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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 0-23434
HIRSCH INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
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Delaware 11-2230715
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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200 Wireless Boulevard, Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 436-7100
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the 6,523,488 shares of Class A Common Stock
held by non-affiliates of the Company as of May 5, 2000 is $6,523,488.
Indicate the number of shares outstanding of each of the registrant's
classes of common equity, as of the latest practicable date:
Class of Number of
Common Equity Shares
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Class A Common Stock 6,815,180
par value $.01
Class B Common Stock 2,668,139
par value $.01
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The information required by Part III of this Form 10-K is incorporated by
reference from the Registrant's definitive proxy statement to be filed with the
Commission on or before May 30, 2000.
PART I
Item 1. Business
General
Hirsch International Corp. ("Hirsch" or the "Company"), a Delaware
Corporation, was founded in 1970 and has become a leading single source provider
of electronic computer-controlled embroidery machinery and related value-added
products and services. The Company offers a complete line of technologically
advanced single- and multi-head embroidery machines, proprietary application
software, a diverse line of embroidery parts, supplies, accessories and
proprietary embroidery products, and a range of equipment financing options. In
addition, Hirsch provides a comprehensive service program, user training and
software support. More recently, through its Hometown Threads venture, the
Company has been test marketing its retail embroidery services concept. The
Company believes its wide-range of product offerings together with its related
value-added products and services place it in a competitively advantageous
position within its marketplace.
The application of new technologies has transformed the embroidery industry
from one which was labor-intensive, utilizing machinery with limited production
capabilities to an industry where investment in electronic, computer-controlled
machinery and related application software has increased labor efficiencies and
production capacities while expanding the flexibility and complexity of
embroidery designs. These developments have not only resulted in the expansion
of existing markets but have also led to the creation of new markets for
embroidery. The industry has benefited from the growth in consumer demand for
licensed products carrying the names, logos and designs of professional and
collegiate sports teams, entertainment companies and their characters, as well
as branded merchandise and related goods. Until recently, these trends and
others have contributed to the increase in demand for machinery, software and
services provided by Hirsch. However, beginning in fiscal 1999 and continuing
through fiscal 2000, the Company and the embroidery industry as a whole
experienced a decrease in overall demand driven by the relocation offshore of
large, multi-head equipment customers which resulted in a shift in the sales mix
of embroidery machines. As a result, the Company initiated a restructuring
program designed to address the market shifts in the industry, including closing
and consolidating certain divisions, reducing total employment and disposing of
facilities no longer required to support its new business model. (See
Management's Discussion and Analysis of Financial Condition and Results of
Operations).
The Company's customer base includes large operators who run numerous
machines as well as individuals who customize products on a single machine.
Principal customer groups include: (i) contract embroiderers, who serve
manufacturers that outsource their embroidery requirements; (ii) manufacturers,
who use embroidery to embellish their apparel, accessories, towels, linens and
other products with decorative appeal; and (iii) embroidery entrepreneurs, who
produce customized products for individuals, sports leagues, school systems,
fraternal organizations, promotional advertisers and other groups.
Hirsch has certain exclusive United States rights to sell new embroidery
machines manufactured by Tajima Industries Ltd. ("Tajima"). Tajima, located in
Nagoya, Japan, is one of the world's leading manufacturers of embroidery
machines, and is regarded as a technological innovator and producer of high
quality, reliable and durable embroidery equipment. The Company has exclusive
right to distribute Tajima small (one through six-head "FX" models) machines in
the continental United States and Hawaii and large (six-head "DC" models through
thirty-head models) machines in 39 states. In the states of Arizona, Idaho,
Montana, Nevada, Oregon, Utah, Washington, Wyoming, and Hawaii, Hirsch has
semi-exclusive rights to distribute Tajima large machines. Beginning in fiscal
year 2000, Tajima granted Hirsch the non-exclusive right to distribute to
US-based customers who had expanded their operating facilities into the
Caribbean region.
The Company enjoys a solid relationship with Tajima, having spanned more
than 20 years. Hirsch is Tajima's largest distributor in the world and
collaborates with Tajima in the development of new embroidery equipment and
enhancements to existing equipment. Until recently, all Tajima equipment was
assembled in Japan. In 1997, Hirsch formed a new subsidiary, Tajima USA, Inc
("TUI"), which currently assembles two, four and six-head Tajima machines in the
United States. In December 1997, Hirsch sold a forty-five (45%) percent interest
in TUI to Tokai Industrial Sewing Machine Company, Ltd. ("Tokai") an affiliate
of Tajima.
In addition to offering a complete line of technologically-advanced
embroidery machines and customer training, support and service, Hirsch provides
an array of value-added products to its customers. The Company's software
subsidiary, Pulse Microsystems Ltd. ("Pulse"), develops and supplies proprietary
application software programs which enhance and simplify the embroidery process,
as well as enabling the customization of designs and reduced production costs.
The majority of Pulse's proprietary application software programs are designed
to operate in the Microsoft(R) Windows(R) 95, Windows(R) 98 and Windows (R) NT
environments, which Hirsch believes will further simplify usage and enhance user
flexibility. The Company believes that Pulse Signature(TM) software is unique in
the industry in that it earned the right to use the Microsoft Windows(R)
compliance trademark.
The Company's leasing subsidiary, HAPL Leasing Co., Inc. ("HAPL Leasing"),
provides a wide range of financing options to customers wishing to finance their
purchases of embroidery equipment. Hirsch also sells a broad range of embroidery
supplies, accessories and proprietary embroidery products.
The Company's equipment and value-added products are marketed directly by
an employee sales force, whose efforts are augmented by trade journal
advertising, informational "open house" seminars and trade shows. The Company's
long-term goal is to leverage its reputation, knowledge of the marketplace,
Tajima distribution rights, industry expertise and technological innovation to
enable it to increase the overall size of the embroidery equipment market and
its market share.
The Embroidery Industry
The development of electronic computer-controlled embroidery machines has
led to new embroidery applications and markets, cost savings, higher profit
margins and production efficiencies which has transformed the embroidery
industry from being extremely labor-intensive to an industry characterized by a
high level of automation. Past innovations to embroidery machines offered
superior design flexibility and increased speed and provided the manufacturer
with the ability to embroider finished products, the ability to efficiently
embroider up to fifteen colors at a time, automatic thread trimming, and other
labor-saving improvements. Current innovations include a narrow cylinder arm
sewing head that permits embroidery on small diameter apparel, such as pockets,
sleeves, pant legs and socks. The embroidery industry on a world-wide basis also
benefited from the sudden growth, beginning in the late 1980s, in the use of
licensed products by apparel and other manufacturers. Licensed names, logos and
designs provided by, among other sources, professional and collegiate sports
teams and the entertainment industry appear on caps, shirts, outerwear, luggage
and other softgoods for sale at affordable prices. In addition, the intricacy of
the designs capable of being embroidered have attracted broad fashion and
commercial appeal for special event promotional marketing. Embroidery equipment
may contain single or multiple sewing heads, each sewing head consisting of one
to a group of needles that are fed by spools of thread attached to the
equipment. The design and production capabilities of the sewing heads are
enhanced through the application and integration of computers and specialized
software.
Business Strategy
The Company's objective is to establish and maintain long-term
relationships with its customers by providing them with a single source solution
for their embroidery equipment, software and related services and financing
needs. To achieve this goal, the Company has developed a comprehensive approach
under which it (i) assembles and sells a broad range of Tajima embroidery
machines, (ii) develops and supplies proprietary application software programs
for embroidery machines, (iii) provides leasing options to customers to finance
equipment purchases, (iv) sells a broad range of embroidery supplies,
accessories and proprietary products, (v) reconditions, remanufactures and sells
used embroidery equipment, and (vi) provides comprehensive customer training,
support and service for these embroidery machines. The Company believes that
this comprehensive approach positions it to become its customers' preferred
vendor for their embroidery equipment and related services and financing needs.
In addition, the Company, through its Hometown Threads venture, is currently
test marketing its concept to provide retail embroidery services at Wal*Mart
Stores, Inc. ("Wal*Mart") retail locations. To complement its comprehensive
approach effectively and efficiently, the Company's business strategy includes
the following:
Comprehensive Embroidery Machine Selection. The Company believes that
offering Tajima embroidery equipment provides it with a competitive advantage
because Tajima produces technologically advanced embroidery machines that are of
high quality, reliable and durable. The Company markets and distributes over 80
models of embroidery machines, ranging in size from 1 head per machine, suitable
for sampling and small production runs, to 30 heads per machine, suitable for
high production runs for embroidered patches and small piece goods which become
parts of garments and other soft goods.
Pulse Microsystems Ltd. Software. The Company's Pulse subsidiary offers a
wide range of proprietary application software products to enhance and simplify
the embroidery process. A majority of the Company's proprietary application
software products are designed to operate in the Microsoft(R) Windows(R) 95,
Windows(R) 98 and Windows(R) NT environments which the Company believes will
enhance creativity, ease of use and user flexibility. It is the Company's
established practice to aggressively market its software with embroidery
equipment and as an upgrade to its installed base of approximately 16,000
embroidery machines. The Company believes that these products have broad appeal
to purchasers of single-head and multi-head embroidery machines and present
opportunities for the Company to increase sales of embroidery equipment and
software as the Company continues to emphasize marketing activities. Pulse
continues to automate the process of creating embroidery applications in order
to open new markets, reduce costs and increase production efficiencies. Pulse
has created what the Company believes is the first Internet-compatible design
software and has developed a business plan to commercialize this product
capability. Pulse has bolstered its software development team to support a
leadership position in the enhanced embroidery software market.
Financing Options. The Company's HAPL Leasing subsidiary offers its
customers the option to lease embroidery equipment. The Company believes that
HAPL Leasing's programs increase opportunities to sell equipment by reducing the
initial capital commitment required of a potential purchaser. HAPL Leasing's
programs are attractive to purchasers who desire to begin or expand embroidery
operations while limiting their initial capital investment.
Embroidery Supplies, Accessories and Proprietary Products. The Company's
parts, supplies and accessories division offers a broad range of embroidery
supplies, accessories and proprietary products, which is an integral part of the
Company's single source strategy. The Company has expanded the product line with
the introduction of proprietary products. Moreover, the expansion of the
Company's marketing efforts is directed toward trade publications, advertising
and both industry and proprietary trade show participation. The Company offers
proprietary products together with a full line of consumable supplies, parts and
materials utilized in the embroidery process and continues to develop special
purpose embroidery replacement parts and products which act to simplify the
embroidery process.
At the end of fiscal 1999 the Company created its new "Building Blocks"
division, specializing in the creation and sale of stock embroidery designs and
associated software products into the retail market. The Company has continued
to focus on the development of the "Building Blocks" product line,
infrastructure and brand during fiscal 2000, and consequently, recorded minimal
sales revenues for the Building Blocks division during the fiscal year.
Retail Embroidery Services. During fiscal 1999, the Company together with
Jacobs Management Corporation ("JMC") formed a joint venture known as Hometown
Threads(TM) for the purpose of providing retail embroidery services within
Wal*Mart establishments. During fiscal 2000, the Company purchased JMC's
interest in Hometown Threads(TM) and currently owns and operates Hometown
Threads(TM) as a wholly-owned subsidiary. Hometown Threads(TM) is currently
concluding the pilot phase of test-marketing its concept at two Wal*Mart
locations in Texas and anticipates expanding these operations to a more
comprehensive test phase in additional Wal*Mart retail establishments throughout
the United States.
Customer Support. The Company provides comprehensive customer training,
support and service for the embroidery machines and software that it sells. The
Company's service department includes service technicians operating out of its
headquarters and regional service centers. After the Company delivers an
embroidery machine to a customer, its trained personnel may assist in the
installation of the machine and with its setup and operation. The Company
employs a staff of service representatives who provide assistance to its
customers by telephone. Although most customer problems or inquiries can be
handled by telephone, where necessary the Company dispatches one of its service
technicians to the customer. In addition, the Company provides introductory and
advanced training programs to assist customers in the use and operation of the
embroidery machines and software it sells. The Company has recently undertaken a
program to significantly upgrade its technical support staff and operations on
the West Coast due to increasing sales activity in this area and resulting
demand for technical support services. This will continue as the Company has
been granted semi-exclusive rights to distribute large Tajima embroidery
machines to the West Coast.
Business Strategies to Generate New Revenue Streams
The Company has developed a number of complementary strategies to generate
new revenue streams, including the following:
Grow with Embroidery Equipment Customers. The continuing growth of the
small machine segment of the embroidery industry and the increasing number of
embroidery entrepreneurs who sell customized products into specialized niche
markets presents the Company with the opportunity to grow its business along
with that of its customers. The Company believes that purchasers of smaller
embroidery machines can be a significant source of repeat business in that they
may require larger multi-head machines as their business and operations expand.
The Company's customer support personnel work with customers to assist them in
expanding their operations. By establishing a relationship through the sale of a
smaller embroidery machine, the Company strives to establish itself as the
customers' preferred vendor for larger multi-head machines. New uses for
embroidery machines in the sewing of apparel also present the Company with an
opportunity to grow with its customers and sell to new customers.
Hometown Threads. The Company initiated a pilot program with Wal*Mart in
late fiscal 1999 and developed and refined it throughout fiscal 2000. The
objective was to establish a retail embroidery service business within the
Wal*Mart environment and determine if such a "store within a store" concept
could be financially feasible for both Wal*Mart and an independent retail
embroidery operator in that environment. Hometown ThreadsTM has obtained
approval from Wal*Mart to expand to the test phase of project development,
including an increased number of store locations in fiscal 2001. The learnings
from this program have had a direct benefit to the general operations of Hirsch,
in that there is improved direct knowledge of the needs and operating issues
faced by the independent embroidery operator. Significant changes are being
implemented within the Hirsch organization to better respond to those needs.
This in turn positions Hirsch as a knowledgeable resource to meet the broad
business needs of this embroidery entrepreneur customer.
Increase Penetration in Recently Acquired New Equipment Distribution
Markets. The Company believes that it has significant opportunities for growth
in new distribution markets. The Company anticipates that its approach to
marketing, customer training, support and service will allow further penetration
of the potential customer base in these markets. In fiscal 1998 the Company was
granted the exclusive right to distribute Tajima one through six-head "FX" model
embroidery machines in nine continental western states and Hawaii. Also in
fiscal 1998 Hirsch was granted semi-exclusive rights to distribute large Tajima
embroidery machines, six-head "DC" models through thirty-head models, to the
states of Arizona, Idaho, Montana, Nevada, Oregon, Utah, Washington, Wyoming and
Hawaii. The Company has continued its investment in the West Coast
infrastructure during fiscal 2000. This expansion included establishing
additional sales offices, hiring of technical service and support staff as well
as investment in demo equipment and inventory. In fiscal 2000 the Company was
granted by Tajima the rights to distribute new machines to US-based customers
who have expanded their operations into the Caribbean region.
Expand Sales of Value-Added Product and Services. Once a relationship with
a customer is established through the sale of a new or used embroidery machine,
the Company seeks to increase its sales through an expanded software product
line developed by Pulse and a broad range of embroidery parts, supplies and
accessories. Higher margins are typically available in these expanded product
offerings. The leasing options offered through HAPL Leasing also present the
Company with opportunities for increased revenues through the sale of new
embroidery equipment. New product development investments have been made in
Internet-based distribution channels and Internet deliverable software products.
Further development of productivity enhancing accessories such as clamping
systems are adding breadth to the Company's product offerings through existing
and new distribution channels. In addition, the Company's embroidery supplies
and accessories product line also is offered to all users of embroidery
equipment in the United States through trade publications, print advertising and
trade show participation.
Ability to Accept Used Equipment on a Trade-In Basis. As part of its sales
and marketing efforts, the Company may accept used embroidery equipment from a
customer to whom it is providing new machinery. Improved management of the used
machine trade-in, acquisition, and sales process has delivered value to the used
machine customer and improved margins to the Company.
Assembly Operations. The Company's Tajima USA, Inc. ("TUI") subsidiary
maintains a facility located in Ronkonkoma, New York, near the Company's
headquarters. Assembly of Tajima machines of up to six heads are completed at
this location, using both Tajima supplied sub-assembly kits and locally supplied
components. Shorter lead times and production flexibility enhance the
responsiveness to changing needs of the market. TUI's net sales during the
fiscal year ended January 31, 2000 were approximately $17.3 million.
Embroidery Equipment
Embroidery equipment may contain single or multiple sewing heads. The
selling prices of these machines range from approximately $15,000 to $180,000.
Each sewing head consists of a group of needles that are fed by spools of thread
attached to the equipment. The needles operate in conjunction with each other to
embroider the thread into the cloth or other surface in such configuration as to
produce the intended design. Thread flowing to each needle can be of the same or
varying colors. Each head creates a design and heads operating at the same time
create the same size and shape designs, although designs created at the same
time can differ in color. Thus, a 30-head machine with all heads operating
simultaneously creates an identical design on thirty surfaces. The design and
production capabilities are enhanced through the integration of computers and
specialized software applications.
