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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, 2001
[ ] 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 6.3 million shares of Class A Common
Stock held by non-affiliates of the Company as of April 2, 2001 is $7.5 million.
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
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, 2001.
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, LLC venture, the
Company has moved from test marketing its retail embroidery services concept to
implementation of a national franchise program. 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 2001, 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 that resulted in reduced demand for large
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 the
exclusive right to distribute Tajima small (one through six-head "FX" models)
machines in the continental United States and Hawaii and large (six-head through
thirty-head "DC" 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 1997, all Tajima equipment sold in the
US was assembled in Japan. At that time, Hirsch formed a new subsidiary, Tajima
USA, Inc ("TUI"), which currently assembles two, four, six and eight-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").
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 enable the customization of designs and reduce 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, Windows(R) 2000,
Windows(R) Me 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, e-commerce presence 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
benefits from the demand for licensed products distributed 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, LLC venture, is
currently implementing its concept to provide retail embroidery services at
Wal*Mart(R) stores, shopping center and mall 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, Windows(R) 2000, Windows(R) Me and Windows(R) NT environments
that 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 17,500 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, branded "StitchPort(R)" and is
implementing a business plan to commercialize this product. Pulse has bolstered
its software development team and will continue to work closely with Hirsch and
Tajima to develop software that enhances new features in the embroidery machines
being introduced.
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 expanded
the brand to include marketing and development of its clamping systems.
Retail Embroidery Services. In fiscal 1999, the Company created a retail
embroidery concept known as Hometown Threads(TM) for the purpose of providing
retail embroidery services within Wal*Mart(R) establishments. Hometown
Threads(TM) has concluded the test market phase and is expanding through a
franchise program in Wal*Mart(R) stores and other mall and shopping center
locations 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 field service technicians throughout the
US who are directed from its headquarters and regional service center. After the
Company delivers an embroidery machine to a customer, its trained personnel may
assist in the installation, setup and operation of the machine. The Company
employs a staff of service representatives who provide assistance to its
customers by telephone. While many customer problems or inquiries can be handled
by telephone, where necessary the Company dispatches one of its service
technicians to the customer. Software support is conducted by telephone-based
software staff located at the Company's Pulse Microsystems Ltd. subsidiary. In
addition, the Company provides introductory and advanced training programs to
assist customers in the use, operation and maintenance of the embroidery
machines and software it sells.
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, LLC. The Company initiated a pilot program with
Wal*Mart(R) in late fiscal 1999 and developed and refined it throughout fiscal
2000 and 2001. The objective was to establish a retail embroidery service
business within the Wal*Mart(R) environment and determine if such a "store
within a store" concept could be financially feasible for both Wal*Mart(R) and
an independent retail embroidery operator in that environment. Hometown
ThreadsTM has obtained approval from Wal*Mart(R) to expand to the implementation
phase of up to 25 store locations in fiscal 2002. The insights learned 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. 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.
Additional programs include a machine rental program for customers with specific
project requirements for which their existing capacity or capabilities cannot
meet the volume or other requirements. 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 eight 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, 2001 were approximately $11.6 million.
Embroidery Equipment
Embroidery equipment may contain single or multiple sewing heads. The
selling prices of these machines range from approximately $12,000 to $150,000.
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) a 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 created and is implementing StitchPort(R) that
the Company believes is the first internet-compatible design software in the
market.
Pulse has expanded its distribution network by establishing distributor
relationships in 43 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 28.9% of the Company's new machine sales were financed
through HAPL Leasing for the year ended January 31, 2001, compared to 42.5% for
the year ended January 31, 2000. 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 2001. 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, 2001, HAPL Leasing had sold
approximately 90.7% 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 represents an established share of the machine market and
operates 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 magazine 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. The Company's products are
considered the highest quality embroidery equipment available, and therefore the
Company attempts not to compete exclusively on a price basis but rather a value
added basis, through its reputation, knowledge of the marketplace, investment in
infrastructure and experience in the industry. In a climate of intense price
competition by lower quality manufacturers, the Company attempts to maintain a
balance between market share and margins to the best degree possible. While in
the short-term this may result in reduced share, the Company believes that this
is the only way to sustain itself over the long-term.
