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, 2000
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: (631) 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 19, 2000.
Class of Number of
Common Equity Shares
------------- ------
Class A Common Stock, 6,487,831
par value $.01
Class B Common Stock, 2,668,139
par value $.01
<PAGE>
HIRSCH INTERNATIONAL CORP. and SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
Part I. Financial Information
Item 1. Consolidated Financial Statements
<S> <C>
Consolidated Balance Sheets - April 30, 2000
and January 31, 2000 F-2 to F-3
Consolidated Statements of Operations for the
Three Months Ended April 30, 2000 and 1999 F-4
Consolidated Statements of Cash Flows for the
Three Months Ended April 30, 2000 and 1999 F-5 to F-6
Notes to Consolidated Financial Statements F-7 to F-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations F-12 to F-15
Part II. Other Information
Signatures F-16
</TABLE>
<PAGE>
Part I - Financial Information
Item 1. Consolidated Financial Statements
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30, January 31,
2000 2000
--------- ---------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $1,112,000 $1,290,000
Accounts receivable, net 18,273,000 17,293,000
Net investment in sales-type leases,
current portion (Note 3) 2,305,000 2,583,000
Inventories, net (Note 2) 22,965,000 25,711,000
Prepaid income taxes 3,927,000 3,673,000
Other current assets 453,000 423,000
----------- ----------
Total current assets 49,035,000 50,973,000
----------- ----------
NET INVESTMENT IN SALES-TYPE LEASES,
non-current portion (Note 3) 6,023,000 8,207,000
EXCESS OF COST OVER NET ASSETS ACQUIRED,
net of accumulated amortization of
approximately $4,142,000 and $3,851,000,
respectively 12,684,000 12,974,000
PURCHASED TECHNOLOGIES, net of accumulated
amortization of approximately $1,180,000
and $1,132,000, respectively 159,000 207,000
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 6,376,000 6,544,000
OTHER ASSETS 1,176,000 1,311,000
----------- -----------
TOTAL ASSETS $75,453,000 $80,216,000
=========== ===========
See notes to consolidated financial statements.
F-2
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30, January 31,
2000 2000
---------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade acceptances payable $2,730,000 $6,199,000
Accounts payable and accrued expenses 11,649,000 12,805,000
Current maturities of long-term debt 3,395,000 2,342,000
---------- ----------
Total current liabilities 17,774,000 21,346,000
LONG-TERM DEBT, less current maturities
(Note 4) 856,000 989,000
---------- ----------
Total liabilities 18,630,000 22,335,000
---------- ----------
MINORITY INTEREST (Note 1) 1,585,000 1,628,000
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized:
1,000,000 shares; issued: none -- --
Class A common stock, $.01 par value; authorized:
20,000,000 shares, issued and outstanding:
6,815,000 and 6,487,831 shares, respectively,
at April 30, 2000; and 6,815,000 and 6,488,700
shares, respectively, at January 31, 2000 68,000 68,000
Class B common stock, $.01 par value; authorized:
3,000,000 shares, issued and outstanding:
2,668,139 shares at April 30,2000 and
January 31, 2000, respectively 27,000 27,000
Additional paid-in capital 41,397,000 41,397,000
Retained earnings 14,752,000 15,721,000
Accumulated other comprehensive income 175,000 221,000
---------- ----------
56,419,000 57,434,000
Less: Treasury stock, at cost; 326,300 shares 1,181,000 1,181,000
---------- ----------
Total stockholders' equity 55,238,000 56,253,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $75,453,000 $80,216,000
=========== ===========
See notes to consolidated financial statements.