Recent Product Developments
The Company often collaborates with Tajima in the development of embroidery
products. Over the past few years, Tajima has introduced the following
embroidery products: (i) machines with faster operating speeds and a wider
variety of color selections; (ii) wide cap embroidery system, which expands the
small sewing field on finished caps to a 270 degree continuous arc; (iii) the
multi-color chenille embroidery machine, which enables embroiderers to create
more elaborate and colorful designs with chenille stitches; (iv) a single head
chenille embroidery machine which enables the embroidery entrepreneur the
opportunity to enhance their products at an affordable price, and; (v) narrow
cylinder arm sewing head which permits embroidery on small diameter apparel such
as sleeves and pockets. The Company believes that these innovations will allow
new applications for the use of embroidery machines that will impact the
sportswear market. Additionally, Tajima develops customized applications to
address specific customers needs.
Value Added Products
Software
Pulse, a strategic acquisition in 1994, is a developer and supplier of a
wide range of application software programs that enhance and simplify the
embroidery process. All Tajima machines, as well as other manufacturers'
embroidery machines can be networked through Pulse software. The computerization
of the embroidery industry has led to a demand for more advanced application
software. Pulse's computer-aided design software packages target the different
functions performed by embroiderers, and are contained in an integrated product
line. These products range from a basic lettering package that permits the
embroiderer to design names and letters for use on the product to be embroidered
to sophisticated packages that permit the creation and editing of intricate
designs, logos and insignias through the use of scanners and computers.
Pulse software provides users with the most technologically advanced
software solutions delivering improved productivity and quality for their
operations. Pulse continues to develop and release innovations that strengthen
its position as the technological leader in the industry.
While continuing to invest in research in its core embroidery technologies,
Pulse has also created specialized and targeted applications that are addressing
the particular needs of growing segments of the embroidery market such as retail
operations, small entrepreneurs and uniform manufacturers. Pulse has also
designed, as part of their new PowertoolsTM suite of applications, products that
assist customers in creating an Internet presence for their embroidery
creations. In addition, Pulse has developed what the Company believes is the
first Internet-compatible design software in the market.
Pulse has expanded its distribution network by establishing distributor
relationships in over 40 countries worldwide. While beginning from a small
dollar value base, Pulse international sales have grown dramatically and are
expected to continue to grow as these new relationships strengthen Pulse's
position as the global leader in embroidery software.
Leasing
In order to become a single source provider to the embroidery industry, the
Company formed HAPL Leasing in 1990. The Company believes that it is the only
embroidery equipment distributor with a captive leasing subsidiary providing the
Company with a unique competitive advantage.
Approximately 42.5% of the Company's new machine sales were financed
through HAPL Leasing for the year ended January 31, 2000, compared to 50.7% for
the year ended January 31, 1999. Historically, HAPL Leasing has minimized its
financing needs by selling substantially all of its sales-type leases to third
party financial institutions. This trend continued in fiscal 2000. Additionally,
during the third quarter of fiscal 1998, HAPL Leasing entered into an Ultimate
Net Loss ("UNL") Limited Liability Recourse Agreement with a third-party
financial institution. The maximum exposure is limited to 10% of the minimum
lease payments receivable, for which the Company records a reserve. The selling
price of the leases to financial institutions generally will be a lump sum equal
to the sales price of the embroidery equipment leased, plus a portion of the
finance charges paid by the lessee. At the end of the lease term, for those
leases that HAPL Leasing has retained the residual value of the embroidery
equipment, it may revert to HAPL Leasing or HAPL Leasing may sell the equipment
to the lessee at terms agreed upon in the original lease agreement. Each lease
generally has a term of 5 years. As of January 31, 2000, HAPL Leasing had sold
approximately 89.1% of its leases.
In some cases, third-party funding sources condition their purchase of
leases on the establishment of a payment history. HAPL Leasing also retains
selected leases for which it has not obtained a purchase commitment from its
funding sources. In each case where a lease is retained, HAPL Leasing applies
its policies and procedures and knowledge of the industry to determine whether
to enter into the lease, including an evaluation of the purchaser's business
prospects and the creditworthiness of the principals. HAPL Leasing sells these
leases if financing becomes available at a later date.
HAPL Leasing continues to work both internally and with its funding sources
to develop new lease programs attractive to the embroidery industry.
Used Embroidery Machinery
The Company accepts used embroidery machines from customers on a trade-in
basis as a condition to the sale of a new machine on a case by case basis. The
Company's ability to accept used machines is an important sales tool and
necessary element in the Company's sales strategy. On occasion, the Company will
also purchase used machines from customers and third-party leasing companies.
The Company believes that the market for reconditioned and remanufactured
embroidery machines is steadily growing and has established its Hirsch Used
Machine Division to capitalize on this source of revenue.
Embroidery Supplies and Accessories
The Company offers a broad range of embroidery supplies including threads,
needles, thread cone winders, embroidery hoops, and embroidery backings. In
addition, the Company develops embroidery products based on the recommendations
of embroiderers. The Company also distributes the Universal Hooper, a manual
hooping device, a machine thread rack upgrade called "Quick Thread" and
specially sized embroidering hoops for unusual applications.
The Company markets "Hoopless Air Clamps," a proprietary product that
allows manufacturers to apply embroidery to unfinished flat pieces without the
need for a hoop. The Company anticipates that this product will benefit clothing
manufacturers by reducing labor costs and production time.
In addition, the Company's distribution of embroidery supplies and
accessories includes the following products: "Power Hoops;" Tajima Hoops; 3-D
Embroidery Foam, which allows embroiderers to add new multi-media,
multi-dimensional embroidery to a design using existing equipment; steamers,
which remove wrinkles and hoop marks, cleaning guns which remove stains that
occur during the embroidery process; and Peggy's Stitch Eraser, an electric
stitch remover that allows embroiderers to quickly and efficiently remove bobbin
thread from sewn garments.
Following the Company's acquisition of its West Coast distribution rights,
the Company expanded the hours of its east coast supply and accessory sales
operations, making it easier for customers across the United States to place an
order.
Marketing and Customer Support
The Company has been selling embroidery equipment since 1976 and believes
it is the leading distributor of Tajima equipment in the world. The Company
reinforces recognition of its name through trade journal advertising and
participation in seminars and over 25 trade shows annually. The Company's sales
staff is headed by Paul Levine, President of the Company, and currently consists
of salespeople who maintain frequent contact with customers in order to
understand and satisfy each customer's needs. Through its reputation, knowledge
of the marketplace, investment in infrastructure and experience in the industry,
the Company believes it has maintained its market share for both machinery and
value-added products and services.
The Company believes that a key element in its business is its focus on
service, and investment in sales support and training, infrastructure and
technology to support operations. The Company provides comprehensive one to five
day training programs developed by the Company to assist customers in the use,
operation and servicing of the embroidery machines and software it sells.
Customers are trained in the operation of embroidery machines as well as in
embroidery techniques and the embroidery industry in general. The Company
provides proprietary videotapes and manuals as training tools. Company personnel
also provide technical and software support by telephone, field maintenance
services and quality control testing, as well as advice with respect to matters
generally affecting embroidery operations.
The Company maintains a training center for its employees at its Hauppauge,
New York headquarters for the training of service technicians. Senior service
technicians also receive formal training from Tajima in addition to technical
updates throughout the year. The Company will continue to dedicate resources to
education and training as the foundation for providing the highest level of
service.
In addition, the Company collaborates with its customers and Tajima in
connection with the development of new embroidery equipment and software
applications to meet the specialized needs of the Company's customers. Current
projects include the development of embroidery applications for a major
automobile manufacturer, collaborations with high end designer clothing
manufacturers to reduce production costs and increase efficiency and further
development of Pulse integrated software.
The Company provides its customers with a one-year warranty against
malfunctions from defects in material or workmanship on the Tajima machines it
distributes. The warranty covers parts and labor. Tajima provides the Company
with a six month warranty. As a consequence, the Company absorbs a portion of
the cost of providing warranty service on Tajima products.
Supplier Relationships with Tajima
The Company has four separate distributorship agreements with Tajima which,
collectively, provide the Company the exclusive right to distribute Tajima's
complete line of standard embroidery, chenille embroidery and certain specialty
embroidery machines in 39 States. The main agreement (the "East Coast/Midwest
Agreement") which covers 33 States, became effective on February 21, 1991 and
has a term of 20 years. The East Coast/Midwest Agreement is terminable by Tajima
and/or the Company on not less than two years' prior notice. The second
agreement (the "Southwest Agreement") covers six states, became effective on
February 21, 1997 and has a term of five years. Under the third distributorship
agreement, which covers nine western states and Hawaii, the Company is the
exclusive distributor of Tajima's single, two, four and six-head "FX" model
machines as well as chenille or chenille/standard embroidery machines with less
than four heads or two stations, respectively (the "West Coast Agreement"). The
West Coast Agreement, which has an initial term of five years, terminates on
February 20, 2002, and contains a renewal provision which permits successive
five year renewals upon mutual agreement of the parties. The fourth agreement
("the Caribbean Agreement") which was effective July 27, 1999 (and is subject to
review after a one year trial period) permits the Company to distribute Tajima
machines to US-based customers who are operating expansion facilities in the
Caribbean region.
Each of the first three agreements may be terminated upon the failure by
the Company to achieve certain minimum sales quotas. Furthermore, the East
Coast/Midwest Agreement may be terminated if Henry Arnberg and Paul Levine (or
in certain circumstances, their spouses and children) fail to own a sufficient
number of shares of voting stock to elect a majority of the Company's Board of
Directors. The Southwest Agreement may be terminated if the Company fails to
remain the sole shareholder of its subsidiary that is the party to the Southwest
Agreement. The West Coast Agreement may be terminated should any material change
occur in the current Class B shareholders, directors or officers of the Company.
Although there can be no assurance, management of the Company believes it
is unlikely that the Company would lose Tajima as a source of supply because:
(i) the Company has maintained a relationship with Tajima for over 20 years and
is Tajima's largest distributor; (ii) Tajima's success in the United States is,
in large part, attributable to the Company's knowledge of the marketplace as
well as the Company's reputation for customer support; (iii) the Company and
Pulse support Tajima's development activities and the Pulse software enhances
the Tajima product line; and (iv) the ownership by Tokai of a forty-five (45%)
percent interest in the TUI venture.
Other Supplier Relationships
The Company purchases personal computers that are integrated with the
embroidery machines it distributes. The Company obtains its inventory for its
embroidery supplies and accessories business from many different sources. The
Company believes that alternate sources of supply are readily available.
Customers
The Company's customers range from large operators utilizing numerous
machines to individuals who customize products on a single machine. Principal
customer groups include: (i) contract embroiderers, who serve manufacturers that
outsource their embroidery requirements; (ii) manufacturers, who use embroidery
to embellish their apparel, accessories, towels, linens and other products with
decorative appeal; and (iii) embroidery entrepreneurs, who produce customized
products for individuals, sports leagues, school systems, fraternal
organizations, promotional advertisers and other groups.
Competition
The Company competes with distributors such as Macpherson, Inc., a
subsidiary of Willcox & Gibbs, Inc., a distributor of Barudan multi-head
embroidery machines and Meistergram single-head embroidery machines, as well as
with smaller distributors. On April 20, 1999, Willcox & Gibbs, Inc. filed a
joint plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code in the
U.S. Bankruptcy Court for the District of Delaware. The Barudan parent
organization has since re-acquired the rights to directly distribute its
products in the US. The Company believes it competes against these competitors
on the basis of knowledge, experience, name recognition, customer service and
the quality of the embroidery equipment it distributes. The Company also
competes with original equipment manufacturers, such as Brother International
and Melco Industries, which distribute products directly into the Company's
markets. A new competitor trading under the "SWF" brand has entered the
worldwide market for embroidery machines and has aggressively competed on a
price basis in various Pacific rim countries, Europe and the US. Tajima has
challenged SWF for patent infringements incorporated in its machines, and the
results are pending in various stages of litigation. It is uncertain what the
results of that litigation will conclude.
Further, the Company's customers are subject to competition from importers
of embroidered products, which could materially affect the Company's customers,
and consequently have a material adverse effect on the Company's business,
financial conditions and results of operations.
The Company's success is dependent, in part, on the ability of Tajima to
continue producing products that are technologically superior and price
competitive with those of other manufacturers.
Pulse's software products compete against products developed by several
companies from around the world. The primary competitors are Wilcom Pty., an
Australian corporation, Melco Industries, Inc., a United States-based subsidiary
of Saurer Textile Machinery Group, a Swiss corporation and Compucon S.A., of
Greece. The Company believes that Pulse competes favorably on the basis of ease
of use, functionality and the range of software applications it markets.
HAPL Leasing competes principally with equipment leasing brokers
specializing in the embroidery industry. The Company believes that it competes
on the basis of HAPL Leasing's favorable pricing and because the Company is a
single source provider of embroidery equipment, customer service and support and
value added products.
The Company's embroidery supplies and accessories business competes with
ARC, a division of Melco Industries and other vendors of embroidery supplies.
The Company believes that the market for embroidery supplies is fragmented and
that the Company will benefit from the breadth of its product line, development
of proprietary products and the fact that the Company is a single source
provider.
Patents and Copyrights
The Pulse software has copyright protection under Canadian law and the
Berne Convention that also affords it protection in the United States. Certain
of the Pulse software has also been granted United States copyright
registrations. The following patents have been granted in the United States:
"Method For Modifying Embroidery Design Programs", "Embroidery Design Systems",
"Method For Creating Self-Generating Embroidery Pattern," two patents entitled
"Method for Automatically Generating Chain Stitches" and three patents entitled
"Method for Automatically Generating A Chenille-Filled Embroidery Stitch
Pattern." Pulse also has several other patents pending. Pulse has been granted
the following patent in the European Patent Office: "Method for Modifying
Embroidery Design Programs." Pulse believes these protections are sufficient to
prevent unauthorized third party uses of such property rights. Neither Pulse nor
the Company is aware of any patents or other intellectual property rights of
third parties which would prevent the use of Pulse's intellectual property. The
Company continues to seek intellectual property protection for Pulse products.
Employees
As of March 31, 2000, the Company employed approximately 335 persons
engaged in sales, service and supplies, product development, finance
administration and management for the Company, Pulse, TUI and HAPL Leasing. None
of the Company's employees are represented by unions. The Company believes its
relationship with its employees is good.
Risk Factors
Dependence on Tajima
For the fiscal year ending January 31, 2000, approximately 92.6% of the
Company's revenues resulted from the sale or lease of embroidery equipment
supplied by Tajima. Four separate distributorship agreements (collectively, the
"Tajima Agreements") govern the Company's rights to distribute Tajima embroidery
equipment in the United States and the Caribbean. Two of the distributorship
agreements with Tajima collectively provide the Company with the exclusive
rights to distribute Tajima's complete line of standard embroidery, chenille
embroidery and certain specialty embroidery machines in 39 states. The main
agreement (the "East Coast/Midwest Agreement"), which now covers 33 states,
first became effective on February 21, 1991, has a term of 20 years and contains
a renewal provision which permits successive five year renewals upon mutual
agreement of the parties. The East Coast/Midwest Agreement is terminable by
Tajima and/or the Company on not less than two years' prior notice. The second
agreement (the "Southwest Agreement") which covers six states, became effective
on February 21, 1997, and has a term of five years. Under the third
distributorship agreement, (the "West Coast Agreement") which covers nine
western continental states and Hawaii, the Company is the exclusive distributor
of Tajima's small machines, as well as chenille and tandem chenille/standard
embroidery machines with less than four heads or two stations, respectively. The
West Coast Agreement, which has an initial term of five years, became effective
on February 21, 1997, and contains a renewal provision that permits successive
five year renewals upon mutual agreement of the parties. The fourth Agreement
(the "Caribbean Agreement") is for a one-year trial period, effective July 27,
1999, that permits the Company to distribute Tajima equipment to its existing
US-based customers who establish expansion facilities in the Caribbean region.