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 limited two-year warranty against
malfunctions from defects in material or workmanship on the Tajima machines it
distributes. The warranty covers specific classes of parts and labor for various
periods up to two years. 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 permits the
Company to distribute Tajima machines to US-based customers who are operating
expansion facilities in the Caribbean region. It has continued without change
from the initial trial period.
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 original equipment manufacturers, such as
Barudan, Brother International and Melco Industries, who distribute products
directly into the Company's markets. The Company also competes against local
Tajima distributors in certain western US markets. 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. A new competitor, SunStar, trading under the "SWF" brand name, 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.
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, MIM, a division of Brother 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:
5,270,939: "Method For Modifying Embroidery Design Programs"; 5,343,401:
"Embroidery Design Systems"; 5,430,658: "Method For Creating Self-Generating
Embroidery Pattern"; 5,510,994: "Method for Automatically Generating Chain
Stitches"; 5,668,730: "Method for Automatically Generating Chain Stitches";
5,506,784: "Method for Automatically Generating A Chenille-Filled Embroidery
Stitch Pattern"; 5,541,847: "Method for Automatically Generating A
Chenille-Filled Embroidery Stitch Pattern."; 5,771,173: "Method for
Automatically Generating A Chenille-Filled Embroidery Stitch Pattern.";
5,809,921: "Method for Generating a Continuously Stitched Regional Carved Fill
Composite Embroidery Stitch Pattern"; 6,196,146: "Web Embroidery System and
Method"; and 6,216,618: "Embroidery System Utilizing Windows CE based GUI".
Pulse also has several other patents pending in the United States Patent
and Trademark Office. Pulse has been granted the following patent in the
European Patent Office: "Method for Modifying Embroidery Design Programs." Pulse
also has the following patents pending in the Japanese Patent Office: "Method
for Modifying Embroidery Design Programs," "Method for Automatically Generating
Chain Stitches" and "Method For Automatically Generating A Chenille-Filled
Embroidery Stitch Pattern." 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 January 31, 2001, the Company employed approximately 290 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, 2001, approximately 90.6% 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 may be terminated 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") was for a one-year trial period, effective July 27,
1999, that permitted the Company to distribute Tajima equipment to its existing
US-based customers who establish expansion facilities in the Caribbean region.
Activity under the fourth agreement has continued without change from inception.
Each of the first three Tajima Agreements contains language that permits
termination if the Company fails to achieve certain minimum sales quotas or
annual targets. In recognition of difficult general industry conditions, Tajima
agreed to waive meeting these specific targets in fiscal year 2001. 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, changes in the exchange rates between currencies, 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.
Foreign Currency Risks
The Company pays for its Tajima embroidery machinery in Japanese Yen. Any
change in the valuation of the U.S. Dollar compared to the Japanese Yen either
increases the cost to the Company of its embroidery machine inventory or results
in competitive pressures for reduced US dollar pricing among Yen-based equipment
distributors and manufacturers. The Company has generally been able to recover
increased costs through price increases to its customers or, in limited
circumstances, price reductions from Tajima, however, dollar price reductions do
reduce dollar contribution margins and as a result create overhead coverage
pressure. There can be no assurance that the Company will be able to recover
such increased costs in the future or reduce overheads to the necessary degree
to maintain profitability. The Company's Pulse Microsystems Ltd. subsidiary
conducts business through 43 distributors throughout the world, and while most
transactions are conducted in US dollars, there are some that are transacted in
major European currencies, including Deutschmarks, French Francs and Euros, as
well as Japanese Yen. While an increasing part of Pulse's business, the foreign
exchange exposure created by these transactions is not presently material to the
consolidated results of the parent Company, and they are not hedged through any
derivative currency product. Should they become material, there can be no
assurance that the Company will be able to effectively hedge against all
currency fluctuations.
