UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30,1999
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 June 18, 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.
<S> <C>
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - April 30, 1999
and January 31, 1999 3-4
Consolidated Statements of Operations for the
Three Months Ended April 30, 1999 and 1998 5
Consolidated Statements of Cash Flows for the
Three Months Ended April 30, 1999 and 1998 6-7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-17
Part II. Other Information 18
Signatures 19
</TABLE>
2
<PAGE>
Part I - Financial Information
Item 1. Consolidated Financial Statements
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, January 31,
1999 1999
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $5,417,000 $3,078,000
Accounts receivable, net 20,131,000 22,956,000
Net investment in sales-type leases,
current portion (Note 4) 2,244,000 2,254,000
Inventories, net (Note 3) 35,604,000 36,335,000
Prepaid income taxes 1,046,000 1,786,000
Other current assets 5,225,000 5,284,000
----------- ----------
Total current assets 69,667,000 71,693,000
----------- ----------
NET INVESTMENT IN SALES-TYPE LEASES,
non-current portion (Note 4) 12,496,000 11,256,000
EXCESS OF COST OVER NET ASSETS ACQUIRED,
net of accumulated amortization of
approximately $2,977,000 and $2,686,000,
respectively 13,848,000 14,139,000
PURCHASED TECHNOLOGIES, net of accumulated
amortization of approximately $988,000
and $940,000, respectively 351,000 399,000
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 7,182,000 7,602,000
OTHER ASSETS 1,804,000 1,846,000
----------- -----------
TOTAL ASSETS $105,348,000 $106,935,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, January 31,
1999 1999
---------- -----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade acceptances payable $2,718,000 $2,164,000
Accounts payable and accrued expenses 13,624,000 17,338,000
Current maturities of long-term debt 251,000 252,000
---------- ----------
Total current liabilities 16,593,000 19,754,000
LONG-TERM DEBT, less current maturities
(Note 5) 17,573,000 15,640,000
---------- ----------
Total liabilities 34,166,000 35,394,000
---------- ----------
MINORITY INTEREST (Note 1) 1,505,000 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 29,013,000 29,543,000
---------- ----------
70,505,000 71,035,000
Less: Treasury stock, at cost; 90,300 shares 828,000 828,000
---------- ----------
Total stockholders' equity 69,677,000 70,207,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $105,348,000 $106,935,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
April 30,
-----------------------
1999 1998
--------- ----------
<S> <C> <C>
REVENUES
Net Sales $24,898,000 $37,198,000
Interest income related to sales-type leases 878,000 1,271,000
---------- ----------
Total revenue 25,776,000 38,469,000
---------- ----------
COST OF SALES 16,241,000 24,231,000
---------- ----------
GROSS PROFIT 9,535,000 14,238,000
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 9,896,000 11,644,000
---------- ----------
OPERATING (LOSS) INCOME (361,000) 2,594,000
OTHER EXPENSE (INCOME)
Interest expense 324,000 204,000
Other income (234,000) (10,000)
---------- ----------
Total other expense 90,000 194,000
---------- ----------
(LOSS) INCOME BEFORE INCOME TAX (BENEFIT)
PROVISION AND MINORITY INTEREST IN NET
EARNINGS OF CONSOLIDATED SUBSIDIARY (451,000) 2,400,000
INCOME TAX (BENEFIT)PROVISION (92,000) 1,020,000
MINORITY INTEREST IN NET EARNINGS
OF CONSOLIDATED SUBSIDIARY (Note 1) 171,000 71,000
--------- ---------
NET (LOSS) INCOME ($530,000) $1,309,000
========= =========
(LOSS) EARNINGS PER SHARE
Basic ($0.06) $0.14
====== =====
Diluted ($0.06) $0.14
====== =====
WEIGHTED AVERAGE NUMBER OF SHARES
IN THE CALCULATION OF (LOSS)
EARNINGS PER SHARE
Basic 9,392,000 9,459,000
========= =========
Diluted 9,392,000 9,524,000
========= =========
</TABLE>
5
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ($530,000) $1,309,000
Adjustments to reconcile net (loss)
income to net cash used in operating
activities:
Depreciation and amortization 887,000 832,000
Provision for reserves 694,000 100,000
Minority interest 171,000 71,000
Changes in assets and liabilities:
Accounts receivable 2,441,000 (1,092,000)
Net investment in sales-type leases (1,154,000) 343,000
Inventories 421,000 (9,489,000)
Prepaid taxes 740,000 -
Other assets 22,000 296,000
Trade acceptances payable 554,000 (1,667,000)