Each of the first three Tajima Agreements may be terminated if the Company fails
to achieve certain minimum sales quotas. The fourth agreement is subject to
review after the one-year trial period expires on July 26, 2000. Furthermore,
the East Coast/Midwest Agreement may be terminated if Henry Arnberg and Paul
Levine (or in certain circumstances, their spouses and children) fail to
maintain ownership of a sufficient number of shares of voting stock to elect a
majority of the Company's Board of Directors or in the event of the death,
physical or mental disability of a duration of six months or longer, or
incapacity of both Henry Arnberg and Paul Levine. The Southwest Agreement may be
terminated if the Company fails to remain the sole shareholder of its subsidiary
that is the party to the Southwest Agreement. The West Coast Agreement may be
terminated should any material change occur in the current Class B shareholders,
directors or officers of the Company or should there occur any change in control
of the Company. The termination of the Tajima Agreements would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Importing Tajima's equipment from Japan subjects the Company to risks of
engaging in business overseas, including international political and economic
conditions, tariffs, foreign regulation of trade with the United States, and
work stoppages. The interruption of supply or a significant increase in the cost
of Tajima equipment for any reason could have a material adverse effect on the
Company's business, financial condition and results of operation. In addition,
Tajima manufactures its embroidery machines in one location in Japan. The
Company could be materially and adversely affected should this facility be
seriously damaged as a result of a fire, natural disaster or otherwise. Further,
the Company could be materially and adversely affected should Tajima be subject
to adverse market, business or financial conditions.
Embroidery machines produced by Tajima are subject to technological
advances and new product introductions. Current competitors or new market
entrants could introduce products with features that render products sold by the
Company and products developed by Tajima less marketable. The Company relies on
Tajima's embroidery equipment to be high quality and state of the art. The
Company's future success will depend, to a certain extent, on the ability of
Tajima to adapt to technological change and address market needs. There can be
no assurance that Tajima will be able to keep pace with technological change in
the embroidery industry or the current demands of the marketplace. The failure
of Tajima to do so could have a material adverse effect on the Company's
business, financial conditions and results of operations.
Embroidery Industry
The Company's growth in past years has resulted in part from the increase
in demand for embroidered products and the growth of the embroidery industry as
a whole. The embroidery industry is cyclical and has recently experienced; (i) a
decline in demand for large embroidery machines, and; (ii) a trend toward the
relocation of manufacturing facilities to Mexico, the Caribbean and South
America, all of which have had an adverse effect on the operations of the
Company and its business. A decrease in consumer preferences for embroidered
products, a general economic downturn or other events having an adverse effect
on the embroidery industry would also have an adverse effect on the Company.
Revolving Credit Facility
The Company was in default of the financial covenant in its Agreement with
PNC Bank (the "Bank") at year-end and is negotiating to receive a waiver for
such default for the fiscal quarter ended January 31, 2000 and amendment to such
financial covenant for all periods thereafter. The Company believes, but there
can be no assurance, that the Company will be successful in these negotiations.
If the Company is unsuccessful in obtaining the waiver since mending the
Agreement with the Bank, it could have a material adverse effect on the
business, operations and financial results of the Company.
Foreign Currency Risks
The Company pays for its Tajima embroidery machinery in Japanese Yen. Any
devaluation of the U.S. Dollar compared to the Japanese Yen increases the cost
to the Company of its embroidery machine inventory. The Company has generally
been able to recover these increased costs through price increases to its
customers or, in limited circumstances, price reductions from Tajima. However
there can be no assurance that the Company will be able to recover such
increased costs in the future.
Assembly Facility
The Company assembles Tajima embroidery machines in the United States
through its subsidiary TUI, initially in configurations of up to six heads per
machine. Tajima provides the Company with technical assistance and support.
While TUI operations were profitable in fiscal 2000, the throughput of the
facility is largely dependent on continued demand for embroidery machines
generated by the Hirsch sales organization.
Acquisitions and Creation of Additional Revenue Streams
Since June 1996, the Company has acquired four (4) companies (the
"Acquisitions"). These acquisitions (i) increased the area in which the Company
is the exclusive distributor of the complete line of Tajima embroidery equipment
from 26 states to 39 states; and (ii) increased the Company's ability to offer a
customer value for its used embroidery equipment. In January 1997, Tajima
granted the Company the exclusive right to distribute small (one through
six-head) Tajima embroidery machines in nine western states and Hawaii. In March
1998, the Company was granted certain rights to distribute large Tajima
embroidery machines, six-head "DC" models through thirty-head models throughout
certain West Coast states, and the Company has invested substantial assets to
support the West Coast expansion. In July, 1999 the Company was granted the
rights to distribute new embroidery machines into its existing US-based
customers who have expanded facilities in the Caribbean region. There can be no
assurance that the Company will be able to successfully integrate the operations
of the Acquisitions with the Company's operations without substantial costs,
delays or problems or that the Company will be able to profitably sell equipment
or the Company's value-added products in the new territories.
During fiscal year 1999, the Company announced the establishment of its new
Building Blocks division for the purpose of creating and distributing stock
embroidery designs and associated software products to the retail market. As of
the end of fiscal 2000, investment in Building Blocks operations was less than
$.3 million and revenues have been minimal. The Company believes that additional
start-up costs and investment will be required in order to continue to develop
Building Blocks' operations and brand. Although the Company believes it will be
able to access the substantial home and retail embroidery market, there is no
guaranty that it will be successful in doing so, or that it will be able to do
so on a profitable basis.
In addition, the Company announced during the fiscal year the acquisition
from Jacobs Management Corporation of its interest in the Hometown Threads
venture. Hometown Threads was created for the purpose of establishing retail
embroidery service centers within Wal-Mart retail locations. As of the end of
fiscal 2000, Hometown Threads had commenced operations on a pilot test market
basis at two Wal*Mart centers located in Texas. As of the end of fiscal 2000,
the Company's net investment in Hometown Threads was less than $.7 million.
Although the Company believes it will be able to access the market for retail
embroidery services, there is no guaranty that it will be successful in doing
so, or that it will be able to do so on a profitable basis.
Changes in the embroidery industry and recent restructuring of the
Company's business have resulted in new and increased responsibilities for
management and have placed increased demands upon the Company's operating,
financial and technical resources. The Company's ability to successfully adapt
to industry-wide changes and the restructuring of its business and operations
will require continued enhancement of its management and operational, financial
and technical resources. The Company will also need to attract and retain
qualified personnel to support its operations. The Company's failure to attract
and retain qualified personnel could have a material adverse effect on the
Company's business, financial condition and results of operations.
Leasing Operations
HAPL Leasing provides a range of equipment financing options to customers
wishing to finance equipment purchases. HAPL Leasing retains selected leases for
which it has not obtained a purchase commitment from its funding sources.
Although HAPL Leasing has sold approximately 89.1% of the leases it has written
to date, there can be no assurance that it will continue to be able to sell its
leases to third party funding sources. Unfunded leases create the risk of
nonpayment by lessees, including the risk that foreclosure could be hampered by
bankruptcy or other legal proceedings, and the risk that foreclosed equipment
cannot be re-leased or sold due to market conditions or the physical condition
of the equipment. The operations of HAPL Leasing are interest rate sensitive. If
interest rates rise, there can be no assurances that profit margins can be
maintained, and, consequently, the business financial condition and results of
operations of HAPL Leasing could be materially and adversely affected.
HAPL Leasing's strategy is to enter into leases that qualify as sales-type
leases for which revenue is recognized immediately in an amount equal to the
present value of minimum lease payments. However, high interest rates, weakness
of the U.S. dollar, poor general economic conditions, market conditions, or
other factors could result in HAPL Leasing having to enter into operating leases
resulting in deferral of revenue recognition. Unlike sales-type leases, revenue
relating to operating leases is recognized over the term of the lease, resulting
in a deferral in the recognition of revenue. In addition, the embroidery
industry as a whole has been experiencing a decline of overall demand for
embroidery machines, which if prolonged, could have a material adverse effect on
the business and results of operations of HAPL Leasing and that of the Company
taken as a whole.
Inventory
The Company's ordering cycle for new embroidery machines is approximately
three to five months prior to delivery to the Company. Since the Company
generally delivers new Tajima embroidery machines to its customers within one
week of receiving orders, it orders inventory based on past experience and
forecasted demand. Due to lower than forecasted demand, in fiscal 1999 and
fiscal 2000 the Company experienced an increase in inventory levels beyond the
desired supply which has caused the Company to experience higher than projected
inventory costs. Any failure in the future to properly manage inventory levels
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Competition
The Company competes with distributors of embroidery machines produced by
manufacturers other than Tajima and with manufacturers who distribute their
embroidery machines directly as well as with other providers of embroidery
products and services. The Company believes that competition in the embroidery
industry is based on technological capability and quality of embroidery
machines, price and service. The Company has been able to compete effectively in
part because of the relatively advanced technological capabilities and excellent
quality of Tajima embroidery machines. However, if other manufacturers develop
more technologically advanced embroidery machines or the quality of Tajima
embroidery machines diminishes, the Company would not be able to compete as
effectively which could have a material adverse effect on its business,
financial condition and results of operations. The Company also faces
competition in selling software, embroidery supplies, accessories and
proprietary products as well as providing leasing and customer training, support
and services. Due to the recent decline in overall demand in the industry,
potential customers may emphasize price differences over value-added services
and support in purchasing new embroidery machines. Severe price competition may
impair the Company's abilities to provide its customers with value-added
services and support. The Company's failure to compete effectively in these
areas could have a material adverse effect on its business, financial condition
and results of operations.
Software
The software industry is characterized by the rapid development of new
programs with increased capabilities. Other producers of software for embroidery
machines could produce new software programs that would make the software
developed by Pulse less marketable or obsolete. The failure by Pulse to continue
to develop and upgrade its software products could have a material adverse
effect on its business, financial condition and results of operations and that
of the Company taken as a whole.
Pulse's software products, like software programs generally, may contain
undetected errors when introduced or when new versions are released. To date,
Pulse has not experienced significant adverse financial or operational problems
due to post release software errors, although there can be no assurance that
this will not occur in the future, particularly if these software programs
continue to become more complex and sophisticated. Defective software could
result in loss of or delay in market acceptance of the Company's software
products, warranty liability or product recalls and can diminish the Company's
reputation in the industry.
The Company has been granted patent and copyright protection for Pulse's
software products. Although the Company does not believe that the ownership of
such patents or copyrights is a significant factor in Pulse's business or that
its success is materially dependent upon the ownership, validity or
enforceability of such patents or copyrights, existing intellectual property
laws afford limited protection of patents and copyrights and unauthorized
parties may obtain and use information that the Company regards as proprietary.
The Company intends to enforce its intellectual property rights in Pulse's
products, but there can be no assurance that it will be successful in doing so.
Dependence on Existing Management
The Company's continued success will depend to a significant extent upon
the abilities and continued efforts of Henry Arnberg, Chairman of the Board and
Chief Executive Officer of the Company; Paul Levine, President, and a Director
of the Company; Ronald Krasnitz, Chief Operating Officer, Secretary and a
Director of the Company; and Richard Richer, its Vice President-Finance and
Chief Financial Officer. Pulse's continued success will depend to a significant
extent upon the abilities and continued efforts of Tas Tsonis, Vice President
and a Director of the Company and CEO of Pulse and Brian Goldberg, Vice
President of the Company and President of Pulse. The Company had previously
entered into five year employment agreements with Messrs. Arnberg and Levine
which expired as of February 20, 1999 with their employment by the Company
continuing on an at-will basis on roughly the same terms and conditions
contained in their expired employment agreements except for substantially
reduced salaries. Effective as of February 24, 1999, Messrs. Tsonis and Goldberg
elected to renew their respective employment agreements for an additional three
(3) year term. Mr. Krasnitz is currently in the fourth year of a five-year
employment agreement. Mr. Richer is not bound by any written employment
agreement with the Company. The loss of the services of Messrs. Arnberg, Levine,
Krasnitz, Tsonis, Goldberg or Richer or the services of other key management
personnel could have a material adverse effect upon the Company's business,
financial condition and results of operations.
ITEM 2. Properties
The Company's corporate headquarters is in Hauppauge, New York in a 50,000
square foot facility. This property houses the Company's executive offices, the
Northeast sales office, technical service, software support and warehouse space.
Additionally, both HAPL Leasing and the Company's parts, supplies and
accessories businesses operate out of this facility. On October 27, 1994, the
Company entered into a ten year, $2,295,000 mortgage agreement (the "Mortgage")
and note ("Note") with a bank for its new corporate headquarters. The Mortgage
as amended bears interest at a fixed rate of 11.3% and is payable in equal
monthly principal installments of $19,125. The Company's obligations under the
Mortgage are secured by a lien on the premises and the related improvements
thereon. The Company was in violation of a covenant contained in the mortgage as
of January 31, 2000. Pursuant to a waiver and amendment dated as of April 27,
2000, the Company obtained a waiver of the covenant violation and an amendment
to the Debt Service Coverage Ratio covenant, contained in the Mortgage. In
addition, simultaneously therewith, the Company entered into an Agreement and
Modification of Note pursuant to which the note was amended to accelerate the
maturity date to April 20, 2001, from October 27, 2004.
In March 1997, the Company entered into a five-year lease for a 25,000
square foot factory facility in Ronkonkoma, New York where Tajima USA, Inc.,
operates a machine assembly facility. The lease provides for lease payments of
approximately $132,000 per annum.
In addition to the Company's headquarters, the Company leases 13 regional
satellite offices, as well as a location in Mississauga, Ontario, Canada for
Pulse headquarters. These offices consist of regional sales offices, training
centers, repair centers and warehouse and showroom space.
ITEM 3. Legal Proceedings
There are no material legal proceedings pending against the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders.
The Company did not submit any matters to a vote of Security holders during
the fourth quarter of its most recent fiscal year.
PART II
ITEM 5. Market For Common Equity and Related Stockholder Matters
(a) The Company's outstanding Common Stock consists of two classes, Class A
Common Stock and Class B Common Stock. The Class A Common Stock, par value
$.01 per share, trades on the NASDAQ Stock Market under the symbol HRSH.
The following table sets forth for each period indicated the high and low
closing bid prices for the Class A Common Stock as reported on the NASDAQ
National Market. Trading began in the Class A Common Stock on February 17,
1994.
Fiscal 2000 High Low
- ----------- ---- ---
First Quarter ended April 30, 1999........................$3.875 $1.750
Second Quarter ended July 31, 1999........................$2.500 $2.031
Third Quarter ended October 31, 1999......................$2.188 $ .813
Fourth Quarter ended January 31, 2000.....................$2.125 $1.094
Fiscal 1999 High Low
- ----------- ---- ---
First Quarter ended April 30, 1998........................$22.750 $8.094
Second Quarter ended July 31, 1998........................$11.250 $4.500
Third Quarter ended October 31, 1998......................$ 5.625 $2.000
Fourth Quarter ended January 31, 1999.....................$ 5.500 $2.750
Fiscal 1998 High Low
- ----------- ---- ---
First Quarter ended April 30, 1997........................$22.750 $16.500
Second Quarter ended July 31, 1997........................$24.750 $16.500
Third Quarter ended October 31, 1997......................$26.250 $17.250
Fourth Quarter ended January 31, 1998.....................$22.000 $17.000
The foregoing over-the-counter market quotations represent inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
(b) As of April 30, 2000, the Company believes that there were approximately
3,652 beneficial owners of its Class A Common Stock.
(c) The Company intends to retain earnings for use in operations and expansion
of its business and therefore does not anticipate paying cash dividends on
the Class A Common Stock or the Class B Common Stock in the foreseeable
future. The future payment of dividends is within the discretion of the
Board of Directors and will be dependent, among other things, upon
earnings, capital requirements, financing agreement covenants, the
financial condition of the Company and applicable law. The Class A Common
Stock and Class B Common Stock share ratably in any dividends declared by
the Company on its Common Stock. Any stock dividends on the Class A Common
Stock and the Class B Common Stock will be paid in shares of Class A Common
Stock.
PART III
ITEM 6. Selected Financial Data
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere herein. The consolidated financial statement data as of
January 31, 2000 and 1999 and for the fiscal years ended January 31, 2000, 1999,
and 1998 are derived from, and qualified by reference to, the audited
Consolidated Financial Statements included elsewhere herein and should be read
in conjunction with those Consolidated Financial Statements and the Notes
thereto. The consolidated financial statement data as of January 31, 1998, 1997,
and 1996 and for the fiscal years ended January 31, 1997 and 1996 are derived
from audited Consolidated Financial Statements not included herein.
Year Ended January 31,
(in thousands of dollars, except per share amounts)
Hirsch International Corp. and Subsidiaries 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Net sales......................................................... $86,958 $127,546 $147,045 $122,195 $87,974
Interest income related to sales-type leases...................... 3,863 5,348 5,432 3,243 3,022
Cost of sales..................................................... 59,846 85,054 96,099 80,820 58,836
Selling, general and administrative expenses...................... 40,491 44,381 41,055 29,070 20,638
(Loss) income before income tax (benefit) provision...... (10,369) (6,066) 14,255 15,170 11,402
Income tax (benefit) provision.................................... 972 (1,848) 6,059 6,402 4,837
(Loss) income before Cumulative Effect of Accounting Change (11,635) (4,608) 8,196 8,768 6,565
Cumulative Effect of Accounting Change (2,187) - - - -
Net (loss) income (3)............................................. (13,822) (4,608) 8,196 8,768 6,565
Basic net (loss) income per share (1), (2)........................ $ (1.48) $ (0.49) $ 0.92 $ 1.13 $ 1.10
Diluted net (loss) income per share (1), (2)...................... $ (1.48) $ (0.49) $ 0.89 $ 1.10 $ 1.09
Shares used in the calculation of basic
net (loss) income per share (1), (2)............................ 9,348 9,413 8,953 7,782 5,960
Shares used in the calculation of diluted
net (loss) income per share (1), (2)............................ 9,348 9,436 9,236 7,967 6,002
(1) Basic and diluted net income per share figures and shares used in the
calculation of diluted net income per share have been retroactively adjusted to
reflect 25% stock dividends which were paid in July 1996 and 1995, respectively
and a 5% stock dividend which was paid in August 1994.