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 and currently including eight head machines. Tajima provides the Company
with technical assistance and support. While TUI operations were profitable in
fiscal 2001, the throughput of the facility is largely dependent on continued
demand for embroidery machines generated by the Hirsch sales organization.
Creation of Additional Revenue Streams
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 integrate activity in the new territories 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 Caribbean region.
The Company's Hometown Threads venture was created for the purpose of
establishing retail embroidery service centers within Wal-Mart(R) retail
locations. As of the end of fiscal 2001, Hometown Threads had concluded a pilot
test market at two Wal-Mart(R) centers located in Texas and was authorized by
Wal-Mart(R) to continue to an expansion strategy of up to 25 units. While the
relationship with Wal-Mart(R) is good, the Company is dependent on the continued
existence of the master lease with Wal-Mart(R) for implementation of its
franchise program of Hometown Threads within Wal-Mart(R) locations. There can be
no assurance that locations outside of Wal-Mart(R) will provide the same
opportunity for expansion of the franchise program as those within Wal-Mart(R),
or that the Wal-Mart(R) locations will be available concurrent with qualified
franchisees as those customers are developed. As of the end of fiscal 2001, the
Company's net investment in Hometown Threads was approximately $1.1 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 90.7% of the leases it has written
to date, the marketability of these leases is subject to changes and volatility
in the equipment financing industry in general, and 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 four 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 caused the Company to experience higher than projected
inventory costs. The Company has reduced new machine inventories substantially
over the past two years, moving to "just in time" inventory management policies.
Due to the relatively long lead times of the ordering cycle, any significant
unanticipated downturn or upturn in equipment sales could result in an increase
in inventory levels or shortage of product, respectively, which 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 Executive Vice President,
Finance and Administration, 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.
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 fifth year of a five-year employment agreement.
Messrs. Arnberg, Levine and Richer are 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. Subsequent to the close of the fiscal year, this facility
was sold to Brandywine Realty Trust and approximately 24,500 square feet was
leased back in a concurrent transaction. This property houses the Company's
executive offices, the Northeast sales office, technical service and HAPL
Leasing.
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.
("TUI"), operates a machine assembly facility. The lease provides for lease
payments of approximately $132,000 per annum.
In addition to the Company's headquarters and assembly facilities occupied
by TUI, the Company leases 14 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. All leased space is considered adequate for the operation of our
business, and no difficulties are foreseen in meeting any future space
requirements.
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
$.01 per share, trades on the NASDAQ Stock Market under the symbol HRSH.
The following table sets forth for each period indicated the high and low
closing bid prices for the Class A Common Stock as reported on the NASDAQ
National Market. Trading began in the Class A Common Stock on February 17,
1994.
Fiscal 2001 High Low
- ----------- ---- ---
First Quarter ended April 30, 2000........................$ 1.750 $ 0.750
Second Quarter ended July 31, 2000........................$ 1.500 $ 0.750
Third Quarter ended October 31, 2000......................$ 1.438 $ 0.938
Fourth Quarter ended January 31, 2001.....................$ 1.313 $ 0.688
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
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, 2001, 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, 2001 and 2000 and for the fiscal years ended January 31, 2001, 2000,
and 1999 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 and
1997, and for the fiscal years ended January 31, 1998 and 1997 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 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Net sales.................................................... $ 68,328 $ 86,958 $122,198 $147,045 $122,195
Interest income related to sales-type leases................. 1,939 3,863 5,348 5,432 3,243
Cost of sales................................................ 46,311 59,846 85,054 96,099 80,820
Operating Expenses (3)....................................... 40,181 40,491 44,381 41,055 29,070
(Loss) income before income tax (benefit) provision...... (15,786) (10,369) (6,066) 14,255 15,170
Income tax (benefit) provision............................... (224) 972 (1,848) 6,059 6,402
(Loss) Income before cumulative effect of accounting
change....................................................... - (11,635) - - -
Cumulative effect of accounting change.................... - 2,187) - - -
Net (loss) income (2)......................................... (15,671) (13,822)(2 (4,608) 8,196 8,768
Basic net (loss) income per share (1)......................... $(1.72) $(1.48) $(0.49) $0.92 $1.13
Diluted net (loss) income per share (1)....................... $(1.72) $(1.48) $(0.49) $0.89 $1.10
Shares used in the calculation of basic
net (loss) income per share (1)............................. 9,112 9,348 9,413 8,953 7,782
Shares used in the calculation of diluted
net (loss) income per share (1)............................. 9,112 9,348 9,436 9,236 7,967
(1) Basic and diluted net income per share figures and shares used in the
calculation of diluted net income per share for fiscal year 1997 have been
retroactively adjusted to reflect the adoption of SFAB No. 128, "Earnings
per Share".