F-3
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
April 30,
-----------------------
2000 1999
--------- ---------
(Restated; See
Note 6)
REVENUES
Net Sales $ 18,094,000 $ 24,498,000
Interest income related to sales-type leases 632,000 878,000
------------ ------------
Total revenue 18,726,000 25,376,000
------------ ------------
COST OF SALES 11,523,000 16,041,000
------------ ------------
GROSS PROFIT 7,203,000 9,335,000
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 8,118,000 9,896,000
------------ ------------
OPERATING (LOSS) INCOME (915,000) (561,000)
OTHER EXPENSE (INCOME)
Interest expense 80,000 324,000
Other expense (income) 20,000 (234,000)
------------ ------------
Total other expense 100,000 90,000
------------ ------------
(LOSS) INCOME BEFORE INCOME TAX (BENEFIT)
PROVISION AND MINORITY INTEREST IN NET
EARNINGS OF CONSOLIDATED SUBSIDIARY (1,015,000) (651,000)
INCOME TAX (BENEFIT)PROVISION (3,000) (92,000)
MINORITY INTEREST IN NET EARNINGS
OF CONSOLIDATED SUBSIDIARY (Note 1) (43,000) 171,000
------------ ------------
NET (LOSS) INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (Note 6) ($ 969,000) ($ 730,000)
------------ ------------
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (NOTE 6) -- (2,187,000)
------------ ------------
NET (LOSS) INCOME ($ 969,000) ($2,917,000)
============ ===========
(LOSS) EARNINGS PER SHARE
Basic:
(Loss) Income before cumulative effect
of accounting change ($ 0.11) ($ 0.08)
Cumulative effect of accounting
change (Note 6) -- ($ 0.23)
------------ ------------
Net (Loss) Income per share ($ 0.11) ($ 0.31)
============ ============
Diluted:
(Loss) Income before cumulative
effect of accounting change ($ 0.11) ($ 0.08)
Cumulative effect of accounting
change (Note 6) -- ($ 0.23)
------------ ------------
Net (Loss) Income per share ($ 0.11) ($ 0.31)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
IN THE CALCULATION OF (LOSS)
EARNINGS PER SHARE
Basic 9,155,970 9,392,000
============ ============
Diluted 9,155,970 9,392,000
============ ============
See notes to consolidated financial statements.
F-4
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
April 30,
-----------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ($ 969,000) ($2,917,000)
Adjustments to reconcile net (loss)
income to net cash used in operating
activities:
Depreciation and amortization 816,000 887,000
Provision for reserves -- 694,000
Minority interest (43,000) 171,000
Changes in assets and liabilities:
Accounts receivable (980,000) 2,441,000
Net investment in sales-type leases 2,462,000 (1,154,000)
Inventories 2,746,000 421,000
Prepaid taxes (254,000) 740,000
Other assets 20,000 22,000
Trade acceptances payable (3,469,000) 554,000
Accounts payable and accrued expenses (1,156,000) (1,327,000)
Income taxes payable -- --
----------- -----------
Net cash provided by (used in)
operating activities (827,000) 532,000
----------- -----------
See notes to consolidated financial statements.
F-5
<PAGE>
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
April 30,
-------------------
2000 1999
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ($ 225,000) (125,000)
-----------
Net cash used in investing activities (225,000) (125,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank financing 1,053,000 3,000,000
Repayments of long-term debt (133,000) (1,068,000)
Unrecognized loss on currency exchange (46,000) --
Purchase of treasury shares -- --
----------- -----------
Net cash provided by financing activities 874,000 1,932,000
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS (178,000) 2,339,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,290,000 3,078,000
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,112,000 $ 5,417,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 80,000 $ 324,000
=========== ===========
Income taxes paid $ 93,000 $ 1,243,000
=========== ===========
See notes to consolidated financial statements.