(2) Basic and diluted net income per share figures and shares used in the
calculation of diluted net income per share for Fiscal years 1995 through 1997
have been retroactively adjusted to reflect the adoption of SFAB No. 128,
"Earnings per Share".
(3) Net of the cumulative effect of SAB101 accounting change.
Year Ended January 31,
(in thousands of dollars)
Hirsch International Corp. and Subsidiaries 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Working capital................................................ $ 29,627 $ 51,939 $ 40,169 (6) $ 22,004 $ 16,847 (4)
Total assets................................................... 80,216 106,935 114,832 (6) 83,696 47,872 (4)
Long-term debt, less current maturities........................ 989 15,640 1,421 13,194 (5) 1,779
Stockholders' equity........................................... 56,253 70,207 75,623 (6) 41,682 29,134 (4)
(4) In January 1996, in connection with its Secondary Offering (the "Second
Offering"), the Company received net proceeds of $1,906,000 (after deducting
expenses of the Second Offering).
(5) Included in long-term debt, less current maturities at January 31, 1997 is
$11,645,000 of debt relating to the acquisitions of SMX and Sedeco.
(6) In June 1997, in connection with a Secondary Offering (the "Secondary
Offering"), the Company received net proceeds of approximately $24,300,000 after
deducting expenses of the Secondary Offering).
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.
General
Hirsch International Corp. ("Hirsch" or the "Company") is a leading single
source supplier of electronic computer-controlled embroidery machinery and
related value-added products and services to the embroidery industry. The
Company offers a complete line of technologically advanced single- and
multi-head embroidery machines, proprietary application software and a diverse
line of embroidery supplies and accessories. Hirsch believes its comprehensive
customer service, user training, software support and broad product offerings
combine to place the Company in a superior competitive position within its
marketplace. The Company sells embroidery machines manufactured by Tajima
Industries Ltd. ("Tajima") and Tajima USA, Inc. ("TUI"), a subsidiary formed in
fiscal 1998, as well as a wide variety of embroidery supplies, microcomputers
manufactured by Dell Computer Corporation and software manufactured by the
Company's wholly-owned subsidiary, Pulse Microsystems Ltd. ("Pulse").
The Company's focus from 1995 through 1998 was on growth and expansion of
its installed machine base and increasing the breadth of its offerings to the
embroidery industry. The acquisitions of SMX and Sedeco increased the area in
which the Company is the exclusive distributor of Tajima embroidery equipment
from 26 states to 39 states. In January 1997, Tajima granted the Company the
exclusive right to distribute small (one through six-head "FX" models) Tajima
embroidery machines in nine western states and Hawaii. With this expansion of
the Company's small machine territory to the West Coast, Hirsch gained the right
to distribute Tajima machines throughout the continental United States and
Hawaii. In fiscal 1998 Hirsch formed TUI for the purpose of assembling Tajima
embroidery machines in the United States. Production at TUI consists of models
in configurations of up to six heads per machine. In January 1998 Tokai
Industries (Tajima's manufacturing arm) purchased a 45 percent interest in TUI.
This investment reflects their continuing confidence in this endeavor and will
be a contributing factor in the long-range growth of TUI. In July 1999 Tajima
granted to Hirsch the non-exclusive right to distribute to its existing US
customers who have expanded their facilities into the Caribbean region.
The Company grew rapidly from the time of its initial public offering
through fiscal 1998. Growth was fueled by rapid technological advances in
software and hardware, the continued strong demand for embroidered products, the
creation of new embroidery applications and the continued strength of the
"embroidery entrepreneur" as a growing segment of the marketplace. The Company
believes that the purchasers of smaller embroidery machines are a significant
source of repeat business for the sale of multi-head embroidery machines as the
entrepreneurs' operations expand. The Company initiated several programs to
broaden the product offering to these smaller machine customers in the latter
part of fiscal 2000 and expects that they will begin to contribute incremental
revenue streams in the future.
Fiscal 1999 and 2000 were years of retrenchment for the industry, driven by
the relocation and continued investment offshore of large multi-head equipment
customers. While small machine customers continued to grow in the domestic
market, their growth rate could not offset the decline in large machine sales,
resulting in a change in the sales mix of embroidery machines and an overall
decline in demand. It was further compounded by dramatic swings in the US dollar
/ Yen exchange rate. All industry competitors faced difficulty in meeting these
new market demands. In fiscal 1999 the Company initiated a restructuring program
to address the market shifts in the industry, including closing and
consolidating certain divisions, reducing total employment, and disposing of
facilities no longer required to support its new business model (See Note 7 of
Notes to Consolidated Financial Statements). The Company continued to reduce
overhead costs throughout fiscal 2000, as the market continued to seek a level
of stability. The Company believes the implementation of the overhead cost
reduction program will position it to return to profitable operations at revenue
levels reflecting today's market realities.
Results of Operations
The following table presents certain income statement items expressed as a
percentage of total revenue for the fiscal years ended January 31, 2000, 1999
and 1998.
2000 1999 1998
---- ---- ----
Net sales 95.7% 95.8% 96.4%
Interest income related
to sales-type leases 4.3% 4.2% 3.6%
------------------------------------- ------------
Total revenue 100.0% 100.0% 100.0%
Cost of 65.9% 66.7% 63.0%
sales
Operating expenses 44.6% 36.7% 26.9%
Interest expense, net 1.4% 1.2% 0.6%
Other expense (income), net -0.5% 0.2% 0.1%
------------ ------------- ------------
(Loss) income before income
taxes and minority interest -11.4% -4.8% 9.4%
Income tax (benefit) provision 1.1% -1.5% 4.0%
Cumulative Effect of Accounting
Change -2.4% 0.0% 0.0%
Minority Interest 0.3% 0.3% 0.0%
------------ ------------- ------------
Net (loss) income -15.2% -3.3% 5.4%
============ ============= ============
Fiscal Year 2000 as Compared to Fiscal Year 1999
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 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
fiscal year's results due to the application of the changed accounting method.
This accounting change also results in a deferral of $3.7 million in sales
revenue and $2.5 million in cost of sales, yielding a gross margin of $1.2
million which has now been deferred to fiscal year 2001. Prior years' financial
statements are presented as originally reported without the accounting change
applied.
Net sales. Net sales for fiscal year 2000 were $87.0 million, a decrease of
$34.9 million, or 28.6%, compared to $122.2 million for fiscal year 1999.
Applied on a pro-forma basis retroactively to remove the accounting change,
fiscal year 2000 sales would have been $84.3 million, a decrease of $37.9
million, or 31.0% compared to fiscal year 1999. The Company believes that the
reduction in the sales level for the fiscal year ended January 31, 2000 is
attributable to a decrease in overall demand for new embroidery machines,
coupled with increased competition.
Sales of new embroidery machinery represented approximately 72.8% and 61.8%
of net sales for fiscal year's 2000 and 1999, respectively. Small embroidery
machines (one through six-head "FX" models) represented approximately 57.7% of
total new embroidery machine sales for fiscal year 2000 as compared to 51.1%,
for fiscal year 1999. Large embroidery machines (six-head "DC" models through
thirty-head models) represented approximately 42.3% of total new embroidery
machine sales during fiscal year 2000 as compared to approximately 48.9% for
fiscal year 1999.
Revenue from the sale of the Company's used machines, computer hardware and
software, parts and service, application software and embroidery supplies for
fiscal year 2000 aggregated approximately $23.6 million as compared to $25.7
million for fiscal year 1999.
Interest income related to sales-type leases. HAPL's interest income
decreased 28.8%, to $3.9 million for fiscal year 2000 from $5.4 million for
fiscal year 1999. This decrease is directly related to the decrease in new
embroidery machine sales. The percentage of new equipment sales which are leased
was 42.5% of total new equipment sales for fiscal year 2000 as compared to 50.7%
for fiscal year 1999.
Cost of sales. For fiscal year 2000, cost of sales decreased $25.7 million
or 30.2%, to $59.3 million from $85.0 million for fiscal year 1999. The decrease
was a result of the related decrease in net sales for fiscal year 2000 as
compared to fiscal year 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 declined for fiscal year 2000 to 34.7%, as compared to 36.0% for fiscal
year 1999. The reductions in gross margin are mainly attributable to aggressive
pricing used to increase sales of slower moving new machine inventory.
Selling, General and Administrative ("SG&A") Expenses. For fiscal year
2000, SG&A decreased $3.9 million or 8.7%, to $40.5 million from $44.3 million
for fiscal year 1999. SG&A expenses increased as a percentage of revenues to
44.6% for fiscal year 2000, from 34.8% for fiscal year 1999. The Company took
substantial write-downs and increased reserves for slow-moving new machinery and
uncollectable accounts in this fiscal year. Additional expenses were incurred in
the replacement of the Company's revolving credit facilities, as well as
development costs incurred for Building Blocks and Hometown Threads business
initiatives. While operating expenses continue to decline as a result of the
Company's cost reduction programs, of the percentage increase in SG&A expenses
versus revenues for fiscal 2000, a significant portion is attributable to these
non-recurring and developmental expenses. Based upon the decrease in net sales,
the Company continues to implement its cost reduction plan. The Company
anticipates that actions taken in accordance with the plan will continue to
reduce costs through the consolidation of support and back office infrastructure
and reduction of overhead. The Company anticipates this will bring SG&A expenses
in line with revised sales projections.
Interest Expense. Interest expense for fiscal year 2000 decreased $.3
million, or 16.5%, to $1.3 million from $1.6 million for fiscal year 1999. The
Company undertook an aggressive inventory reduction program in fiscal year 2000.
The results of this program directly reflect a decrease in interest expense as a
result of reduced working capital borrowings outstanding against the Company's
Revolving Credit Agreements during fiscal 2000 as compared to fiscal 1999.
Income tax (benefit) provision. The income tax provision reflected an
effective tax rate of approximately 9.6% for the twelve months ended January 31,
2000 as compared to an income tax benefit rate of 30.5% for fiscal year 1999.
The principal components of the deferred income tax assets recognized in fiscal
1999 resulted from allowances and accruals that were not then deductible for tax
purposes and differences in amortization periods between book and tax bases. In
fiscal 2000 the Company has established a 100% valuation allowance against these
deferred tax assets, since the Company cannot determine the future utilization
of such assets.
Net (Loss) income. The net loss for fiscal year 2000 was $13.8 million, a
decline of $9.2 million, compared to a net loss of $4.6 million for fiscal year
1999. The net margin declined to (15.2%) for fiscal year 2000 from (3.6%) for
fiscal year 1999. These declines are attributable to the decrease in net sales,
the increase in SG&A expenses as a percentage of revenues, and the valuation
allowance reserved against the deferred tax asset.
Fiscal Year 1999 as Compared to Fiscal Year 1998
Net sales. Net sales for fiscal year 1999 were $122.2 million, a decrease
of $24.8 million, or 16.9%, compared to $147.0 million for fiscal year 1998. The
Company believes that the reduction in the sales level for the fiscal year ended
January 31, 1999 is attributable to a softening of demand for new large
(six-head "DC" models through thirty-head models) machines. In addition, the
reduction in sales revenue during fiscal year 1999 is also attributable to lower
average machine selling prices as compared to fiscal year 1998. This reduction
in average selling price was mainly the result of the strong dollar/yen exchange
rate.
The sale of new embroidery machinery represented approximately $96.5
million, or 79.0% and $120.6 million, or 82.0%, of net sales for the fiscal
years 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 $49.3 million, or 51.1%,
and $47.2 million, or 48.9% of total new embroidery machine sales during fiscal
year 1999 as compared to approximately $51.4 million, or 42.6%, and $69.2
million, or 57.4%, respectively for fiscal year 1998.
Revenue from the sale of the Company's used machines, computer hardware and
software, parts, service, application software and embroidery supplies for
fiscal year 1999 was approximately $25.7 million, as compared to $26.5 million
for fiscal year 1998.
Interest income related to sales-type leases. HAPL's interest income
decreased 1.6% to $5.3 million for fiscal year 1999 from $5.4 million for the
comparable period of the prior year. This small decrease in HAPL's interest
income as compared to the decrease in new embroidery machine sales is a result
of the continued expansion of HAPL's operations. Their diversified leasing
programs have resulted in a 37.4% increase in the number of new equipment sales
which are leased to 50.7% of total new equipment sales for fiscal year 1999 from
36.9% for fiscal year 1998. This is primarily attributable to HAPL's continued
penetration into the small machine market, which represented 51.1% of new
machine sales in fiscal 1999 as compared to 42.6% of new machine sales in fiscal
1998.
Cost of sales. For fiscal year 1999, cost of sales decreased $11.0 million,
or 11.5%, to $85.1 million from $96.1 million for fiscal year 1998. The decrease
was a result of the related decrease in net sales for fiscal 1999 as compared to
fiscal 1998, offset by the inventory write-down of $3.5 million recorded in
fiscal 1999. The inventory write-down related to the Company's restructuring
plan and includes the write-down of used machine and ESW inventories (See Note 7
of Notes to Consolidated Financial Statements). 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.
Exclusive of the inventory write-down recorded in fiscal 1999, there was a small
decrease in the Company's gross margin for fiscal year 1999 to 36.0% as compared
to 37.0% for fiscal year 1998. This is primarily attributable to an increase in
sales of used embroidery machines, which typically yields lower gross margins
than those obtained in the sale of new embroidery machines.
Selling, general and administrative ("SG&A") expenses. For fiscal year 1999
SG&A increased $3.3 million, or 8.1%, to $44.4 million from $41.1 million for
fiscal year 1998. SG&A expenses increased as a percentage of revenues to 34.8%
from 26.9%. The increase in SG&A as a percentage of revenues for fiscal year
1999 as compared to fiscal 1998 is primarily attributable to the Company's
investment in its infrastructure to support anticipated sales levels. In
addition, approximately $.3 million of SG&A expenses were incurred in fiscal
1999 in connection with the formation of the Hometown Threads joint venture with
Jacobs Management Corporation and the Company's creation of its new Building
Blocks division. Based upon the decrease in net sales in fiscal 1999 as compared
to fiscal 1998, the Company has developed and implemented a 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. This will
bring the Company's expenses in line with revised sales projections.
Interest expense. Interest expense for fiscal year 1999 increased $.6
million, or 67.8%, from $.9 million in fiscal year 1998 to $1.6 million in
fiscal year 1999. This increase in interest expense is the result of increased
working capital borrowings outstanding against the Company's Revolving Credit
Facility during fiscal year 1999 as compared to fiscal year 1998.
Income tax (benefit) provision. The income tax benefit reflected an
effective benefit rate of approximately 30.5% for fiscal year 1999 as compared
to an income tax provision reflecting an effective tax rate of 42.5% for fiscal
year 1998. Differences from the federal statutory rate consisted primarily of
provisions for state income taxes net of Federal tax benefit. The principal
components of the deferred income tax assets result from allowances and accruals
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 fiscal year 1999 was $4.6 million, a
decrease in income of $12.8 million, or 156.2%, as compared to net income of
$8.2 million for fiscal year 1998. The net margin decreased to (3.6%) in fiscal
year 1999 from 5.4% in fiscal year 1998. These decreases are primarily
attributable to the restructuring costs and inventory write-down recorded in
connection with the Company's restructuring plan (See Note 7 of Notes to
Consolidated Financial Statements), as well as an increase in SG&A expenses.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $29.6 million at January 31, 2000,
decreasing $22.3 million or 43.0%, from $51.9 million, at January 31, 1999. The
decrease in working capital was principally due to reductions in inventory,
write-offs and incremental reserves in accounts receivable, the valuation
reserve against the deferred tax asset and the classification of the new credit
facility as short-term debt versus the old facility as long-term debt. The
Company has financed its operations principally through long-term financing of
certain capital expenditures and working capital borrowings under its revolving
credit facilities.
During fiscal year 2000, the Company's cash decreased by $1.8 million to
$1.3 million, in accordance with the terms of the Revolving Credit and Security
Agreement of September 30, 1999 with PNC Bank, National Association ("PNC
Bank"), which calls for the reduction of cash balances to minimum practical
levels. Net cash of $12.2 million was provided by the Company's operating
activities and was largely driven by decreases in the balance of accounts
receivable, inventory and net investment in sales-type leases. It was
substantially offset by cash used for repayments of long-term debt.