(2) Net of the cumulative effect of SAB101 accounting change.
(3) Fiscal year 2001 SG&A includes a write-down of impaired goodwill of $7.6
million.
January 31,
(in thousands of dollars)
Hirsch International Corp. and Subsidiaries 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
Balance Sheet Data:
Working capital................................. $ 25,214 $ 29,627 $ 51,939 $ 40,169 (5) $ 22,004
Total assets.................................... 54,030 80,216 106,935 114,832 (5) 83,696
Long-term debt, less current maturities......... 79 989 15,640 1,421 13,194 (4)
Stockholders' equity............................ 40,278 56,253 70,207 75,623 (5) 41,682
(4) 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.
(5) 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).
Hirsch International Corp
Summarized Quarterly Data
$ in thousands, except for per share amounts Fiscal Quarter
2001 First Second Third Fourth Total
- ---- ----- ------ ----- ------ -----
Revenue 18,726 18,544 19,732 13,265 70,267
Gross Profit 7,203 6,975 6,383 3,395 23,956
Impairment of Goodwill - - - 7,640 7,640
Net Earnings (Loss) (969) (1,705) (1,035) (11,960) (15,669)
- ------------------- ----- ------- ------- -------- --------
Basic and Diluted (Loss) Per Share (0.11) (0.19) (0.11) (1.31) (1.72)
====== ====== ====== ====== ======
2000
- ----
Revenue 25,376 20,392 21,064 23,989 90,821
Gross Profit 9,335 6,955 5,882 8,803 30,975
Cumulative Effect of Accounting Change (2,187) - - - (2,187)
Net Earnings (Loss) (2,917) (1,383) (2,582) (6,940) (13,822)
Basic and Diluted Earnings (Loss) Per Share Before
Cumulative Effect of Accounting Change (0.08) (0.15) (0.28) (0.74) (1.25)
Cumulative Effect of Accounting Change (0.23) - - - (0.23)
------ ----- ------ ------ ------
Basic and Diluted (Loss) Per Share (0.31) (0.15) (0.28) (0.74) (1.48)
====== ====== ====== ====== ======
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.
Fiscal 2001 continued the trend begun in the industry in fiscal 1999, with
retrenchment driven by the relocation and continued investment offshore of large
multi-head equipment customers. While growth of small machine customers
stabilized in the domestic market, the market continued to experience a decline
in large machine sales, continuing the change in the sales mix of embroidery
machines and an overall decline in demand. It was further compounded by
weakening value in foreign exchange of the Yen versus the US dollar, resulting
in dollar price pressure for machine sales. All Japanese equipment based
competitors in the industry 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 8 of Notes to Consolidated
Financial Statements). The Company continued to reduce overhead operating costs
throughout fiscal 2000 and 2001, as the market continued to seek a level of
stability. The Company believes the continued implementation of the overhead
cost reduction program will position it to return to profitable operations at
anticipated reduced revenue levels.
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, 2001, 2000
and 1999.