Accounts payable and accrued expenses (3,714,000) 1,503,000
Income taxes payable - (74,000)
--------- ---------
Net cash provided by (used in)
operating activities 532,000 (7,868,000)
--------- ---------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (125,000) (451,000)
-------- -------
Net cash used in investing activities (125,000) (451,000)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank financing 3,000,000 14,000,000
Repayments of long-term debt (1,068,000) (61,000)
Proceeds from exercise of stock options
and warrants - 20,000
Purchase of treasury shares - (478,000)
--------- ---------
Net cash provided by financing activities 1,932,000 13,481,000
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 2,339,000 5,162,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,078,000 2,956,000
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $5,417,000 $8,118,000
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $373,000 $203,000
========= =========
Income taxes paid $276,000 $1,243,000
========= =========
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Three Months Ended April 30, 1999 and 1998
1. Organization and Basis of Presentation
The accompanying consolidated financial statements as of and for the three
month periods ended April 30, 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"), and
Tajima USA, Inc. ("TUI") (collectively, the "Company").
On January 6, 1998, Tokai Industrial Sewing Machine Company ("Tokai")
purchased a 45 percent interest in TUI for $900,000. For financial purposes, the
assets, liabilities and earnings of TUI are consolidated in the Company's
financial statements. Tokai's 45 percent interest in TUI has been reported as
minority interest in the Company's Consolidated Balance Sheet and the earnings
from January 6, 1998 have been reported as minority interest in the Company's
Consolidated Statements of Income.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all the adjustments, consisting of normal accruals,
necessary to present fairly the results of operations for each of the three
month periods ended April 30, 1999 and 1998, the financial position at April 30,
1999 and cash flows for the three month periods ended April 30, 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 three months ended
April 30, 1999 and 1998.
3. Inventories
<TABLE>
<CAPTION>
April 30, 1999 January 31, 1999
-------------- ----------------
<S> <C> <C>
Machines.......................................... $32,722,000 $32,465,000
Parts............................................. 5,705,000 6,383,000
------------- ------------
38,427,000 38,848,000
Less: Reserve.................................... (2,823,000) (2,513,000)
------------- ------------
Inventories, net.................................. $35,604,000 $36,335,000
============== ============
</TABLE>
8
<PAGE>
4. Net Investment in Sales-Type Leases
<TABLE>
<CAPTION>
April 30, 1999 January 31, 1999
-------------- ----------------
<S> <C> <C>
Total minimum lease payments
receivable........................................ $11,308,000 $9,944,000
Estimated residual value of leased
property (unguaranteed)..................... 7,587,000 7,360,000
Reserve for estimated uncollectible
lease payments................................ (1,100,000) (1,100,000)
Less: Unearned income....................... (3,055,000) (2,694,000)
----------- -----------
Net investment................................... 14,740,000 13,510,000
Less: Current portion........................... (2,244,000) (2,254,000)
---------- -----------
Non-current portion............................. $12,496,000 $11,256,000
============ ===========
5. Long-Term Debt
April 30, 1999 January 31, 1998
-------------- ----------------
Revolving credit facility (A).................... $16,500,000 $14,500,000
Mortgage (B)..................................... 1,262,000 1,320,000
Other............................................ 62,000 72,000
------------- -------------
Total............................................ 17,824,000 15,892,000
Less: Current maturities....................... (251,000) (252,000)
------------ -------------
Long-term maturities........................... $17,573,000 $15,640,000
============= ==============
</TABLE>
9
<PAGE>
(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 $2,718,000 at April 30, 1999. The Company was in
default of certain financial covenants at April 30, 1999 and has received
waivers of such defaults from the banks.