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.
Cash generated from operations was partially used for the purchase of
236,000 shares of the Company's stock in the open market during fiscal year
2000, at an average cost of approximately $1.50 per share.
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 in its Agreement
with PNC Bank at year-end and is currently negotiating to obtain a waiver of
such default for the fiscal quarter ended January 31, 2000 and an amendment of
the financial covenant contained in the Agreement for all periods thereafter.
Outstanding working capital borrowings against the Agreement aggregated
approximately $2.1 million at January 31, 2000. The Agreement was also used to
support trade acceptances payable of approximately $6.2 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 $218.2
million in lease agreements through January 31, 2000. As of January 31, 2000,
approximately $194.4 million, or 89.1%, 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 anticipates that it will satisfy the remaining balance of
approximately $1.0 million of the Mortgage prior to the originally scheduled
maturity date, in accordance with the agreement, as amended.
Future Capital Requirements
The Company believes that its existing cash and funds generated from
operations, together with its existing revolving credit facility, will be
sufficient to meet its working capital and capital expenditure requirements and
to finance planned growth.
Year 2000 Date Compliance
The Year 2000 issue existed because many computer systems and applications
used two-digit date fields to designate a year. The Company established a
Steering Committee (the "Committee") to address Year 2000 issues, including
senior members of the management team, which reported regularly to the Board of
Directors. The committee initiated a program to upgrade its internal information
systems to address any Year 2000 compliance issues. The Company completed its
Year 2000 program on a timely basis. The Company has implemented new computer
systems that addressed the Year 2000 transition problems.
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, however, be using earlier versions of the Company's
software products, which may not be Year 2000 compliant. The Company has
notified such customers of the risks associated with using these products and as
a result the majority of such customers have migrated to the Company's current
software products.
Based upon the Company's current estimates, incremental out-of-pocket costs
of its Year 2000 program were within the anticipated $300,000 allocated for such
expenditures. These costs were incurred primarily in fiscal year 2000 and
consisted mainly of remediation of and/or upgrades to existing computer hardware
and software and telecommunication systems. Such costs did not include internal
management time and the deferral of other projects, the effects of which were
not material to the Company's results of operations or financial condition.
The Company believes that no further material exposure exists in regard to
the Year 2000 issue and has concluded the activities of the Committee.
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.
Recent Pronouncements of the Financial Accounting Standards Board and the
SEC
Recent pronouncements of the Financial Accounting Standards Board ("FASB")
which are not required to be adopted at this date include, Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for fiscal quarters
of all fiscal years beginning after June 15, 1999. Based upon current data the
adoption of this pronouncement is not expected to have a material impact on the
Company's consolidated financial statements.
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 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 fiscal year's results due to the
application of the changed accounting method. This accounting change also
results in a deferral of $3.7 million in sales revenue and $2.5 million in cost
of sales, yielding a gross margin of $1.2 million which has now been deferred to
fiscal year 2001. Prior years' financial statements are presented as originally
reported without the accounting change applied.
Market Risk Sensitivity
The Company is exposed to various market risks, including changes in
foreign currency exchange rates and interest rates. Market risk is the potential
loss arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The Company has a formal policy that
prohibits the use of currency derivatives or other financial instruments for
trading or speculative purposes. The policy permits the use of financial
instruments to manage and reduce the impact of changes in foreign currency
exchange rates that may arise in the normal course of the Company's business.
Currently, the Company does not use interest rate derivatives.
The Company may enter into forward foreign exchange contracts principally
to hedge the currency fluctuations in transactions denominated in foreign
currencies, thereby limiting the Company's risk that would otherwise result from
changes in exchange rates. During fiscal 2000, the principal transactions hedged
were purchases of machinery from the Company's major supplier. The periods of
the forward foreign exchange contracts correspond to the periods of the hedged
transactions. The cost of such contracts is included in the cost of the related
machinery in inventory. A 5% strengthening or weakening of the U.S. dollar
against purchases denominated in foreign currencies would have approximately a
$2.5 million annualized impact on the cost of sales of the Company. The Company
does not use foreign exchange contracts to hedge expected earnings.
All of the Company debt is U.S. dollar denominated. At year-end,
approximately 67.6% of this indebtedness to third parties was floating
rate-based. Although the Company has exposure to rising and falling rates, a 1%
rise in rates on the average outstanding floating rate-based borrowings during
the fiscal year would have approximately $.1 million annualized adverse impact
on net pre-tax expenses. The Company does not use interest rate derivatives to
protect its exposure to interest rate market movements.
ITEM 8. FINANCIAL STATEMENTS IN SUPPLEMENTARY DATA
The information contained in pages F-1 through F-32 hereof.
ITEM 9. CHANGES IN A DISAGREEMENT WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS PAGE(S)
--------------------------------- -------
Index to Consolidated Financial Statements..........................................................F-1
Independent Auditors' Repors........................................................................F-2
Consolidated Balance Sheets.........................................................................F-3
Consolidated Statements of Income ..................................................................F-5
Consolidated Statements of Stockholders' Equity.....................................................F-6
Consolidated Statements of Cash Flows...............................................................F-7
Notes to Consolidated Financial Statements...................................................F-11- F-26
(a)(2) FINANCIAL STATEMENT SCHEDULE
....................................................................................................S-1
(a)(3) 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
^10.1 $60,000,000 Revolving Credit Facility and $10,000,000
Credit Facility Dated as of September 26, 1997 among Hirsch
International Corp., HAPL Leasing Co., Inc., Sewing Machine
Exchange, Inc., Pulse Microsystems Ltd., Sedeco, Inc., The
Bank of New York, Mellon Bank, N.A., Fleet Bank, N.A., and
The Bank of New York, as agent.
++10.2 Second Amendment to Loan Agreement among Hirsch
International Corp., HAPL Leasing Co., Inc., Sewing Machine
Exchange, Inc., Pulse Microsystems Ltd., 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.
++10.3 Waiver Agreement among Hirsch International Corp., HAPL
Leasing Co., Inc., Sewing Machine Exchange, Inc., Pulse
Microsystems Ltd., 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.
**10.4 $2,295,000 Mortgage Note from Hirsch International Corp.
to Chemical Bank
**10.5 Mortgage between Hirsch International Corp. and Chemical
Bank
**10.6 Guaranty of Payment of HAPL Leasing Co, Inc. and Pulse
Microsystems Ltd. to Chemical Bank
++10.7 Waiver and First Amendment to Mortgage between Hirsch
International Corp. and The Chase Manhattan Bank, dated as
of April 30, 1999.
++10.8 Agreement of Modification of Note between Hirsch
International Corp. and The Chase Manhattan Bank
dated as of April 30, 1999.
++10.9 Joinder by Guarantors among HAPL Leasing Co., Inc., Pulse
Microsystems, Ltd. and The Chase Manhattan Bank.
****10.10 Stock Purchase Agreement, dated June 7, 1996 by and among
Hirsch International Corp. and Ronald H. Krasnitz and
Martin Krasnitz
*****10.11 Stock Purchase Agreement, Dated December 20, 1996 by and
between Hirsch International Corp. and Jimmy L. Yates.
*10.12 Employment Agreement between Henry Arnberg and the
Registrant
*10.13 Employment Agreement between Paul Levine and the Registrant
*10.14 Employment Agreement between Tas Tsonis and Pulse
Microsystems, Ltd.
*10.15 Employment Agreement between Brian Goldberg and Pulse
Microsystems, Ltd.
***10.16 Employment Agreement between Ronald H. Krasnitz and Sewing
Machine Exchange, Inc.
***10.17 Employment Agreement between Martin Krasnitz and Sewing
Machine Exchange, Inc.
@10.18 Employment Agreement between Jimmy L. Yates and Sedeco,
Inc.
+10.19 Amendment to Employment Agreement between Tas Tsonis and
Pulse Microsystems, Ltd.
+10.20 Amendment to Employment Agreement between Brian Goldberg
and Pulse Microsystems, Ltd.
*10.21 Distributorship Agreement Dated February 21, 1991 together
with Supplements and Amendments thereto, among Tajima
Industries, Ltd., Nomura Trading Co. Ltd., Nomura (America)
Corp. and Hirsch International Corp. ("Hirsch
Distributorship Agreement")
@10.22 Amendment Number Two to Hirsch Distributorship Agreement,
Dated June 7, 1996
@10.23 Distributorship Agreement, Dated February 21, 1991,
together with Supplement Dated February 21, 1996, among
Tajima Industries, Ltd., Nomura Trading Co. Ltd., Nomura
(America) Corp., and Sedeco, Inc.
@10.24 West Coast Distributorship Agreement, Dated February 21,
1997, among Tajima Industries, Ltd., Nomura Trading Co.
Ltd. and Nomura (America) Corp., and Hirsch International
Corp.
%10.25 Stock Option Plan, as Amended
#10.26 1994 Non-Employee Director Stock Option Plan
@10.27 Registration Rights Agreement, Dated December 20, 1996,
between Hirsch International Corp. and Jimmy L. Yates
@10.28 Non-Qualified Stock Option Agreement between Hirsch
International Corp. and Jimmy L. Yates, Dated December 6,
1996
@10.29 Non-Qualified Stock Option Agreement between Hirsch
International Corp. and Ronald H. Krasnitz, Dated June 7,
1996
@10.30 Non-Qualified Stock Option Agreement between Hirsch
International Corp. and Martin Krasnitz, Dated June 7, 1996
+10.31 Agreement dated as of December 20, 1997 between the
Registrant and Tokai Industrial Sewing Machine Company,
Ltd. for sale of a forty-five (45%) per cent interest
in Tajima USA, Inc.
10.32 Waiver to Mortgage between Hirsch International Corp. and
The Chase Manhattan Bank, dated as of May 12, 2000.
10.33 Agreement of Modification of Note between Hirsch
International Corp. and The Chase Manhattan Bank
dated as of May 12, 2000.
10.34 Joinder by Guarantors among HAPL Leasing Co., Inc., Pulse
Microsystems, Ltd. and The Chase Manhattan Bank dated as
of May 12, 2000.
10.35 Memorandum of Request for Business with Mexico, Latin
American and Caribbean Countries among Hirsch International
Corp., Tajima Industries Ltd. and TM Trading Co., Ltd.
dated as of July 27, 1999.
+++10.36 Loan Agreement among Hirsch International Corp., HAPL
Leasing Co., Inc., Sewing Machine Exchange, Inc., Pulse
Microsystems Ltd., Sedeco, Inc., Hirsch Equipment
Connection, Inc., Hometown Threads, LLC, HJ Grassroots, LLC
and PNC Bank, NA dated September 30, 1999.
21.1 List of Subsidiaries of the Registrant
27.1 Financial Data Schedule
- ----------------------
%Incorporated by reference from the Registrant's Form 10-Q filed for the
quarter ended July 31, 1997.
^Incorporated by reference from the Registrant's Form 10-Q filed for the
quarter ended October, 31, 1997.
*Incorporated by reference from the Registrant's Registration Statement on
Forms S-1, Registration Number 33-72618.
**Incorporated by reference from the Registrant's Form 10-K filed for the
fiscal year ended January 21, 1995.
#Incorporated by reference from the Registrant's Registration Statement on
Form S-1, Registration No. 33-80563.
***Incorporated by reference from the Registrant's Form 10-Q filed for the
quarter ended July 31, 1996.
****Incorporated by reference from Registrant's Form 8-K filed with the
Commission on June 19, 1996.
*****Incorporated by reference from Registrant's Form 8-K filed with the
Commission on January 3, 1997.
@Incorporated by reference from the Registrant's Form 10-K filed for the
year ended January 31, 1997.
+ Incorporated by reference from Registrant's Form 10-K filed for the
fiscal year ended January 31, 1998.
++ Incorporated by reference from Registrant's Form 10-K filed for the
fiscal year ended January 31, 1999.
+++ Incorporated by reference from Registrant's Form 10-Q filed for the
quarter ended October 31, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Dated: May 15, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Henry Arnberg Chairman of the Board of Directors and Chief May 15, 2000
- --------------------------
Henry Arnberg Executive Officer (Principal Executive Officer)
/s/ Paul Levine President and Director May 15, 2000
- --------------------------
Paul Levine
/s/ Tas Tsonis Vice President and Director May 15, 2000
- --------------------------
Tas Tsonis
/s/ Richard Richer Vice President-Finance and Chief Financial Officer May 15, 2000
- -------------------------- (Principal Accounting and Financial Officer)
Richard Richer
/s/ Ronald Krasnitz Chief Operating Officer and Director May 15, 2000
- --------------------------
Ronald Krasnitz
/s/ Marvin Broitman Director May 15, 2000
- --------------------------
Marvin Broitman
/s/ Herbert M. Gardner Director May 15, 2000
- --------------------------
Herbert M. Gardner
/s/ Douglas Schenendorf Director May 15, 2000
- --------------------------
Douglas Schenendorf
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
INDEPENDENT AUDITORS' REPORTS F1-5
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED JANUARY 31, 2000, 1999 AND 1998:
Consolidated Balance Sheets F6-7
Consolidated Statements of Operations F8
Consolidated Statements of Stockholders' Equity F9
Consolidated Statements of Cash Flows F10
Notes to Consolidated Financial Statements F11-31
F1
Independent Auditors' Report
Board of Directors
Hirsch International Corp.
Hauppauge, New York
We have audited the accompanying consolidated balance sheet of Hirsch
International Corp. and subsidiaries as of January 31, 2000, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended January 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion of these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hirsch International
Corp. and subsidiaries as of January 31, 2000 and the results of their
operations and their cash flows for the year ended January 31, 2000 in
conformity with generally accepted accounting principles.
As discussed in Notes 2 and 12 to the consolidated financial statements, the
Company changed its method of accounting for revenue recognition for the year
ended January 31, 2000.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
May 3, 2000
F2
May 3, 2000
Mr. Richard Richer, CFO
Hirsch International Corp.
200 Wireless Boulevard
Hauppauge, New York 11788
Dear Mr. Richer:
As stated in Note 12 to the financial statements of Hirsch International Corp.
for the year ended January 31, 2000, the Company changed its method of
accounting for revenue recognition and states that the newly adopted accounting
method is preferable in the circumstances because 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
and 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 installation, rather than upon shipment by the Company.
In connection with our audit of the above mentioned financial statements, we
have evaluated whether the newly adopted accounting principle is preferable in
the circumstances.
Based on our audit, we concur in management's judgment that the newly adopted
accounting principle described in Note 12 is preferable in the circumstances.
Very truly yours,
/s/ BDO Seidman, LLP
BDO Seidman, LLP
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Post Effective Amendment No. 1
to Registration Statement No. 33-94914 on Form S-8, Registration No. 333-30237
on Form S-8 and Registration No. 333-22535 on Form S-3 of Hirsch International
Corp. and Subsidiaries of our report dated May 3, 2000, appearing in this Annual
Report on Form 10-K of Hirsch International Corp. and Subsidiaries for the year
ended January 31, 2000.
/s/ BDO SEIDMAN LLP
BDO Seidman, LLP
Melville, New York
May 12, 2000
F3
INDEPENDENT AUDITORS' REPORT
Board of Directors
Hirsch International Corp.
Hauppauge, New York
We have audited the accompanying consolidated balance sheet of Hirsch
International Corp. and Subsidiaries as of January 31, 1999 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended January 31, 1999 and 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Hirsch International
Corp. and Subsidiaries as of January 31, 1999 and the consolidated results of
their operations and their cash flows for the years ended January 31, 1999 and
1998 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Jericho, New York
April 22, 1999
F4
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Post Effective Amendment No. 1
to Registration Statement No. 33-94914 on Form S-8, Registration No, 333-30237
on Form S-8 and Registration No. 333-22535 on Form S-3 of Hirsch International
Corp. and Subsidiaries of our report dated April 22, 1999, appearing in this
Annual Report on Form 10-K of Hirsch International Corp. and Subsidiaries for
the year ended January 31, 2000.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Jericho, New York
May 10, 2000
F5
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2000 AND 1999
- -------------------------------------------------------------------------------
ASSETS 2000 1999
CURRENT ASSETS:
Cash and cash equivalents $1,290,000 $3,078,000
Accounts receivable, net of an allowance for
possible losses of approximately $5,632,000
and $4,033,000, respectively 17,293,000 22,956,000
Net investment in sales-type leases -
current portion (Note 6) 2,583,000 2,254,000
Inventories, net (Notes 4, 8 and 13) 25,711,000 36,335,000
Prepaid income taxes (Note 10) 3,673,000 1,786,000
Other current assets (Note 10) 423,000 5,284,000
---------- ----------
Total current assets 50,973,000 71,693,000
NET INVESTMENT IN SALES - TYPE LEASES - Noncurrent
portion (Note 6) 8,207,000 11,256,000
EXCESS OF COST OVER NET ASSETS ACQUIRED - Net
of accumulated amortization of approximately
$3,851,000 and $2,686,000, respectively
(Notes 3 and 8) 12,974,000 14,139,000
PURCHASED TECHNOLOGIES - Net of accumulated
amortization of approximately $1,132,000 and
$940,000, respectively 207,000 399,000
PROPERTY, PLANT AND EQUIPMENT - Net of accumulated 6,544,000 7,602,000
depreciation and amortization (Notes 7 and 9)
OTHER ASSETS (Note 10) 1,311,000 1,846,000
----------- ------------
TOTAL ASSETS $80,216,000 $106,935,000
=========== ============
See notes to consolidated financial statements.