2001 2000 1999
---- ---- ----
Net sales 97.2% 95.7% 95.8%
Interest income related
to sales-type leases 2.8% 4.3% 4.2%
------ ------ ------
Total revenue 100.0% 100.0% 100.0%
Cost of 65.9% 65.9% 66.7%
sales
Operating expenses 57.2% 44.6% 36.7%
Interest expense, net 0.5% 1.4% 1.2%
Other expense (income), net -1.1% -0.5% 0.2%
------ ------ ------
(Loss) income before income
taxes and minority interest -22.5% -11.4% -4.8%
Income tax (benefit) provision -0.3% 1.1% -1.5%
Cumulative Effect of Accounting
Change - -2.4% 0.0%
Minority Interest 0.2% 0.3% 0.3%
------ ------ ------
Net (loss) income -22.3% -15.2% -3.6%
====== ====== ======
Fiscal Year 2001 as Compared to Fiscal Year 2000
Net sales. Net sales for fiscal year 2001 were $68.3 million, a decrease of
$18.7 million, or 21.5%, compared to $ 87.0 million for fiscal year 2000. The
Company believes that the reduction in the sales level for the fiscal year ended
January 31, 2001 is attributable to a decrease in overall demand for new
multi-head embroidery machines, stability in demand for small embroidery
machines, coupled with increased competition and a weakened Yen exchange rate,
resulting in downward pressure in US dollar pricing.
Sales of new embroidery machinery represented approximately 66.4% and 72.8%
of net sales for fiscal year's 2001 and 2000, respectively. Small embroidery
machines (one through six-head "FX" models) represented approximately 66.5% of
total new embroidery machine sales for fiscal year 2001 as compared to 57.7%,
for fiscal year 2000. Large embroidery machines (six-head "DC" models through
thirty-head models) represented approximately 33.5% of total new embroidery
machine sales during fiscal year 2001 as compared to approximately 42.3% for
fiscal year 2000.
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 2001 aggregated approximately $25.8 million as compared to $23.6
million for fiscal year 2000.
Interest income related to sales-type leases. HAPL's interest income
decreased 49.8%, to $1.9 million for fiscal year 2001 from $3.9 million for
fiscal year 2000. This decrease is directly related to the decrease in new
embroidery machine sales. The percentage of new equipment sales which are leased
was 28.9% of total new equipment sales for fiscal year 2001 as compared to 42.5%
for fiscal year 2000. This also reflects tightened credit criteria used by the
leasing organization.
Cost of sales. For fiscal year 2001, cost of sales decreased $13.5 million
or 21.9%, to $46.3 million from $59.8 million for fiscal year 2000. The decrease
was a result of the related decrease in net sales for fiscal year 2001 as
compared to fiscal year 2000. 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 2001 to 34.1%, as compared to 34.7% for fiscal
year 2000. The reductions in gross margin are mainly attributable to aggressive
pricing used to meet competitive products, and changes in overall sales mix.
Operating Expenses. As reported for fiscal year 2001, operating expenses
decreased $0.3 million or 0.8%, to $40.2 million from $40.5 million for fiscal
year 2000. Operating expenses increased as a percentage of revenues to 57.2% for
fiscal year 2001, from 44.6% for fiscal year 2000. During the fourth quarter of
fiscal 2001 in view of the overall industry decline in demand for embroidery
equipment and related products, the resulting decline in Company revenue
delivered in the territories associated with the acquisition of SMX Corporation
and Sedeco Corporation and the Company's impairment evaluation, the Company
wrote-off approximately $7.6 million of goodwill as an impairment charge to
operations. This write-off includes the remaining value of goodwill associated
with its acquisition of the digitizing embroidery business assets of All Pro
Punching, Inc. of approximately $0.2 million, reflecting discontinuance of those
operations. The goodwill write-off represented a per-share net loss of $ 0.84
both on a basic and diluted basis for fiscal year 2001. The Company also
continued to incur development costs associated with the Hometown Threads
business initiative. While operating expenses continue to decline as a result of
the Company's cost reduction programs, of the percentage increase in operating
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 operating expenses in line with revised sales projections.
Interest Expense. Interest expense for fiscal year 2001 was $0.4 million
versus interest expense of $1.3 million for fiscal year 2000. The Company
continued its aggressive inventory reduction program in fiscal year 2001. The
results of this program directly reflect increased liquidity and decreased
interest expense as a result of reduced working capital borrowings outstanding
against the Company's Revolving Credit Agreements during fiscal 2001 as compared
to fiscal 2000.