(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.
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.
10
<PAGE>
<TABLE>
<CAPTION>
Embroidery Leasing Corporate Consolidated
---------- -------- --------- -------------
<S> <C> <C> <C> <C>
Three Months Ended April 30, 1999
- ----------------------------------
Sales to unaffiliated customers $24,710,000 $ 1,066,000 $ - $ 25,766,000
Transfers between segments 8,628,000 - (8,628,000) -
--------- --------- ---------- -----------
Total revenues $33,338,000 $ 1,066,000 $ (8,628,000) $ 25,766,000
========= ========= ========== ===========
Interest expense $ 309,000 $ 15,000 $ - $ 324,000
========= ========= ========== ===========
Depreciation and amortization expense $ 438,000 $ 103,000 $ 339,000 $ 880,000
========= ========= ========== ===========
(Loss) income before income tax
(benefit) provision $ (733,000) $ 135,000 $ 147,000 $ (451,000)
========= ========= ========== ===========
Income tax (benefit) provision $ (146,000) $ 54,000 $ - $ (92,000)
========= ========= ========== ===========
Identifiable assets $68,452,000 $19,847,000 $ 17,049,000 $ 105,348,000
========== ========== ========== ===========
Three Months Ended April 30, 1998
- ---------------------------------
Sales to unaffiliated customers $36,580,000 $ 1,889,000 $ - $ 38,469,000
Transfers between segments 9,948,000 - (9,948,000) -
--------- --------- ---------- -----------
Total revenues $46,528,000 $ 1,889,000 $ (9,948,000) $ 38,469,000
========= ========= ========== ===========
Interest expense $ 204,000 $ - $ - $ 204,000
========= ========= ========== ===========
Depreciation and amortization expense $ 448,000 $ 5,000 380,000 833,000
========= ========= ========== ===========
Income before income tax provision $ 2,304,000 $ 450,000 $ (354,000) $ 2,400,000
========= ========= ========== ===========
Income tax provision $ 840,000 $ 180,000 $ - $ 1,020,000
========= ========= ========== ===========
Identifiable assets $91,404,000 $18,919,000 $ 19,247,000 $ 129,570,000
========= ========= ========== ===========
</TABLE>
11
<PAGE>
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 April 30, 1999, cash payments and non-cash
charges of approximately $1,113,000 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.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. When used herein, the words "anticipate",
"believe", "estimate" and "expect" and similar expressions as they relate to the
Company or its management are intended to identify such forward-looking
statements. The Company's actual results, performance or achievements could
differ materially from the results expressed in or implied by these
forward-looking statements. Factors that could cause or contribute to such
differences should be read in conjunction with, and is qualified in its entirety
by, the Company's Consolidated Financial Statements, including the Notes
thereto. Historical results are not necessarily indicative of trends in
operating results for any future period. As used herein, "fiscal year" and
"fiscal" refers to the applicable fiscal year ending January 31 of the
applicable calendar year.
Three months ended April 30, 1999 as compared to the three months ended
April 30, 1998
Net sales. Net sales for the three months ended April 30, 1999 were
$24,898,000, a decrease of $12,300,000, or 33.1%, compared to $37,198,000 for
the three months ended April 30, 1998. The Company believes that the reduction
in the sales level for the three months ended April 30, 1999 is attributable to
a decrease in overall demand for new embroidery machines.
The sale of new embroidery machinery represented approximately $18,730,000
or 75.2%, and $28,630,000, or 77.0%, of net sales for the three months ended
April 30, 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 $10,347,000 and
$8,383,000, respectively of total new embroidery machine sales during the three
months ended April 30, 1999 as compared to approximately $13,254,000 and
$15,376,000 for the three months ended April 30, 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 three months ended April 30, 1999 aggregated approximately $6,168,000, as
compared to $8,568,000 for the three months ended April 30, 1998.
Interest income related to sales-type leases. HAPL's interest income
decreased 30.9% to $878,000 for the three months ended April 30, 1999 from
$1,271,000 for the comparable period 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 43.8% of total new equipment sales
for the three months ended April 30, 1999 as compared to 48.9% for the three
months ended April 30, 1998.