(Continued)
F6
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2000 AND 1999
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
CURRENT LIABILITIES:
Trade acceptances payable (Note 9) $6,199,000 $2,164,000
Accounts payable and accrued expenses (Note 8) 12,805,000 17,338,000
Current maturities of bank debt (Note 9) 2,342,000 252,000
---------- ----------
Total current liabilities 21,346,000 19,754,000
LONG-TERM DEBT - Less current maturities (Note 9) 989,000 15,640,000
---------- ----------
Total liabilities 22,335,000 35,394,000
---------- ----------
MINORITY INTEREST (Note 1) 1,628,000 1,334,000
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 13)
STOCKHOLDERS' EQUITY (Notes 1 and 11):
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 6,488,700 shares, respectively,
at January 31, 2000;and 6,815,000 and 6,724,700
shares, respectively at January 31, 1999; 68,000 68,000
Class B common stock, $.01 par value;
authorized: 3,000,000 shares, outstanding:
2,668,000 shares 27,000 27,000
Additional paid-in capital 41,397,000 41,397,000
Retained earnings 15,721,000 29,543,000
Accumulated other comprehensive income 221,000 -
---------- ----------
57,434,000 71,035,000
Less: Treasury Class A Common stock at cost,
326,300 and 90,300 shares, respectively 1,181,000 828,000
---------- ----------
Total stockholders' equity 56,253,000 70,207,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $80,216,000 $106,935,000
========== ===========
F7
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Years Ended January 31,
2000 1999 1998
---------------- ---------------- ----------------
REVENUES
Net Sales $86,958,000 $122,198,000 $147,045,000
Interest income related to sales-type leases 3,863,000 5,348,000 5,432,000
---------------- ---------------- ----------------
Total revenue 90,821,000 127,546,000 152,477,000
---------------- ---------------- ----------------
COST OF SALES
Cost of sales (Note 13) 59,846,000 81,604,000 96,099,000
Inventory write-down (Notes 4 & 8) - 3,450,000 -
---------------- ---------------- ----------------
Total cost of sales 59,846,000 85,054,000 96,099,000
---------------- ---------------- ----------------
GROSS PROFIT 30,975,000 42,492,000 56,378,000
---------------- ---------------- ----------------
OPERATING EXPENSES
Selling, general and administrative expenses 40,491,000 44,381,000 41,055,000
Restructuring costs (Note 8) - 2,377,000 -
---------------- ---------------- ----------------
Total operating expenses 40,491,000 46,758,000 41,055,000
---------------- ---------------- ----------------
OPERATING (LOSS) INCOME (9,516,000) (4,266,000) 15,323,000
---------------- ---------------- ----------------
OTHER EXPENSE (INCOME)
Interest expense (Note 9) 1,308,000 1,567,000 934,000
Other (455,000) 233,000 90,000
---------------- ---------------- ----------------
Total other expense - net 853,000 1,800,000 1,024,000
---------------- ---------------- ----------------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION
FOR INCOME TAXES AND MINORITY
INTEREST IN NET EARNINGS OF
CONSOLIDATED SUBSIDIARY (10,369,000) (6,066,000) 14,299,000
INCOME TAX (BENEFIT) PROVISION (Note 10) 972,000 (1,848,000) 6,059,000
MINORITY INTEREST IN NET EARNINGS
OF CONSOLIDATED SUBSIDIARY (Note 1) 294,000 390,000 44,000
---------------- ---------------- ----------------
(LOSS) INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (11,635,000) (4,608,000) 8,196,000
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (Note 2) (2,187,000) - -
---------------- ---------------- ----------------
NET (LOSS) INCOME ($13,822,000) ($4,608,000) $8,196,000
================ ================ ================
(LOSS) EARNINGS PER SHARE:
Basic:
(Loss) Income before cumulative effect
of accounting change ($1.25) ($0.49) $0.92
Cumulative effect of accounting (.23) - -
change (Notes 2 and 12)
---------------- ---------------- ----------------
Net (Loss) Income per share ($1.48) ($0.49) $0.92
================ ================ ================
Diluted:
(Loss) Income before cumulative
effect
of accounting change ($1.25) ($0.49) $0.89
Cumulative effect of accounting ($0.23) - -
change (Notes 2 and 12)
---------------- ---------------- ----------------
Net (Loss) Income per share ($1.48) ($0.49) $0.89
================ ================ ================
WEIGHTED AVERAGE NUMBER OF SHARES
IN THE CALCULATION OF (LOSS)
EARNINGS PER SHARE (Note 14)
Basic 9,348,500 9,413,000 8,953,000
================ ================ ================
Diluted 9,348,500 9,436,000 9,236,000
================ ================ ================
See notes to consolidated financial statements.
F8
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------
Class A Class B
Common Stock Common Stock
(Note 10) (Note 10) Additional
--------------------- -------------------- Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
BALANCE, JANUARY 31, 1997 5,313,000 53,000 2,732,000 $ 27,000 $ 15,626,000
Proceeds from public offering
of common stock, net (Note 1) 1,333,000 13,000 -- -- 24,289,000
Issuance of shares in connection
with acquisitions (Note 3) 20,000 -- -- -- 392,000
Issuance of Class A stock 49,000 1,000 -- -- 819,000
Transfer of Class B stock to
Class A stockholder 64,000 -- (64,000) -- --
Exercise of stock options and warrants 32,000 1,000 -- -- 251,000
Comprehensive income:
Unrealized holding loss -- -- -- -- --
Net income -- -- -- -- --
Total comprehensive income: -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, JANUARY 31, 1998 6,811,000 68,000 2,668,000 27,000 41,337,000
Exercise of stock options 4,000 -- -- -- 20,000
Purchase of treasury shares (Note 11e) -- -- -- -- --
Comprehensive income:
Net loss -- -- -- -- --
Total comprehensive income: -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, JANUARY 31, 1999 6,815,000 68,000 2,668,000 27,000 41,397,000
Purchase of treasury shares (Note 11e) -- -- -- -- --
Comprehensive income:
Gain on Foreign Currency Translation -- -- -- -- --
Net loss -- -- -- --
Total comprehensive income: -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, JANUARY 31, 2000 6,815,000 $ 68,000 2,668,000 $ 27,000 $ 41,397,000
============ ============ ============ ============ ============
Accumulated
other
Comprehensive Retained Treasury
Income Earnings Stock Total
------ -------- ----- -----
(Note 2)
BALANCE, JANUARY 31, 1997 $ 21,000 $ 25,955,000 -- 41,682,000
Proceeds from public offering
of common stock, net (Note 1) -- -- -- 24,302,000
Issuance of shares in connection
with acquisitions (Note 3) -- -- -- 392,000
Issuance of Class A stock -- -- -- 820,000
Transfer of Class B stock to
Class A stockholder -- -- -- --
Exercise of stock options and warrants -- -- -- 252,000
Comprehensive income:
Unrealized holding loss (Note 2o) (21,000) -- -- --
Net income -- 8,196,000 -- --
Total comprehensive income: -- -- -- 8,175,000
------------ ------------ ------------ ------------
BALANCE, JANUARY 31, 1998 -- 34,151,000 -- 75,623,000
Exercise of stock options -- -- -- 20,000
Purchase of treasury shares (Note 11e) -- -- (828,000) (828,000)
Comprehensive income:
Net loss -- (4,608,000) -- --
Total comprehensive income: -- -- -- (4,608,000)
------------- ------------ ------------- -------------
BALANCE, JANUARY 31, 1999 -- 29,543,000 (828,000) 70,207,000
Purchase of treasury shares (Note 11e) -- -- (353,000) (353,000)
Comprehensive income:
Gain on Foreign Currency Translation 221,000 -- --
Net loss -- (13,822,000) --
Total comprehensive income: -- -- -- (13,601,000)
------------ ------------ ------------ ------------
BALANCE, JANUARY 31, 2000 $ 221,000 $ 15,721,000 ($ 1,181,000) $ 56,253,000
============ ============ ============ ============
See notes to consolidated financial statements.
F9
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
- -------------------------------------------------------------------------------
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(13,822,000) $ (4,608,000) $ 8,196,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 3,920,000 3,754,000 3,214,000
Provisions for reserves 5,151,000 1,643,000 807,000
Deferred income taxes 4,542,000 (2,826,000) (621,000)
Gain on disposal of assets - - (42,000)
Minority interest 294,000 390,000 44,000
Write-off of goodwill - 711,000 -
Changes in assets and liabilities:
Accounts receivable 1,630,000 10,598,000 (14,382,000)
Net investments in sales-type leases 2,870,000 213,000 (3,591,000)
Inventories 9,506,000 (3,467,000) (18,749,000)
Other current assets and other assets 228,000 614,000 (1,251,000)
Trade acceptances payable 4,035,000 (13,122,000) 1,954,000)
Accounts payable and accrued expenses (4,533,000) (3,375,000) 8,254,000
Prepaid income taxes and income taxes payable (1,887,000) (2,521,000) (807,000)
----------- ---------- ----------
Net cash (used in) provided by operating activities 11,934,000 (11,996,000) 16,974,000
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,029,000) (1,314,000) (2,096,000)
Acquisition of Equipment Connection, Inc. - - (553,000)
Sales of short-term investments - - 2,570,000
----------- ---------- ----------
Net cash (used in) investing activities (1,029,000) (1,314,000) (79,000)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of bank financing 6,952,000 26,021,000 17,260,000
Repayments of long-term debt (19,513,000) (11,781,000) (31,390,000)
Proceeds from public offering - - 24,302,000
Proceeds from issuance of stock and
exercise of stock options and warrants - 20,000 1,072,000
Purchase of treasury shares (353,000) (828,000) -
Contributions from minority interest - - 900,000
----------- ---------- ----------
Net cash provided by (used in) financing activities 12,914,000 13,432,000 12,144,000
----------- ---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 221,000 - -
----------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,788,000) 122,000 (4,909,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,078,000 2,956,000 7,865,000
----------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,290,000 $ 3,078,000 $ 2,956,000
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 1,308,000 $ 1,483,000 $ 966,000
=========== ========== ==========
Income taxes paid $ 527,000 $ 3,537,000 $ 7,621,000
=========== ========== ==========
See notes to consolidated financial statements.
F10
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Hirsch International Corp. ("Hirsch"), HAPL Leasing Co., Inc. ("HAPL" or
"HAPL Leasing"), Pulse Microsystems Ltd. ("Pulse"), Sewing Machine
Exchange, Inc. ("SMX"), Sedeco, Inc. ("Sedeco"), Hirsch Equipment
Connection, Inc. ("HECI"), and Tajima USA, Inc. ("TUI") (collectively, the
"Company"). The operations of HECI are included in consolidated operations
since its acquisition on March 26, 1997 (Note 3). The operations of TUI
have been included in consolidated operations since inception in June 1997.
On January 6, 1998, Tokai Industrial Sewing Machine Company ("Tokai"), an
affiliate of Tajima, the Company's major supplier, 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 has been reported as minority interest in the
Company's Consolidated Statements of Operations.
The Company is a single source provider of sophisticated equipment and
value added products and services to the embroidery industry. The
embroidery equipment and value added products sold by the Company are
widely used by contract embroiderers, large and small manufacturers of
apparel and fashion accessories, retail stores and embroidery entrepreneurs
servicing specialized niche markets. HAPL Leasing provides leasing services
to customers of the Company.
On June 6, 1997, the Company consummated a secondary public offering of
Class A common stock (the "Secondary Offering"). The Company sold 1,210,528
shares at $20.00 per share. Another 750,022 shares were sold by certain
stockholders of the Company ("Selling Stockholders'). On July 7, 1997, the
underwriters exercised their over-allotment option to purchase an
additional 294,082 shares of Class A common stock, 122,592 shares of which
were sold by the Company and 171,490 shares sold by the selling
stockholders. Net proceeds of approximately $24,300,000 were received by
the Company after expenses and underwriting discount.
F11
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries,
and since January 1998, the majority interest in the operations of
TUI. All inter-company balances and transactions have been eliminated
in consolidation.
b. Revenue Recognition - The Company distributes embroidery equipment
that it offers for sale or lease. Prior to the issuance by the SEC of
the Staff Accounting Bulletin No. 101 ("SAB 101"), revenue related to
the sale of equipment was recorded at the time of shipment. The
Company has adopted the recommendation of SAB 101 effective with
reporting for fiscal year 2000. Where installation and customer
acceptance are a substantive part of the sale, by its terms, the
Company has deferred recognition of the revenue until such customer
acceptance of installation has occurred. Comparisons of financial
performance have been retroactively adjusted to reflect the impact of
this change in accounting method (See Note 12).
Lease contracts which meet the criteria of Statement of Financial
Accounting Standards No. 13, "Accounting for Leases" are accounted for
as sales-type leases. Under this method, revenue is recognized as a
sale at the later of the time of shipment or acceptance by the lessee
in an amount equal to the present value of the rental payments and the
present value is amortized over the term of the lease so as to produce
a constant periodic rate of return on the net investment in the lease.
The operating method of accounting for leases is followed for lease
contracts not meeting the above criteria. Under this method of
accounting, aggregate rental revenue would be recognized over the term
of the lease.
Service revenues and costs are recognized when services are provided.
Sales of computer hardware and software are recognized when shipped
provided that no significant vendor and post-contract and support
obligations remain and collection is probable.
c. Cash Equivalents - Cash equivalents consist of money market accounts
with initial maturities of three months or less.
d. Allowance for Possible Losses - The Company provides an allowance for
possible losses determined by a specific identification of individual
accounts and a general reserve to cover other accounts based on
historical experience. The Company writes off receivables upon
determination that no further collections are probable.
e. Inventories - Inventories consisting of machines and parts are stated
at the lower of cost or market. Cost for machinery is determined by
specific identification and for all other items on a first-in,
first-out basis. Reserves are established to record provisions for
slow moving inventories in the period in which it becomes reasonably
evident that the product is not salable or the market value is less
than cost (see Note 4). Used equipment is valued based on an
assessment of age, condition, model type, accessories, capabilities
and demand in the used machine market.
f. Foreign Operations - The functional currency of the Company's foreign
subsidiary was the US dollar during the fiscal years ended January 31,
1999 and 1998. During the year ended January 31, 2000, the functional
currency of this subsidiary changed to the Canadian dollar. Assets and
liabilities of the Company's foreign subsidiary are translated at
year-end exchange rates. Results of operations are translated using
the average exchange rate prevailing throughout the year. Gains or
losses resulting from translation adjustments are included in
accumulated other comprehensive income in stockholders' equity. Gains
and losses from foreign currency transactions are included in net
income and are not significant.
F12
The Company makes only limited use of derivative financial instruments
and does not use them for trading purposes. Trade acceptances payable
are denominated in Japanese yen and are related to the purchase of
equipment from the Company's major supplier. At times the Company
purchases foreign currency forward contracts (which are usually
approximately six months in duration) to hedge the risk associated
with fluctuations in foreign currency exchange rates (see Note 13b).
The cost of such contracts are included in the cost of the related
machinery in inventory.
g. Property, Plant and Equipment - Property, plant and equipment are
stated at cost less accumulated depreciation and amortization.
Capitalized values of property under leases are amortized over the
life of the lease or the estimated life of the asset, whichever is
less. Depreciation and amortization are provided on the straight-line
or declining balance methods over the following estimated useful
lives:
Asset Category Lives in Years
Building 39
Furniture and fixtures 3-7
Machinery and equipment 3-7
Automobiles 3-5
Leasehold improvements 3-20
h. Software Development Costs - The development of new software products
and enhancements to existing products are expensed as incurred until
technological feasibility has been established. After technological
feasibility is established, any additional costs would be capitalized
in accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed." Capitalized software costs are amortized on a
straight-line basis over the estimated useful product lives (normally
three years) commencing in the month following product release. Such
costs are included in other assets on the accompanying consolidated
balance sheets. Amortization expense for the years ended January 31,
2000, 1999, and 1998 was approximately $100,000, $205,000, and
$205,000, respectively.
i. Impairment of Long-Lived Assets - In accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121"), the Company reviews its long-lived assets, including
property, plant and equipment, identifiable intangibles and purchased
technologies, for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not
be fully recoverable. To determine recoverability of its long-lived
assets, the Company evaluates the probability that future undiscounted
net cash flows, without interest charges, will be less than the
carrying amount of the assets. Impairment is measured at fair value.
j. Leases - Leases (in which the Company is lessee) which transfer
substantially all of the risks and benefits of ownership are
classified as capital leases, and assets and liabilities are recorded
at amounts equal to the lesser of the present value of the minimum
lease payments or the fair value of the leased properties at the
beginning of the respective lease terms. Interest expense relating to
the lease liabilities is recorded to effect constant rates of interest
over the terms of the leases. Leases which do not meet such criteria
are classified as operating leases and the related rentals are charged
to expense as incurred.
k. Purchased Technologies - Purchased technologies represent the cost in
excess of the fair value of the assets of Pulse at the date of
acquisition. Purchased technologies are being amortized over a period
of seven years using the straight-line method.