Income tax (benefit) provision. The income tax provision reflected an
effective tax benefit rate of approximately 0.3% for the twelve months ended
January 31, 2001 as compared to an income tax rate of 9.6% for fiscal year 2000.
The difference of the above rates to the federal statutory rate is the valuation
allowance established on deferred tax assets since the company cannot determine
the future utilization of those assets.
Net (Loss) income. The net loss for fiscal year 2001 was $15.7 million, a
decline of $1.9 million, compared to a net loss of $13.8 million for fiscal year
2000. The net margin declined to (22.2%) for fiscal year 2001 from (15.2%) for
fiscal year 2000. These declines are attributable to the decrease in net sales,
an increase in operating expenses as a percentage of revenues, and a goodwill
impairment charge of $7.6 million. The reported loss for fiscal year 2000
included a cumulative effect for accounting change of $2.2 million; without that
change the difference between fiscal year 2001 and fiscal year 2000 would have
been $2.2 million greater.
Fiscal Year 2000 as Compared to Fiscal Year 1999
Change in accounting method. On December 3, 1999, The SEC issued its "Staff
Advisory 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 statements, Hirsch has implemented the
recommendations contained in SAB 101. SAB 101 establishes the basis for a
conservative approach to revenue recognition, including a deferral of revenue
recognition of equipment sales based upon customer acceptance of installation,
rather than upon shipment by the distributor, where such installation is a
substantive part of the sale. Historically, as the value of the installation is
not material to the sale, Hirsch accounting practice, in accordance with GAAP,
had been to accrue the expense where installation was not yet completed. This
change in accounting method requires an adjustment of fiscal year 2000 results
in the form of an after-tax expense, which reflects the cumulative effect on the
fiscal years' results due to the application of the changed accounting method.
Prior years' comparisons are discussed 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 79.0%
of net sales for fiscal years 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 $5.3 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 $25.3 million
or 30.2%, to $59.8 million from $85.1 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 as well as
substantial write-downs and increased reserves for slow-moving new machinery.
Operating Expenses. For fiscal year 2000, operating expenses decreased $3.9
million or 8.7%, to $40.5 million from $44.4 million for fiscal year 1999.
Operating expenses increased as a percentage of revenues to 44.6% for fiscal
year 2000, from 34.8% for fiscal year 1999. 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 operating
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 operating 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, however, the Company anticipates that over the
nineteen-year life of the tax loss carry-forward, this will be realized as
profits are earned in the future.
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.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $25.2 million at January 31, 2001,
decreasing $4.4 million or 14.9%, from $29.6 million, at January 31, 2000. The
decrease in working capital was principally due to continued reductions in
inventory, accounts receivable and accounts payable, reflecting an absolute
lower level of business activity. The Company has financed its operations
principally through long-term financing of certain capital expenditures and
working capital borrowings under its revolving credit facilities, along with
cash generated by operations.
During fiscal year 2001, the Company's cash increased by $6.2 million to
$7.5 million. Net cash of $10.5 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.
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 of $171,000 was used for the purchase of
134,620 shares of the Company's stock in the open market during fiscal year
2001, at an average cost of approximately $1.30 per share.
Revolving Credit Facility and Borrowings
Effective as of September 30, 1999 the Company entered a 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, as amended, restrict additional borrowings by the
Company and require the Company to maintain certain interest expense coverage
ratios, as defined therein. There were no outstanding working capital borrowings
against the Agreement at January 31, 2001. The Agreement was used to support
trade acceptances payable of approximately $4.0 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 $230.5
million in lease agreements through January 31, 2001. As of January 31, 2001,
approximately $209.1 million, or 90.7%, 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. The
Company satisfied the remaining balance of approximately $1.0 million of the
Mortgage prior to the originally scheduled maturity date, in the first quarter
of fiscal 2001, in accordance with the agreement, as amended.
Future Capital Requirements
Subsequent to the close of the year, the Company sold its corporate
headquarters facility. This provided approximately $4.0 million in cash to be
made available for operations. The Company believes these proceeds, with 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.