13
<PAGE>
Cost of sales. For the three months ended April 30, 1999, cost of sales
decreased $7,990,000, or 33.0%, to $16,241,000 from $24,231,000 for the three
months ended April 30, 1998. The decrease was a result of the related decrease
in net sales for the three months ended April 30, 1999 as compared to the three
months ended April 30, 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 consistent for the three months ended April 30, 1999 at 37.0% as
compared to 37.0% for the three months ended April 30, 1998.
Selling, General and Administrative ("SG&A") Expenses. For the three months
ended April 30, 1999, SG&A decreased $1,748,000, or 15.0%, to $9,896,000 from
$11,644,000 for the three months ended April 30, 1998. SG&A expenses increased
as a percentage of revenues to 38.4% from 30.3%. The increase in SG&A expenses
as a percentage of revenues for the three months ended April 30, 1999 as
compared to the three months ended April 30, 1998 is primarily attributable to
the Company's prior investment in its infrastructure to support anticipated
sales levels during fiscal 1999. In addition, approximately $200,000 of SG&A
expenses were incurred in the three months ended April 30, 1999 in connection
with the Hometown Threads joint venture with Jacobs Management Corporation and
the Company's new Building Blocks division. 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 three months ended April 30,
1999 increased $120,000, or 58.8%, to $324,000 from $204,000 for the three
months ended April 30, 1998. This increase in interest expense is the result of
increased working capital borrowings outstanding against the Company's Revolving
Credit Facility during the three months ended April 30, 1999 as compared to the
three months ended April 30, 1998.
Income tax (benefit) provision. The income tax benefit reflected an
effective benefit rate of approximately 20.4% for the three months ended April
30, 1999 as compared to an income tax provision reflecting an effective tax rate
of 42.5% for the three months ended April 30, 1998. 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 three months ended April 30, 1999
was $530,000, a decrease of $1,839,000, or 140.5%, as compared to net income of
$1,309.000 for the three months ended April 30, 1998. The net margin decreased
to (2.1%) for the three months ended April 30, 1999 from 3.4% for the three
months ended April 30, 1998. These decreases are attributable to the decrease in
net sales and the increase in SG&A expenses as a percentage of revenues.
14
<PAGE>
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $53,074,000 at April 30, 1999, increasing
$1,135,000, or 2.2%, 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 three months ended April 30, 1999, the Company's cash and cash
equivalents increased by $2,339,000 to $5,417,000. Net cash of $532,000 was
provided by the Company's operating activities. Cash provided by decreases in
the balance of accounts receivable, inventory, prepaid taxes, and other assets
aggregating approximately $3,642,000 and an increase in trade acceptances
payable of approximately $554,000 was offset by cash used to increase net
investment in sales-type leases of approximately $1,154,000 and a decrease in
accounts payable and accrued expenses of approximately $3,714,000.
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 $2,718,000 at April 30, 1999. Outstanding
working capital borrowings against the Facility aggregated $16,500,000 at April
30, 1999. The Company was in default of certain financial covenants at April 30,
1999 and has received waivers of such defaults from the banks.
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
$200,376,000 in lease agreements through April 30, 1999. As of April 30, 1999,
approximately $180,096,000, or 89.9%, 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.
15
<PAGE>
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.
16
<PAGE>
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 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.
17
<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 Vite of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*3.1 Restated Certifictae of Incorporatin of the Registrant
**3.2 Amended and Restated By-laws of the Registrant
***4.1 Specimen of Class A Common Stock Certificate
***4.2 Specimen of Class B Common Stock Certificate
10.1 Form of Third Amendment and Waiver, dated as of June 21, 1999, by and
among the Company, HAPL Leasing Co., Inc., Sewing Machine Exchange, Inc., Pulse
Microsystems, Inc., Sedeco, Inc., Hirsch Equipment Connection, inc., The Bank of
New YOrk, Fleet Bank, n.A., Mellon Bank, N.A. and The Bank of New York, as
Agent.