F-6
<PAGE>
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Three Months Ended April 30, 2000 and 1999
1. Organization and Basis of Presentation
The accompanying consolidated financial statements as of and for the three
month periods ended April 30, 2000 and 1999 include the accounts of Hirsch
International Corp. ("Hirsch"), HAPL Leasing Co., Inc. ("HAPL"), Pulse
Microsystems Ltd. ("Pulse"), Tajima USA, Inc. ("TUI"), Hometown Threads, LLC,
and HJ Grassroots, LLC (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 Tokai's share
of the earnings 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, 2000 and 1999, the financial position at April 30,
2000 and cash flows for the three month periods ended April 30, 2000 and 1999,
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, 2000 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. Inventories
April 30, 2000 January 31, 2000
----------- -----------
New Machines...................$17,704,000 $20,455,000
Used Machines.................. 3,575,000 4,795,000
Parts and Accessories.......... 4,717,000 4,092,000
----------- -----------
25,896,000 29,342,000
Less: Reserve for Slow
Moving Inventory............. (2,931,000) (3,631,000)
----------- -----------
Inventories, net............... $22,965,000 $25,711,000
============ ===========
F-7
<PAGE>
3. Net Investment in Sales-Type Leases
<TABLE>
<CAPTION>
April 30, 2000 January 31, 2000
-------------- ----------------
<S> <C> <C>
Total minimum lease payments
receivable........................................ $5,943,000 $9,688,000
Estimated residual value of leased
property (unguaranteed)..................... 5,041,000 4,848,000
Reserve for estimated uncollectible
lease payments................................ (1,100,000) (1,100,000)
Less: Unearned income....................... (1,556,000) (2,646,000)
----------- -----------
Net investment................................... 8,328,000 10,790,000
Less: Current portion........................... (2,305,000) (2,583,000)
---------- -----------
Non-current portion............................. $6,023,000 $ 8,207,000
============ ===========
</TABLE>
4. Long-Term Debt
<TABLE>
<CAPTION>
April 30, 2000 January 31, 2000
-------------- ----------------
<S> <C> <C>
Revolving credit facility (A).................... $3,118,000 $ 2,064,000
Long Term Debt:
Mortgage (B)..................................... 1,032,000 1,090,000
Other............................................ 101,000 177,000
------------ -------------
Total............................................ 4,251,000 3,331,000
Less: Current maturities....................... (3,395,000) (2,342,000)
------------ -------------
Long-term maturities........................... $856,000 $ 989,000
============ =============
</TABLE>
F-8
<PAGE>
(A) Effective as of September 30, 1999 the Company satisfied all of its
obligations and exited its Revolving Credit Facility with a syndicate led by
Bank of New York and replaced it with a new Revolving Credit and Security
Agreement (the "Agreement") with PNC Bank. The Agreement provides for a
commitment of $20.0 million for Hirsch and all wholly-owned subsidiaries. The
Agreement is used for working capital loans, letters of credit and deferred
payment letters of credit and bears interest as defined in the Agreement. The
terms of the Agreement restrict additional borrowings by the Company and require
the Company to maintain certain levels of shareholders equity, as defined
therein. The Company was in default of the financial covenant contained in its
Agreement with PNC Bank at quarter-end. The Company has been advised by PNC Bank
that it has been granted a waiver of such default for the fiscal quarters ended
January 31 and April 30, 2000 and the Company is currently awaiting
documentation reflecting same. Outstanding working capital borrowings against
the Agreement aggregated approximately $3.1 million at April 30, 2000. The
Agreement was also used to support trade acceptances payable of approximately
$2.7 million as of that date.
(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. During fiscal 2000, the Mortgage
was amended to provide for an increase in the interest rate to 9.3 percent per
annum and to 11.3 percent per annum in successive quarters, subject to a
quarterly review and adjustment. The Mortgage is payable in equal monthly
principal installments of approximately $19,000. The obligation under the
Mortgage is secured by a first priority lien on the premises and the related
improvements thereon. The Company was in default of the financial covenant
contained in the Mortgage at January 31, 2000 and has received an amendment and
waiver of such default from the bank. The Company has satisfied the remaining
balance of approximately $1.0 million of the Mortgage prior to the originally
scheduled maturity date, on May 12, 2000, subsequent to the close of the
quarter.