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 Accounting Pronouncements
In December 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, the Company has implemented the recommendations contained in SAB
101. SAB 101 establishes and clarifies the basis for revenue recognition.
In June 2000, the FASB issued Statement of Financial Accounting Standards No.
138 ("FAS 138"), "Accounting for Certain Derivative Instruments and Certain
Hedging Activities" which amended FAS 133. The amendments in FAS 138 address
certain implementation issues and relate to such matters as the normal purchases
and normal sales exception, the definition of interest rate risk, hedging
recognized foreign currency denominated assets and liabilities, and intercompany
derivatives. Effective February 1, 2001, the Company will adopt FAS 133 and FAS
138. The initial impact of adoption on the Company's financial statements will
be recorded in the first quarter of fiscal 2002 and will not be material. The
ongoing effect of adoption on the Company's consolidated financial statements
will be determined each quarter by several factors, including the specific
hedging instruments in place and their relationships to hedged items, as well as
market conditions at the end of each period.
In September 2000, the FASB issued Statement of Financial Accounting Standards
No. 140 ("FAS 140"), "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities a replacement of FAS 125". This Statement
replaces FAS 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of FAS 125's provisions
without reconsideration. This Statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after March 31,
2001. This Statement is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. The Company believes
the adoption of this standard will not have a material effect on its operating
results and disclosures.
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 2001, 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
$2.2 million annualized impact on the cost of sales of the Company. The Company
does not use foreign exchange contracts to hedge expected earnings.
Any Company debt, if utilized, is U.S. dollar denominated and floating
rate-based. At year-end, there was no usage of the revolving credit facility. If
the Company had utilized its credit facility, it would have exposure to rising
and falling rates, and an increase in such rates would have an 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-23 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' Report........................................................................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)(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
April 27, 2000.
10.33 Agreement of Modification of Note between Hirsch International Corp. and The Chase Manhattan Bank
dated as of April 27, 2000.
10.34 Joinder by Guarantors among HAPL Leasing Co., Inc., Pulse Microsystems, Ltd. and The Chase
Manhattan Bank dated as of April 27, 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.
10.37 Waiver and 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., Hometown Threads, LLC, HJ Grassroots, LLC and PNC Bank, NA dated October 30,
2000.
21.1 List of Subsidiaries of the Registrant
++++ Auditor's letter of concurrence with management's change in accounting method adopting SAB 101
dated May 3, 2000.
- ----------------------
%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.
++++ Incorporated by reference from Registrant's Form 10-K filed for
the fiscal year ended January 31, 2000.
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 9, 2001
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 9, 2001
- --------------------------- Executive Officer (Principal Executive Officer)
Henry Arnberg
/s/ Paul Levine President and Director May 9, 2001
- ------------------------------
Paul Levine
/s/ Tas Tsonis Vice President and Director May 9, 2001
- ------------------------------
Tas Tsonis
/s/ Richard Richer Executive Vice President-Finance and May 9, 2001
- --------------------------- Administration, and Chief Financial Officer
Richard Richer (Principal Accounting and Financial Officer)
/s/ Ronald Krasnitz Executive Vice President, Chief Operating Officer, May 9, 2001
- --------------------------- Secretary and Director
Ronald Krasnitz
/s/ Marvin Broitman Director May 9, 2001
- -------------------
Marvin Broitman
/s/ Herbert M. Gardner Director May 9, 2001
- ------------------------
Herbert M. Gardner
/s/ Douglas Schenendorf Director May 9, 2001
- ------------------------
Douglas Schenendorf
Independent Auditors' Report
Board of Directors
Hirsch International Corp.
Hauppauge, New York
We have audited the accompanying consolidated balance sheets of Hirsch
International Corp. and subsidiaries as of January 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended January 31, 2001. 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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, 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, 2001 and 2000 and the results of their
operations and their cash flows for each of the two years in the period ended
January 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Notes 2 and 14 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, 2001
INDEPENDENT AUDITORS' REPORT
Board of Directors
Hirsch International Corp.