27 Finacial Data Schedule
18
<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, Chairman and
Chief Executive Officer
By: /s/Richard M. Richer
------------------------------
Richard Richer,
Chief Financial Officer
Dated: June 21, 1999
19
THIRD AMENDMENT AND WAIVER
THIS THIRD AMENDMENT AND WAIVER ("Amendment") made as of this 21st day of
June, 1999 among HIRSCH INTERNATIONAL CORP., a Delaware corporation having its
principal place of business at 200 Wireless Boulevard, Hauppauge, New York 11788
("Hirsch" or a "Borrower"), HAPL LEASING CO., INC., a New York corporation
having its principal place of business at 200 Wireless Boulevard, Hauppauge, New
York 11788 ("HAPL" or a "Borrower") (Hirsch and HAPL sometimes referred to
herein as a "Borrower" or collectively, as the "Borrowers"), SEWING MACHINE
EXCHANGE, INC., an Illinois corporation having an office at 200 Wireless
Boulevard, Hauppauge, New York 11788 ("SMX"), PULSE MICROSYSTEMS LTD., an
Ontario, Canada corporation having its principal place of business at 2660
Meadowvale Boulevard, Unit 10, Mississauga, Ontario, Canada L5N6M6 ("Pulse"),
SEDECO, INC., a Texas corporation having its principal place of business at 1124
W. Fuller Avenue, Fort Worth, Texas 76115 ("Sedeco") and HIRSCH EQUIPMENT
CONNECTION, INC., a Delaware corporation having an office at 200 Wireless
Boulevard, Hauppauge, New York 11788 ("Equipment") (Hirsch,( with respect to
Loans made to HAPL), HAPL, (with respect to Loans made to and Letters of Credit
issued for, Hirsch), SMX, Pulse, Sedeco and Equipment being individually, a
"Guarantor" and collectively, the "Guarantors"), THE BANK OF NEW YORK, a New
York banking organization, having an office at 604 Broad Hollow Road, Melville
New York 11747 ("BNY" or a "Bank") FLEET BANK, N.A., a national banking
association, having an office at 300 Broad Hollow Road, Melville, New York
("Fleet" or a "Bank"), MELLON BANK, N.A., a national banking association, having
an office at 176 EAB Plaza, West Tower, 11th Floor, Uniondale, New York
11556-0176 ("Mellon" or a "Bank") and THE BANK OF NEW YORK, as agent for the
Banks (the "Agent").
W I T N E S S E T H :
WHEREAS, Hirsch, HAPL and the other Guarantors, and BNY, Mellon and Fleet,
as lending Banks, and BNY, as Agent, entered into a Loan Agreement dated as of
the 7th day of January, 1997, which Loan Agreement has heretofore been amended
pursuant to that certain First Amendment dated September 26, 1997 and that
certain Second Amendment dated as of February 9, 1999 (hereinafter, the
"Agreement"); and
WHEREAS, the Banks have made certain commitments to Hirsch and HAPL
pursuant to the Agreement; and
<PAGE>
WHEREAS, Hirsch, HAPL and the other Guarantors have requested that the
Agent and the Banks agree to waive certain defaults under the Agreement; and
WHEREAS, the Agent and the Banks have agreed to waive such defaults on the
terms and conditions herein contained; and
WHEREAS, Hirsch, the Agent and the Banks have agreed to reduce Hirsch's L/C
Exposure on the terms and conditions herein contained; and
WHEREAS, Hirsch, HAPL, the other Guarantors the Agent and the Banks have
agreed to amend the definition of the term Obligations contained in the Security
Agreement.
NOW, THEREFORE, in consideration of Ten ($10.00) Dollars and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Borrower, the Guarantors and the Bank do hereby agree as
follows:
1. Defined Terms. As used in this Amendment, capitalized terms, unless
otherwise defined, shall have the meanings set forth in the Agreement.