5. Industry Segments
The Company operates in two reportable segments; embroidery equipment and
leasing. The Embroidery segment consists principally of the sale of new and 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 as previously reported. 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.
F-9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended April 30, 2000 Embroidery Leasing Corporate Consolidated
--------------------------------- ---------- ------- --------- ------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 17,985,000 $ 741,000 $ -- $ 18,726,000
------------ ------------ ------------ ------------
Total revenues 17,985,000 741,000 -- $ 18,726,000
============ ============ ============ ============
Interest expense 77,000 3,000 -- 80,000
============ ============ ============ ============
Depreciation and amortization expense 408,000 107,000 300,000 815,000
============ ============ ============ ============
(Loss) income before income tax
(benefit) provision (1,151,000) 202,000 (66,000) (1,015,000)
============ ============ ============ ============
Income tax (benefit) provision (3,000) -- -- (3,000)
============ ============ ============ ============
Identifiable assets $ 47,336,000 $ 11,528,000 $ 15,267,000 $ 74,131,000
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Embroidery Leasing Corporate Consolidated
---------- -------- --------- -------------
Three Months Ended April 30, 1999
----------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $24,710,000 $ 1,066,000 $ - $ 25,766,000
--------- --------- ---------- -----------
Total revenues $24,710,000 $ 1,066,000 $ - $ 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
========== ========== ========== ===========
</TABLE>
F-10
<PAGE>
6. Change in Accounting Method
On December 3, 1999, The SEC issued its "Staff Accounting Bulletin No. 101-
Revenue Recognition in Financial Statements," ("SAB 101") which represents a
clarification of "Generally Accepted Accounting Principles" ("GAAP") regarding
the timing of revenue recognition. Beginning with the reporting of fiscal year
2000 results, Hirsch has implemented the recommendations contained in SAB 101.
SAB 101 establishes and clarifies the basis for revenue recognition. Revenue is
recorded on equipment sales based upon customer acceptance of the machines upon
the completion of installation, rather than upon shipment by the Company.
Historically, as the cost of the installation is not material to the sale,
Hirsch's accounting practice had been to record the sale upon shipment and to
accrue the installation expense where installation was not yet completed. This
change in accounting method results in an increase of $6.4 million in sales and
$4.2 million in cost of sales during fiscal year 2000 which were originally
reported in fiscal year 1999 and requires an adjustment of fiscal year 2000
results in the amount of $2.2 million, disclosed as the cumulative effect on the
results of the three months ended April 30, 1999 due to the application of the
changed accounting method. The following table presents the adjusted effect of
the accounting change on the prior years. Key figures for the first quarter of
fiscal 2000 are summarized below.
(All figures in $000,000) Quarter Ended
April 30, 1999
--------------
Revenue:
As originally reported $ 25.8
Adjusted for Accounting Change $ 25.4
Cost of sales:
As originally reported $ 16.2
Adjusted for Accounting Change $ 16.0
Gross Profit:
As originally reported $ 9.5
Adjusted for Accounting Change $ 9.3
Income (loss) before Provision for Taxes:
As originally reported $ (0.4)
Adjusted for Accounting Change $ (2.6)
Net (loss)Income:
As originally reported $ (0.5)
Adjusted for Accounting Change $ (2.7)
F-11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. When used herein, the words "anticipate",
"believe", "estimate" and "expect" and similar expressions as they relate to the
Company or its management are intended to identify such forward-looking
statements. The Company's actual results, performance or achievements could
differ materially from the results expressed in or implied by these
forward-looking statements. Factors that could cause or contribute to such
differences should be read in conjunction with, and is qualified in its entirety
by, the Company's Consolidated Financial Statements, including the Notes
thereto. Historical results are not necessarily indicative of trends in
operating results for any future period. As used herein, "fiscal year" and
"fiscal" refers to the applicable fiscal year ending January 31 of the
applicable calendar year.