F13
l. Income Taxes - The Company accounts for income taxes pursuant to
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the Company's
consolidated financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the
differences between the financial accounting and tax bases of assets
and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. Valuation allowances
are established when the Company cannot determine the future
utilization of some portion or all of the deferred tax asset.
m. Earnings Per Share - The Company has adopted Financial Accounting
Standards No. 128 "Earnings per Share" ("SFAS No. 128"), which
requires dual presentation of basic and diluted earnings per share on
the face of the income statement.
Basic earnings per share are based on the weighted average number of
shares of common stock outstanding during the period. Diluted earnings
per share are based on the weighted average number of shares of common
stock and common stock equivalents (options and warrants) outstanding
during the period, computed in accordance with the treasury stock
method. Outstanding options and warrants were anti-dilutive for the
fiscal years ended January 31, 2000 and 1999.
n. Stock-Based Compensation - The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with APB
No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
o. Comprehensive Income - In fiscal 1999, the Company adopted Statement
of Financial Accounting Standards No. 130. "Reporting Comprehensive
Income" ("SFAS 130"). This statement established rules for reporting
comprehensive income and its components. Comprehensive income consists
of net income, holding gains and losses on short term investments
available for sale, and foreign exchange translation adjustments and
is presented in the consolidated statements of stockholders' equity.
p. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
q. Fair Value of Financial Instruments - Financial instruments consist
primarily of investments in cash, cash equivalents, trade account
receivables, accounts payable and debt obligations. At January 31,
2000 and 1999, the fair value of the Company's financial instruments
approximated the carrying value (Note 2c).
F14
3. ACQUISITIONS
Acquisition of Equipment Connection - On March 26, 1997, the Company
acquired all of the assets of Equipment Connection, Inc. ("ECI"). The
acquisition was accounted for as a purchase in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations"
("APB 16") and, accordingly, the acquired assets and assumed
liabilities have been recorded at their estimated fair market values
at the date of acquisition. The purchase price was $805,000, paid in
the form of $605,000 in cash and $200,000 in the company's Class A
Common Stock. Concurrent with the acquisition, the Company entered
into five-year employment contracts with ECI's two former principals.
In the fourth quarter of fiscal 1999, the Company commenced a
restructuring plan in connection with certain of its operations,
including the closing of ECI. In connection with the closing of ECI,
the ECI goodwill was written off (Notes 4 and 8).
4. INVENTORIES
January 31,
2000 1999
New machines $20,455,000 $29,623,000
Used machines 4,795,000 3,194,000
Parts and accessories 4,092,000 6,031,000
Less: Reserve for slow-moving inventory (3,631,000) (2,513,000)
----------- ----------
Total $25,711,000 $36,335,000
In connection with the Company's restructuring (Note 8), the Company
wrote-down used machine and parts and accessories inventories by
$3,450,000 in the fourth quarter of fiscal 1999. Such write-down is
included in cost of sales on the accompanying statements of
operations.
F15
5. CHANGES IN RESERVES
Allowance for Possible Losses:
- ------------------------------
Opening Additions Write Offs Ending
------- --------- ---------- ------
Balance Balance
------- -------
Year ended January 31, 2000 $ 4,033,000 $ 1,615,000 $(16,000) $5,632,000
Year ended January 31, 1999 $ 3,160,000 $ 930,000 $(57,000) $4,033,000
Year ended January 31, 1998 $ 2,578,000 $ 582,000 $ - $3,160,000
Inventory Reserve
- -----------------
Opening Additions Write Offs Ending
------- --------- ---------- ------
Balance Balance
------- -------
Year ended January 31, 2000 $ 2,513,000 $ 1,437,000 $(319,000) $3,631,000
Year ended January 31, 1999 $ 2,255,000 $ 258,000 $ - $2,513,000
Year ended January 31, 1998 $ 2,003,000 $ 252,000 $ - $2,255,000
F16
6. NET INVESTMENT IN SALES-TYPE LEASES
January 31,
2000 1999
Total minimum lease payments receivable $9,688,000 $9,944,000
Estimated residual value of leased property (unguaranteed) (A) 4,848,000 7,360,000
Reserve for estimated uncollectible lease payments (1,100,000) (1,100,000)
Less: Unearned income (2,646,000) (2,694,000)
---------- ----------
Net investment 10,790,000 13,510,000
Less: Current portion 2,583,000 2,254,000
---------- ----------
Non-current portion $8,207,000 $11,256,000
========== ==========
(A) The estimated residual value of leased property will fluctuate based on
volume of transactions, financial structure of the transactions, sales of
residuals to third party financing organizations and periodic recognition
of the increased net present value of the residuals over time. The largest
portion of the decline in the estimated residual value of leased property
from fiscal 1999 to fiscal 2000 was a sale of residuals to a third party of
approximately $4.7 million.
At January 31, 2000 future annual lease payments receivable (including
estimated residual values) under sales-type leases are as follows:
Fiscal Year
Ending
January 31,
2001 $ 3,789,000
2002 2,760,000
2003 2,954,000
2004 2,682,000
2005 2,238,000
Thereafter 113,000
-----------
$14,536,000
F17
7. PROPERTY, PLANT AND EQUIPMENT
January 31,
2000 1999
Land and building $ 2,767,000 $ 3,288,000
Machinery and equipment 6,514,000 5,131,000
Furniture and fixtures 1,936,000 1,930,000
Rental Equipment 1,113,000 1,195,000
Automobiles 322,000 338,000
Leasehold improvements 1,650,000 1,798,000
---------- ----------
Total 14,302,000 13,680,000
Less: Accumulated depreciation and
amortization (7,758,000) (6,078,000)
---------- ----------
Property, plant and equipment, net $ 6,544,000 $7,602,000
========== ==========
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
January 31,
2000 1999
Accounts payable $ 7,573,000 $11,684,000
Accrued restructuring costs (A) 776,000 1,544,000
Accrued commissions payable 236,000 1,091,000
Accrued payroll costs 276,000 316,000
Accrued warranty and installation costs 580,000 922,000
Customer deposits payable 562,000 634,000
Deferred revenue 1,237,000 -
Other accrued expenses 1,565,000 1,147,000
----------- -----------
Total accounts payable and accrued
expenses $12,805,000 $17,338,000
=========== ===========
(A) 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 parts and supplies operations with existing Hirsch
operations and the closing of four decentralized sales and training
offices. The restructuring costs of $2,377,000 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). Payments
and adjustments of $122,000 and $338,000 were made for these costs in
fiscal years ended January 31, 1999 and 2000, respectively. The Company
anticipates that substantially all of the remaining restructuring costs
will be paid in fiscal year 2001.
As an additional part of the plan, which is recorded as cost of sales, the
Company wrote-down to net realizable value used machine and ESW parts and
supplies inventories by $3,450,000.
F18
9. BANK DEBT
January 31,
2000 1999
Revolving credit facility (A) $ 2,064,000 $14,500,000
Long-term bank debt
Mortgage (B) 1,090,000 1,320,000
Other 177,000 72,000
----------- -----------
Total 3,331,000 15,892,000
Less: Current maturities 2,342,000 252,000
----------- -----------
Long-term maturities $ 989,000 $15,640,000
=========== ===========
(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 that had been in place for approximately the prior two
years. It was replaced with a new Revolving Credit and Security Agreement
(the "Agreement") with PNC Bank. The Agreement provides for a commitment of
$20 million for Hirsch and all 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, as amended, restrict additional borrowings by the Company and
require the Company to maintain certain levels of shareholders equity, as
defined therein. Outstanding working capital borrowings against the
Agreement aggregated approximately $2.1 million at January 31, 2000. The
Agreement was also used to support trade acceptances payable of
approximately $6.2 million as of that date. The Company was in default of
the financial covenant at year-end and is currently negotiating with the
Bank for an amendment to the 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.
The Mortgage currently bears interest at a fixed rate of 11.3 percent and
is payable in equal monthly principal installments of $19,125. 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 at year-end and has
received a waiver from the bank for the fiscal quarter ending January 31,
2000 and all four quarters of fiscal year 2001, and thereafter. The Company
anticipates that it will satisfy the remaining balance of approximately
$1.0 million of the Mortgage prior to the originally scheduled maturity
date, in accordance with the agreement, as amended.
Long-term debt (including capitalized lease obligations) of the
Company at January 31, 2000 matures as follows:
Fiscal Year
Ending
January 31,
2001 $2,342,000
2002 915,000
2003 36,000
2004 30,000
2005 8,000
----------
$3,331,000
F19
10. INCOME TAXES
The income tax (benefit) provision for each of the periods presented herein is
as follows:
January 31,
2000 1999 1998
Current:
Federal $(3,074,000) $ 456,000 $4,978,000
State and foreign (770,000) 522,000 1,702,000
----------- ---------- ----------
Total current (3,844,000) 978,000 6,680,000
----------- ---------- ----------
Deferred:
Federal 3,853,000 2,491,000 (527,000)
State and foreign 963,000 (335,000) (94,000)
----------- ---------- ----------
Total deferred 4,816,000 (2,826,000) (621,000)
----------- ---------- ----------
Total income tax (benefit) provision $ 972,000 $(1,848,000) $6,059,000
=========== ========== ==========
The tax effects of temporary differences that give rise to deferred income tax
assets at January 31, 2000 and 1999 are as follows:
January 31, 2000 January 31, 1999
Net Current Net Long- Net Current Long-Term
Deferred Tax Term Deferred Deferred Tax Deferred Tax
Assets Tax Assets Assets Assets
--------------------------------- ---------------------------------
Accounts receivable $ 1,840,000 $ - $ 1,147,000 $ -
Inventories 1,625,000 - 790,000 -
Accrued warranty costs 232,000 - 264,000 -
Other accrued expenses 214,000 - 582,000 -
Purchased technologies and goodwill - 258,000 - 234,000
Net operating loss 754,000 - 1,400,000 -
Net investments in sales-type leases
(allowance for possible losses) - 820,000 - 439,000
Capitalized software development
costs - - - (40,000)
------------ ---------- ------------ ----------
4,665,000 1,078,000 4,183,000 633,000
Less valuation allowance (4,665,000) (1,078,000) - -
------------ ---------- ------------ ----------
Net deferred tax asset - - $ 4,183,000 $ 633,000
============ ========== ============ ==========
A valuation allowance for such deferred tax asset has been established at
January 31, 2000, since the Company cannot determine the future utilization of
those assets.
F20
A reconciliation of the differences between the federal statutory tax rate of 34
percent and the Company's effective income tax rate is as follows:
Year Ended January 31,
2000 1999 1998
Federal statutory income tax rate (34.0)% (34.0)% 34.0%
State income taxes, net of Federal benefit 5.0 5.0 7.9
Permanent differences 2.1 (1.5) 0.5
Valuation Allowance 36.5 - -
------ ------- -----
Effective income tax rate 9.6% (30.5)% 42.4%
====== ======= =====
11. STOCKHOLDERS' EQUITY
a. Common Stock - The Class A Common Stock and Class B Common Stock has
authorizations of 20,000,000 and 3,000,000 shares, respectively. The
Class A Common Stock and Class B Common Stock are substantially
identical in all respects, except that the holders of Class B Common
Stock elect two-thirds of the Company's Board of Directors (as long as
the number of shares of Class B Common Stock outstanding equals or
exceeds 400,000), while the holders of Class A Common Stock elect
one-third of the Company's Board of Directors. Each share of Class B
Common Stock automatically converts into one share of Class A Common
Stock upon transfer to a non-Class B common stockholder. The 1,000,000
shares of preferred stock are authorized and may be issued from time
to time, in such series and with such designations, rights and
preferences as the Board may determine.
b. Stock Option Plans - The Company maintains two stock options plans
pursuant to which an aggregate of approximately 1,284,000 shares of
Common Stock may be granted.
The 1993 Stock Option Plan (the "1993 Plan") has 1,050,000 shares of
Common Stock reserved for issuance upon the exercise of options
designated as either (i) incentive stock options ("ISOs") under the
Internal Revenue Code of 1986, as amended (the "Code"), or (ii)
non-qualified options. ISOs may be granted under the Stock Option Plan
to employees and officers of the Company. Non-qualified options may be
granted to consultants, directors (whether or not they are employees),
employees or officers of the Company.
Stock option transactions during the years ended January 31, 2000,
1999 and 1998 for the 1993 Plan are summarized below:
F21
Exercise Weighted Average
Shares Price Range Exercise Price
Options outstanding - January 31, 1997 308,000 $4.88 - $17.05 $ 13.23
Options granted 332,000 $17.00 - $24.20 $ 17.10
Options exercised (14,000) $4.88 - $14.50 $ 11.70
Options canceled (11,000) $14.50 - $17.00 $ 15.05
------- --------------- ----------
Options outstanding - January 31, 1998 615,000 $4.88 - $24.20 $ 13.74
Options exercised (2,000) $4.88 $ 4.88
Options canceled (78,000) $4.88 - $17.00 $ 15.66
------- --------------- ----------
Options outstanding - January 31, 1999 535,000 $4.88 - $24.20 $ 15.53
Options canceled (88,000) $4.88 - $24.20 $ 15.53
Options issued 264,000 $1.75 - $5.25 $ 3.42
------- -------------- ----------
Options outstanding - January 31, 2000 711,000 $1.75 - $24.20 $ 9.91
------- --------------- ----------
Options exerciseable at January 31, 2000 360,000 $14.50 - $24.20 $ 17.99
======= =============== ==========
Options Outstanding Options Exercisable
Weighted Avg. Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (yrs) Price Exerciseable Price
$1.75 - $5.25 264,000 5.0 $ 3.42 - -
$14.50 - $18.37 437,000 1.5 $ 13.67 354,000 $ 15.65
$22.00 - $24.20 10,000 2.5 $ 23.10 6,000 $ 24.20
------- --------
711,000 360,000
All options granted for the fiscal year ended January 31, 1995 are
exercisable one year from the date of grant and expire five years from
the date of grant. All options issued subsequent to the fiscal year
ended January 31, 1995 vest in three annual installments of 33-1/3
percent each on the first, second, and third anniversary of the date
of grant. There are approximately 361,000 shares available for future
grants under the 1993 Plan. Approximately 95,000 options have been
canceled under this plan.
F-22
The 1994 Non-Employee Director Stock Option Plan (the "Directors
Plan") has approximately 234,000 shares of Common Stock reserved for
issuance. Pursuant to the terms of the Directors Plan, each
independent unaffiliated Director shall automatically be granted,
subject to availability, without any further action by the Board of
Directors or the Stock Option Committee: (i) a non-qualified option to
purchase 7,500 shares of Common Stock upon their election to the Board
of Directors; and (ii) a non-qualified option to purchase 2,500 shares
of Common Stock on the date of each annual meeting of stockholders
following their election to the Board of Directors. The exercise price
under each option is the fair market value of the Company's Common
Stock on the date of grant. Each option has a five-year term and vests
in three annual installments of 33-1/3 percent each on the first,
second, and third anniversary of the date of grant. Options granted
under the Directors Plan are generally not transferable during an
optionee's lifetime but are transferable at death by will or by the
laws of descent and distribution. In the event an optionee ceases to
be a member of the Board of Directors (other than by reason of death
or disability), then the non-vested portion of the option immediately
terminates and becomes void and any vested but unexercised portion of
the option may be exercised for a period of 180 days from the date the
optionee ceased to be a member of the Board of Directors. In the event
of death or permanent disability of an optionee, all options
accelerate and become immediately exercisable until the scheduled
expiration date of the option.