2. Representations and Warranties. As an inducement for the Agent and the
Banks to enter into this Amendment, Hirsch, HAPL and each other Guarantor
represent and warrant as follows:
A. That with respect to the Agreement and the Loan Documents executed in
connection therewith and herewith:
(i) There are no defenses or offsets to Hirsch's, HAPL's or any other
Guarantor's obligations under the Agreement, as in effect prior to or subsequent
to this Amendment, the Notes or any of the other Loan Documents or any other
agreements in favor of the Agent or the Banks referred to in the Agreement, and
if any such defenses or offsets exist without the knowledge of Hirsch, HAPL or
any other Guarantor, the same are hereby waived.
(ii) All of the representations and warranties made by Hirsch, HAPL or any
other Guarantor in the Agreement, as amended hereby, are true and correct in all
material respects as if made on the date hereof, except for those made with
respect to a particular date, which such representations and warranties are
restated as of such date; and provided further that the representations and
warranties set forth in Section 4.01(f) of the Agreement shall relate to the
consolidated financial statements of Hirsch, HAPL and the other Guarantors for
the fiscal year ended January 31, 1999.
<PAGE>
(iii) The outstanding aggregate principal balance of the Revolving Credit
Loans (Hirsch) is $20,000,000.00 and interest has been paid (i) with respect to
the $2,000,000.00 Eurodollar Loan through June 14, 1999, (ii) with respect to
the $14,500,000.00 Eurodollar Loan through May 19, 1999; and (iii) with respect
to the $3,500,000.00 ABR Loan through June 10, 1999.
(iv) The outstanding aggregate L/C Exposure is $3,616,888.33.
(v) The outstanding aggregate principal balance of the Revolving Credit
Loans (HAPL) is $0.
3. Amendments.
(a) The following definition is hereby added to the Agreement as follows:
"'Foreign Exchange Potential Risk' means any and all risk, cost, expense or
liability incurred or which may be incurred by a Bank resulting from such Bank
and Hirsch entering into any foreign exchange contract."
(b) Section 2A.01(b)(v) is hereby deleted in its entirety and replaced as
follows:
"(v) the aggregate L/C Exposure, after giving effect to the requested
Letter of Credit, under all Letters of Credit shall exceed $6,616,888.33; or"
4. Waivers. The Agent and the Banks hereby waive the following:
(a) (i) the failure of Hirsch and the Guarantors to maintain a Consolidated
Tangible Net Worth ("TNW") (excluding the financial impact of third party sales
by Tajima USA, Inc. from consolidated operations and after excluding the net
income of Tajima USA, Inc. from Hirsch's consolidated net income) of not less
than $60,958,600.00 as of the fiscal quarter ended April 30, 1999, provided that
the actual TNW as of such fiscal quarter end is not less than $55,474,000.00.
(ii) the failure of Hirsch and the Guarantors to maintain a
Consolidated Tangible Net Worth ("TNW") of not less than $60,958,600.00 as of
the fiscal quarter ended April 30, 1999, provided that the actual TNW as of such
fiscal quarter end is not less than $55,474,000.00.
<PAGE>
(b) (i) the failure of Hirsch and Guarantors to maintain as of the fiscal
quarter ended April 30, 1999, on a consolidated basis, a Funded Debt to EBITDA
Ratio (excluding the financial impact of third party sales by Tajima USA, Inc.
from consolidated operations and after excluding the net income of Tajima USA,
Inc. from Hirsch's consolidated net income) of not greater than 2.25 to 1.00,
provided that the actual Funded Debt to EBITDA Ratio as of such fiscal year end
is not greater than -5.23 to 1.00.
(ii) the failure of Hirsch and Guarantors to maintain as of the fiscal
quarter ended April 30, 1999, on a consolidated basis, a Funded Debt to EBITDA
Ratio of not greater than 2.25 to 1.00, provided that the actual Funded Debt to
EBITDA Ratio as of such fiscal year end is not greater than -5.23 to 1.00.
(c) (i) the failure of Hirsch and Guarantors to maintain as of the fiscal
quarter ended April 30, 1999, on a consolidated basis, a Fixed Charge Coverage
Ratio (excluding the financial impact of third party sales by Tajima USA, Inc.
from consolidated operations and after excluding the net income of Tajima USA,
Inc. from Hirsch's consolidated net income) of not less than 3.50 to 1.00,
provided that the actual Fixed Charge Coverage Ratio is not less than -2.93 to
1.00.