Three months ended April 30, 2000 as compared to the three months ended April
30, 1999, as adjusted for the change in accounting method.
Net sales. Net sales for the three months ended April 30, 2000 were $18.7
million, a decrease of $6.7 million, or 26.4%, compared to $25.4 million for the
three months ended April 30, 1999. The Company believes that the reduction in
the sales level for the three months ended April 30, 2000 is attributable to a
decrease in overall demand for new embroidery machines.
The sale of new embroidery machinery represented approximately $12,682,000
or 73.3%, and $18,730,000, or 77.0%, of net sales for the three months ended
April 30, 2000 and 1999, respectively. Small embroidery machines (one through
six-head "FX" models) and large embroidery machines (six-head "DC" models
through thirty-head models) represented approximately $8,268,000 and $4,414,000,
respectively of total new embroidery machine sales during the three months ended
April 30, 2000 as compared to approximately $10,347,000 and $8,383,000 for the
three months ended April 30, 1999, 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, 2000 aggregated approximately $5,413,000, as
compared to $6,168,000 for the three months ended April 30, 1999.
Interest income related to sales-type leases. HAPL's interest income
decreased 28.0% to $0.6 million for the three months ended April 30, 2000 from
$0.8 million for the comparable period of the prior year. This decrease is
directly related to the decrease in lease related receivables. The percentage
of new equipment sales which are leased was 24.3% of total new equipment sales
for the three months ended April 30, 2000 as compared to 43.8% for the three
months ended April 30, 1999.
Cost of sales. For the three months ended April 30, 2000, cost of sales
decreased $4.8 million, or 29.5%, to $11.5 million from $16.2 million for the
three months ended April 30, 1999. The decrease was a result of the related
decrease in net sales for the three months ended April 30, 2000 as compared to
the three months ended April 30, 1999. 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 improved to 38.5% for the three months ended April 30, 2000 as
compared to 37.0% for the three months ended April 30, 1999 due to changes in
the sales mix for the period.
F-12
<PAGE>
Selling, General and Administrative ("SG&A") Expenses. For the three months
ended April 30, 2000, SG&A decreased $1.8 million, or 18.0%, to $8.1 million
from $19.9 million for the three months ended April 30, 1999. SG&A expenses
increased as a percentage of revenues to 43.4% from 38.4%. The increase in SG&A
expenses as a percentage of revenues for the three months ended April 30, 2000
as compared to the three months ended April 30, 1999 is primarily attributable
to the Company's prior investment in its infrastructure to support higher
anticipated sales levels. 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,
2000 decreased $244,000, or 75.3%, to $80,000 from $324,000 for the three months
ended April 30, 1999. This decrease in interest expense is the result of
decreased working capital borrowings outstanding against the Company's Revolving
Credit Facility during the three months ended April 30, 2000 as compared to the
three months ended April 30, 1999.
Income tax (benefit) provision. The income tax provision was neutral based
on required valuation allowances for the three months ended April 30, 2000 as
compared to an income tax benefit reflecting an effective benefit rate of 20.4%
for the three months ended April 30, 1999. The Company has established a
valuation allowance against these deferred tax assets as management believes it
is not specifically determinable as to when the Company will realize these
assets in the future based upon the profitable operations of the Company.
Net (Loss) income. The net loss for the three months ended April 30, 2000
was $969,000, a decrease of $1,948,000, or 66.8%, as compared to a net loss of
$2,917,000 for the three months ended April 30, 1999 after the cumulative effect
of the accounting change of $2,187,000. The net margin decreased to (4.8%) for
the three months ended April 30, 2000 from (2.1%) for the three months ended
April 30, 1999. These decreases are attributable to the decrease in net sales, a
decrease in SG&A expenses and the cumulative effect of the change in accounting
method.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $31,491,000 at April 30, 2000, increasing
$1,865,000, or 6.2%, from $29,626,000, at January 31, 2000. The Company has
financed its operations principally through working capital borrowings under its
Revolving Line of Credit Agreement.