Stock option transactions during the years ended January 31, 2000,
1999 and 1998 for the Directors' Plan are summarized below:
Exercise Weighted Average
Shares Price Range Exercise Price
Options outstanding - January 31, 1997 56,000 $5.36 - $15.50 $ 7.83
Options granted 8,000 $ 22.00 $ 22.00
Options exercised (17,000) $ 5.36 $ 5.36
------- -------------- -------
Options outstanding - January 31, 1998 47,000 $5.36 - $22.00 $ 11.09
Options exercised (2,000) $ 5.36 $ 5.36
------- -------------- -------
Options outstanding - January 31, 1999 45,000 $5.36 - $22.00 $ 11.35
Options cancelled (8,000) $ 9.36 $ 9.36
Options issued 7,000 $ 2.25 $ 2.25
------- -------------- -------
Options outstanding - January 31, 2000 44,000 $2.25 - $22.00 $ 12.44
======= ============== =======
Options exerciseable - January 29,000 $7.81 - $22.00 $ 13.19
======= ============== =======
F-23
Options Outstanding Options Exercisable
Weighted Avg. Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (yrs) Price Exerciseable Price
$ 2.25 7,000 4.5 $ 2.25
$ 7.81 8,000 3.5 $ 7.81 3,000 $ 7.81
$ 9.12 12,000 0.5 $ 9.12 12,000 $ 9.12
$15.50 9,000 2.5 $15.50 9,000 $15.50
$22.00 8,000 2.5 $22.00 5,000 $22.00
------ ------
44,000 29,000
====== ======
There are approximately 182,000 shares available for future grants under
the Directors' Plan. 8,000 options have been cancelled under this plan.
In connection with the acquisitions of ECI, Sedeco, SMX, and Pulse,
approximately 453,000 non-plan options have been issued as follows:
Exercise Weighted Average
Shares Price Range Exercise Price
Options outstanding - January 31, 1997 427,000 $4.88 - $18.25 $ 15.54
Options granted - ECI acquisition 26,000 $ 18.25 $ 18.25
------- -------------- -------
Options outstanding - January 31, 1998 and 1999 453,000 $4.88 - $18.25 $ 15.69
Options cancelled (49,000) $4.88 - $18.25 $ 8.42
------- -------------- -------
Options outstanding - January 31, 2000 404,000 $16.20 - $18.25 $ 16.57
======= =============== =======
Options exerciseable at January 31, 2000 284,000 $16.20 - $18.25 $ 16.57
======= =============== =======
Options Outstanding Options Exercisable
Weighted Avg. Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (yrs) Price Exerciseable Price
$16.20 331,000 1.5 $16.20 232,000 $16.20
$18.25 73,000 1.6 $18.25 52,000 $18.25
------- -------
404,000 284,000
======= =======
The options issued in connection with the Pulse acquisition are
exercisable and have a life of five years. The options issued in
connection with the SMX, Sedeco and ECI acquisitions vest in four
annual installments of 25 percent each in the first, second, third,
and fourth anniversary of the date of grant and expire five years from
the date of grant. The options issued in connection with the Pulse
acquisition expired in February 1999. 49,000 options have been
exercised or canceled.
In addition, pursuant to the IPO, the underwriters received warrants
to purchase from the Company 205,080 shares of Class A Common Stock.
The warrants are exercisable for a period of four years commencing one
year after the date of the IPO at exercise prices ranging from 107
percent to 128 percent of the initial public offering price. During
the fiscal year ended January 31, 1998, 2,700 warrants were exercised
at a price of $5.56 per share. No warrants were exercised during 1999.
Approximately 4,080 are exercisable at a price of $5.90 per share.
These warrants expired in February 1999.
F24
c. Additional Stock Plan Information - As discussed in Note 2, the
Company continues to account for its stock-based awards using the
intrinsic value method in accordance with APB 25 and its related
interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock
arrangements.
The Company follows Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," ("SFAS 123") which
requires the disclosure of pro forma net income and earnings per
share. Under SFAS 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions,
which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly
affect the calculated values. The Company's calculations were made
using the Black-Scholes option pricing model with the following
weighted average assumptions for 2000, 1999, and 1998: expected life,
five years following vesting; stock volatility, 68.3 percent in 2000,
128.5 percent in 1999 and 54 percent in 1998; risk free interest rate
of 6.0 percent in 2000, 5.0 percent in 1999, and 5.5 percent in 1998
and no dividends during the expected term. The Company's calculations
are based on a multiple option valuation approach and forfeitures are
recognized as they occur.
If compensation cost for the Company's stock options had been
determined consistent with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation to Employees" ("SFAS
No. 123"), the Company's net (loss) income and (loss) earnings per
share would have been the pro forma amounts indicated below:
Year Ended January 31,
2000 1999 1998
Net (loss) income:
As reported $(13,822,000) $(4,608,000) $8,196,000
Pro forma $(16,510,000) $(5,757,000) $7,597,000
Basic (loss) earnings par share:
As reported $ (1.48) $ (0.49) $ 0.92
Pro forma $ (1.77) $ (0.61) $ 0.85
Diluted (loss) earnings per share:
As reported $ (1.48) $ (0.49) $ 0.89
Pro forma $ (1.77) $ (0.61) $ 0.82
d. Treasury Stock - Treasury stock at January 31, 2000 consists of
326,300 shares of Class A common stock purchased in open market
transactions for a total cost of approximately $1,181,000 pursuant to
a stock repurchase program authorized by the Board of Directors in
fiscal year 1999.
e. Profit Sharing Plan - The Company has a voluntary contribution profit
sharing plan (the "Plan"), which complies with Section 401(k) of the
Internal Revenue Code. Employees who have attained the age of 21 and
have one year of continuous service are eligible to participate in the
Plan. The Plan permits employees to make a voluntary contribution of
pre-tax dollars to a pension trust, with a discretionary matching
contribution by the Company up to a maximum of two percent of an
eligible employee's annual compensation. The Company elected not to
make matching contributions for fiscal years ended January 31, 1999
and 2000. The Company contributed approximately $148,000 for the year
ended January 31, 1998. The Company funds all amounts when due.
F25
12. 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 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 fiscal year's results due to the
application of the changed accounting method. This accounting change also
results in a deferral of $3.7 million in sales revenue and $2.5 million in
cost of sales, yielding a gross margin of $1.2 million which has now been
deferred to fiscal year 2001. Prior years' financial statements are
presented as originally reported without the accounting change applied. The
following table presents the proforma effect of the accounting change on
the prior years.
(All figures in $000,000) Year Ended January 31,
1999 1998
Revenue:
As Reported $ 127.5 $ 152.5
Proforma $ 135.6 $ 150.7
Cost of sales:
As Reported $ 85.1 $ 96.1
Proforma $ 90.4 $ 94.9
Gross Profit:
As Reported $ 42.5 $ 56.4
Proforma $ 45.3 $ 55.8
Income (loss) before Provision for Taxes:
As Reported $ (6.1) $ 14.3
Proforma $ (3.3) $ 13.7
Net (loss)Income:
As Reported $ (4.6) $ 8.2
Proforma $ (2.5) $ 7.8
F26
13. COMMITMENTS AND CONTINGENCIES
a. Minimum Operating Lease Commitments - The Company has operating leases
for various automobiles and sales and service locations. The annual
aggregate rental commitments required under these leases, except for
those providing for month-to-month tenancy, are as follows:
Fiscal Year
Ending
January 31,
2001 $ 626,000
2002 496,000
2003 109,000
2004 2,000
--------
$1,233,000
Rent expense was approximately $1,240,000, $1,360,000 and $1,292,000
for the years ended January 31, 2000, 1999 and 1998, respectively. The
decline from previous years is the result of termination of various
facility leases.
b. Foreign Currency Contracts - In connection with the purchase of
equipment from its major supplier, the Company may purchase foreign
currency forward contracts (which usually approximate six months in
duration) to hedge the risk associated with fluctuations in foreign
currency exchange rates relating to all trade acceptances payable and
certain firm purchase commitments. The costs of such contracts are
included in the cost of the related machinery in inventory.
At January 31, 2000, the Company did not hold any foreign currency
contracts.
c. Litigation - The Company is a defendant in various litigation matters,
all arising in the normal course of business. Based upon discussion
with Company counsel, management does not expect that these matters
will have a material adverse effect on the Company's consolidated
financial position or results of operations.
F27
d. Employment Agreements - The Company had entered into five-year
employment agreements with the Company's current Chief Executive
Officer and President, which expired by their terms on February 17,
1999. The agreements provided that each executive received minimum
annual compensation of $350,000 (adjusted annually based upon the
CPI). Effective August 1, 1999, the Chief Executive Officer and the
President each voluntarily reduced their salary to $100,000 on an
annualized basis for a six-month period ending January 31, 2000.
Effective January 31, 2000, the Chief Executive Officer and the
President each voluntarily continued their salary at the reduced
annualized rate until an agreement could be reached with the
Compensation Committee of the Board of Directors. In addition, each
employment agreement provided for an annual bonus equal to five
percent of pre-tax profits of the Company. No bonus was paid to either
executive relating to the Company's fiscal 1999 or fiscal 2000
financial results. Each executive is currently employed by the Company
on an at-will basis on substantially the same terms and conditions
contained in their expired employment agreements with the exception of
the voluntary salary reduction as noted above. It is anticipated that
in fiscal 2001 the Compensation Committee of the Board of Directors
will consider an employment agreement for each executive. The Company
is currently in the fourth year of a five-year employment agreement
with the Company's Chief Operating Officer. The agreement provides for
annual compensation of $300,000. The Company also entered into
employment agreements with the former shareholders of Pulse for an
initial term of five years. Effective February 24, 1999, these
employment agreements were renewed at the election of each executive
for an additional three-year term. The agreements provide each with an
annual base salary of $300,000 (adjusted annually based upon the CPI)
and an annual bonus based on annual pre-tax profits of Pulse. The
Company is currently in the fourth year of a five year employment
agreement with the former shareholder of Sedeco, now Regional Sales
Director. This agreement provides for a current annual salary of
$200,000. The Company is currently in the first year of a two-year
memorandum of compensation with the Vice President of the Hirsch Used
Machine Division. It provides for an annual base salary of $300,000
and an annual bonus based on annual pre-tax profits of the division.
The Company is currently in the fourth year of a five-year employment
agreement with the National Vice President of Sales. This agreement
provides for annual compensation of $200,000 plus commissions based on
sales within a specific territory. On November 1, 1999 the Company and
the executive amended the agreement in principle by agreeing to a base
salary of $300,000 through the term of the agreement coupled with an
incentive tied to Company performance for achievement of targeted
sales goals and margins. The Company entered into a severance
agreement with the Vice President, HAPL Leasing, and Marketing,
equivalent to one-year of base compensation if terminated.
e. Dependency Upon Major Supplier - During the fiscal years ended January
31, 2000, 1999, and 1998, the Company made purchases of approximately
$42,193,000, $68,255,000, and $90,300,000 respectively, from Tajima
Industries Ltd. ("Tajima"), the manufacturer of the embroidery
machines the Company sells. This amounted to approximately 94, 84, and
80 percent of the Company's total purchases for the years ended
January 31, 2000, 1999, and 1998, respectively.
The Company has two separate distributorship agreements with Tajima
which, collectively, provide the Company the exclusive right to
distribute Tajima's complete line of embroidery machines in 39 states.
The main agreement (the "East Coast / Midwest Agreement") which covers
33 states, including the original Hirsch territory and the additional
states acquired in the SMX territory, became effective on February 21,
1991 and has a term of 20 years. The East Coast / Midwest Agreement is
terminable by Tajima and/or the Company on not less than two years'
prior notice. The second agreement (the "Southwest Agreement") covers
the six states acquired in the Sedeco territory, became effective on
February 21, 1997 and has a term of five years.
F28
In the states of Arizona, California, Hawaii, Idaho, Montana, Nevada,
Oregon, Utah, Washington and Wyoming, the Company is the exclusive
distributor of Tajima's single, two, four, and six-head machines as
well as chenille or chenille/standard embroidery machines with less
than four heads or two stations, respectively (the "West Coast
Agreement"). The West Coast Agreement has a term of five years and
contains a renewal provision which permits successive five-year
renewals upon mutual agreement of the parties. Tajima may terminate
the West Coast Agreement or its exclusivity on 30 days written notice
or upon a material change in the current Class B shareholders in which
case, the West Coast Agreement can be terminated earlier.
The Company has satisfied its obligations as to the minimum quantity
of embroidery machines to be sold for calendar year 1999-2000. The
minimum quantity to be sold in calendar year 2000-2001 is
approximately 1,625 machines in various designations, as defined.
14. RECONCILIATION OF BASIC EARNINGS PER SHARE
In accordance with SFAS No. 128, basic earnings per common share are
computed based on the weighted-average number of common shares
outstanding during each period. Diluted earnings per common share are
computed based on the weighted-average number of common shares, after
giving effect to diluted common stock equivalents outstanding during
each period. The following table provides a reconciliation between
basic and diluted earnings per share:
For the Year Ended January 31,
2000 1999 1998
---------------------------------- ----------------------------------- -----------------------------
Loss Shares Per Share Loss Shares Per Share Income Shares Per Share
(In Thousands, Except Per Share Amounts)
Basic EPS
Income
available to
common
stockholders $(13,822) 9,349 $(1.48) $(4,608) 9,413 $ (0.49) $8,196 8,953 $0.92
Effect of
dilutive
securities:
Options/
warrant - - - - 23 - - 283 (0.03)
---------------------------------- ----------------------------------- -----------------------------
Diluted EPS
Income
available to
common
stockholders
plus assumed
exercises $(13,822) 9,349 $(1.48) $(4,608) 9,436 $ (0.49) $8,196 9,236 $0.89
=================================== ==================================== =============================
F29
15. 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. 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.
Embroidery Leasing Corporate Consolidated
---------- ------- --------- ------------
Year Ended January 31, 2000
- ---------------------------
Sales to unaffiliated customers $ 85,536,000 $ 5,285,000 $ - $ 90,821,000
Transfers between segments 21,829,000 - (21,829,000) -
------------ ------------ ------------ ------------
Total revenues $107,365,000 $ 5,285,000 $(21,829,000) $ 90,821,000
============ ============ ============ ============
Interest expense $ 1,272,000 $ 36,000 $ - $ 1,308,000
============ ============ ============ ============
Depreciation and amortization expense $ 1,725,000 $ 401,000 $ 1,792,000 $ 3,918,000
============ ============ ============ ============
(Loss) income before income tax
provision $ (8,449,000) $ (1,056,000) $ (864,000) $(10,369,000)
------------ ------------ ------------ ------------
Income tax provision $ 710,000 $ 262,000 $ - $ 972,000
============ ============ ============ ============
Identifiable assets $ 56,993,000 $ 13,987,000 $ 13,181,000 $ 84,161,000
============ ============ ============ ============
Year Ended January 31, 1999
- ---------------------------
Sales to unaffiliated customers $118,889,000 $ 8,657,000 $ - $127,546,000
Transfers between segments 37,478,000 - (37,478,000) -
------------ ------------ ------------ ------------
Total revenues $156,367,000 $ 8,657,000 $(37,478,000) $127,546,000
============ ============ ============ ============
Interest expense $ 1,550,000 $ 17,000 $ - $ 1,567,000
============ ============ ============ ============
Depreciation and amortization expense $ 1,910,000 $ 332,000 $ 1,512,000 $ 3,754,000
============ ============ ============ ============
(Loss) income before income tax
(benefit) provision $ (6,951,000) $ 1,381,000 $ (496,000) $ (6,066,000)
------------ ------------ ------------ ------------
Income tax (benefit) provision $ (2,400,000) $ 552,000 $ - $ (1,848,000)
============ ============ ============ ============
Identifiable assets $ 71,862,000 $ 17,667,000 $ 17,406,000 $106,935,000
============ ============ ============ ============
Year Ended January 31, 1998
- ---------------------------
Sales to unaffiliated customers $144,557,000 $ 7,920,000 $ - $152,477,000
Transfers between segments 22,386,000 - (22,386,000) -
------------ ------------ ------------ ------------
Total revenues $166,943,000 $ 7,920,000 $(22,386,000) $152,477,000
============ ============ ============ ============
Interest expense $ 930,000 $ 4,000 $ - $ 934,000
============ ============ ============ ============
Depreciation and amortization expense $ 1,736,000 $ 24,000 $ 1,454,000 $ 3,214,000
============ ============ ============ ============
Income before income tax provision $ 11,136,000 $ 3,640,000 $ (477,000) $ 14,299,000
------------ ------------ ------------ ------------
Income tax provision $ 4,617,000 $ 1,442,000 $ - $ 6,059,000
============ ============ ============ ============
Identifiable assets $ 79,049,000 $ 16,275,000 $ 19,508,000 $114,832,000
============ ============ ============ ============
F30
16. FOURTH QUARTER ADJUSTMENTS
In the fourth quarter of fiscal year 2000 the Company recorded material net
adjustments that increased its net loss by approximately $4.5 million for:
Allowances for Possible Losses; write off the deferred tax asset not
definitively recoverable; overaccruals; and to adjust residual lease
carrying amounts. In addition the accounting change referred to in Note 12
was recorded in the fourth quarter.
F-31