(ii) the failure of Hirsch and Guarantors to maintain as of the fiscal
quarter ended April 30, 1999, on a consolidated basis, a Fixed Charge Coverage
Ratio of not less than 3.50 to 1.00, provided that the actual Fixed Charge
Coverage Ratio is not less than -2.93 to 1.00.
5. Effectiveness. This Amendment shall become effective upon the occurrence
of the following events and the receipt and satisfactory review by the Bank and
its counsel of the following documents:
(a) The Agent shall have received this Amendment, duly executed by Hirsch,
HAPL, each other Guarantor and each of the Banks.
(b) The Bank's counsel shall have been paid their fees and disbursements in
connection with this Amendment.
6. Amendment to Security Agreements. The definition of the term Obligations
contained in each of the Security Agreements is hereby deleted in its entirety
and replaced as follows:
<PAGE>
"'Obligations' shall mean any and all liabilities and obligations of the
Company to the Agent and the Banks of every kind arising under this Agreement,
the Loan Agreement, any other Loan Document, any other agreement of the Company
with the Agent and the Banks and all Foreign Exchange Potential Risk (determined
by the bank incurring the same in its sole discretion) resulting from foreign
exchange contracts between the Company and any Bank, including any liability of
the Company pursuant to any guarantee executed by the Company in favor of the
Banks, however evidenced and whether now existing or hereafter incurred,
originally contracted with the Agent and the Banks alone or with another or
others, or as agent for another or others, secured or not secured, direct or
indirect, matured or not matured, absolute or contingent, now due or hereafter
to become due (including, without limitation, any and all costs and reasonable
attorneys' fees incurred by the Agent in the collection, whether by suit or by
any other means of any of the Obligations hereunder) and any amendment,
modification, extension or renewal of any of the foregoing."
7. Governing Law. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of New York.
8. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
9. Ratification. Except as hereby amended, the Agreement and all other Loan
Documents executed in connection therewith shall remain in full force and effect
in accordance with their originally stated terms and conditions. The Agreement
and all other Loan Documents executed in connection therewith, as amended
hereby, are in all respects ratified and confirmed.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the year and date first above written.
THE BANK OF NEW YORK, as Agent HAPL LEASING CO., INC.
By:____________________________ By:________________________
Steven E. Ratner Name:
Vice President Title:
THE BANK OF NEW YORK PULSE MICROSYSTEMS, LTD.
By:____________________________ By:________________________
Steven E. Ratner Name:
Vice President Title:
FLEET BANK, N.A. SEWING MACHINE EXCHANGE, INC.
By:____________________________ By:________________________
Name: Name:
Title: Title:
MELLON BANK, N.A. SEDECO, INC.
By:____________________________ By:________________________
Name: Name:
Title: Title:
HIRSCH INTERNATIONAL CORP. HIRSCH EQUIPMENT CONNECTION, INC.
By:____________________________ By:_________________________
Name: Name:
Title: Title:
<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> FEB-01-1999
<PERIOD-END> APR-30-1999
<CASH> 5,417,000
<SECURITIES> 0
<RECEIVABLES> 24,354,000
<ALLOWANCES> (4,223,000)
<INVENTORY> 35,604,000
<CURRENT-ASSETS> 69,667,000
<PP&E> 13,695,000
<DEPRECIATION> (6,513,000)
<TOTAL-ASSETS> 105,348,000
<CURRENT-LIABILITIES> 16,593,000
<BONDS> 0
0
0
<COMMON> 95,000
<OTHER-SE> 69,582,000
<TOTAL-LIABILITY-AND-EQUITY> 105,348,000
<SALES> 24,898,000
<TOTAL-REVENUES> 25,776,000
<CGS> 16,241,000
<TOTAL-COSTS> 26,137,000
<OTHER-EXPENSES> (234,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 324,000
<INCOME-PRETAX> (451,000)
<INCOME-TAX> (92,000)
<INCOME-CONTINUING> (530,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (530,000)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