During the three months ended April 30, 2000, the Company's cash and cash
equivalents decreased by $178,000 to $1,112,000. Net cash of ($827,000) was used
by the Company's operating activities. Cash used by increases in the balance of
accounts receivable, inventory, prepaid taxes, and other assets aggregating
approximately $1,532,000 and a decrease in trade acceptances payable of
approximately $1,156,000 was offset by cash used to increase net investment in
sales-type leases of approximately $2,462,000 and a decrease in accounts payable
and accrued expenses of approximately $3,469,000.
The Company's strategy is to mitigate its exposure to foreign currency
fluctuations by utilizing purchases of foreign currency on the current market as
well as forward contracts to satisfy specific purchase commitments. Inventory
purchase commitments may be matched with specific foreign currency futures
contracts or covered by current purchases of foreign currency. 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.
F-13
<PAGE>
Revolving Credit Facility and Borrowings
Effective as of September 30, 1999 the Company satisfied all of its
obligations and exited its Revolving Credit Facility with a syndicate led by
Bank of New York and replaced it with a new Revolving Credit and Security
Agreement (the "Agreement") with PNC Bank. The Agreement provides for a
commitment of $20.0 million for Hirsch and all wholly-owned subsidiaries. The
Agreement is used for working capital loans, letters of credit and deferred
payment letters of credit and bears interest as defined in the Agreement. The
terms of the Agreement restrict additional borrowings by the Company and require
the Company to maintain certain levels of shareholders equity, as defined
therein. The Company was in default of the financial covenant contained in its
Credit Facility with PNC Bank,N.A. at quarter end. The Company has been advised
by PNC Bank that it has been granted a waiver of default at quarter end as well
as the default at the conclusion of fiscal 2000 and is currently awaiting
documentation reflecting same. Outstanding working capital borrowings against
the Agreement aggregated approximately $3.1 million at April 30, 2000. The
Agreement was also used to support trade acceptances payable of approximately
$2.8 million as of that date.
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 $221.3
million in lease agreements through April 30, 2000. As of April 30, 2000,
approximately $199.0 million, 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. During fiscal 2000, the Mortgage was amended to
provide for an increase in the interest rate to 9.3 percent per annum and to
11.3 percent per annum in successive quarters, subject to a quarterly review and
adjustment. The Mortgage is payable in equal monthly principal installments of
approximately $19,000. The obligation under the Mortgage is secured by a first
priority lien on the premises and the related improvements thereon. The Company
was in default of the financial covenant contained in the Mortgage at January
31, 2000 and has received an amendment and waiver of such default from the bank.
The Company has satisfied the remaining balance of approximately $1.0 million of
the Mortgage prior to the originally scheduled maturity date, on May 12, 2000,
subsequent to the close of the quarter.
F-14
<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.
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.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
The Company was in default of the financial covenant contained in its
Credit Facility with PNC Bank,N.A. at quarter end. The Company has been advised
by PNC Bank that it has been granted a waiver of default at quarter end as well
as the default at the conclusion of fiscal 2000 and is currently awaiting
documentation reflecting same.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*3.1 Restated Certificate of Incorporation of the Registrant
**3.2 Amended and Restated By-laws of the Registrant
***4.1 Specimen of Class A Common Stock Certificate
***4.2 Specimen of Class B Common Stock Certificate
27 Financial Data Schedule
*Incorporated by reference from the Registrant's Form 10-Q filed for the
quarter end July 31, 1997.
** Incorporated by reference from the Registrant's Form 10-Q filed for the
quarterend October 31, 1997.
*** Incorporated by reference from the Registrant's Registration Statemetn
on Form S-1, Registration Number 33-72618.
F-15
<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 M. Richer,
Chief Financial Officer
Dated: June 19, 2000
F-16
