BONDS> 0
0
0
<COMMON> 95,000
<OTHER-SE> 67,120,000
<TOTAL-LIABILITY-AND-EQUITY> 103,792,000
<SALES> 16,879,000
<TOTAL-REVENUES> 17,406,000
<CGS> 11,530,000
<TOTAL-COSTS> 20,805,000
<OTHER-EXPENSES> 154,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 380,000
<INCOME-PRETAX> (3,933,000)
<INCOME-TAX> (1,500,000)
<INCOME-CONTINUING> (2,462,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,462,000)
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