Hauppauge, New York
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Hirsch International Corp. and
Subsidiaries for the year ended January 31, 1999. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the consolidated results of the operations and the cash flows
of Hirsch International Corp. and Subsidiaries for the year ended January 31,
1999 in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
Jericho, New York
April 22, 1999
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2001 AND 2000
- -------------------------------------------------------------------------------
ASSETS 2001 2000
CURRENT ASSETS:
Cash and cash equivalents $7,544,000 $1,290,000
Accounts receivable, net of an allowance for
possible losses of approximately $2,570,000
and $5,632,000, respectively 9,840,000 17,293,000
Net investment in sales-type leases -
current portion (Note 6) 2,576,000 2,583,000
Inventories, net (Notes 4, 8 and 15) 15,154,000 25,711,000
Prepaid income taxes (Note 10) 1,762,000 3,673,000
Other current assets 274,000 423,000
---------- ----------
Total current assets 37,150,000 50,973,000
NET INVESTMENT IN SALES - TYPE LEASES - Noncurrent
portion (Note 6) 6,110,000 8,207,000
EXCESS OF COST OVER NET ASSETS ACQUIRED - Net
of accumulated amortization of approximately
$12,656,000 and $3,851,000, respectively
(Notes 3,8 and 16) 4,169,000 12,974,000
PURCHASED TECHNOLOGIES - Net of accumulated
amortization of approximately $1,323,000 and
$1,132,000, respectively 16,000 207,000
PROPERTY, PLANT AND EQUIPMENT - Net of accumulated 5,447,000 6,544,000
depreciation and amortization (Notes 7 and 9)
OTHER ASSETS 1,138,000 1,311,000
----------- ------------
TOTAL ASSETS $54,030,000 $ 80,216,000
=========== ============
See notes to consolidated financial statements.
(Continued)
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2001 AND 2000
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
CURRENT LIABILITIES:
Trade acceptances payable (Note 9) $3,974,000 $6,199,000
Accounts payable and accrued expenses (Note 8) 7,924,000 12,805,000
Current maturities of long term debt (Note 9) 38,000 2,342,000
---------- ----------
Total current liabilities 11,936,000 21,346,000
LONG-TERM DEBT - Less current maturities (Note 9) 79,000 989,000
---------- ----------
Total liabilities 12,015,000 22,335,000
---------- ----------
MINORITY INTEREST (Note 1) 1,737,000 1,628,000
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 15)
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 6,112,000 shares, respectively,
at January 31, 2001;and 6,815,000 and 6,488,700
shares, respectively at January 31, 2000; 68,000 68,000
Class B common stock, $.01 par value;
authorized: 3,000,000 shares, outstanding:
2,668,000 shares 27,000 27,000
Additional paid-in capital 41,397,000 41,397,000
Retained earnings 50,000 15,721,000
Accumulated other comprehensive income 88,000 221,000
---------- ----------
41,630,000 57,434,000
Less: Treasury Class A Common stock at cost,
461,000 and 326,300 shares, respectively 1,352,000 1,181,000
---------- ----------
Total stockholders' equity 40,278,000 56,253,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $54,030,000 $ 80,216,000
========== ===========
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Years Ended January 31,
2001 2000 1999
---------------- ---------------- ----------------
REVENUES
Net Sales $68,328,000 $86,958,000 $122,198,000
Interest income related to sales-type leases 1,939,000 3,863,000 5,348,000
---------------- ---------------- ----------------
Total revenue 70,267,000 90,821,000 127,546,000
---------------- ---------------- ----------------
COST OF SALES
Cost of sales (Note 15) 46,311,000 59,846,000 81,604,000
Inventory write-down (Notes 4 & 8) - - 3,450,000
---------------- ---------------- ----------------
Total cost of sales 46,311,000 59,846,000 85,054,000
---------------- ---------------- ----------------
GROSS PROFIT 23,956,000 30,975,000 42,492,000
---------------- ---------------- ----------------
OPERATING EXPENSES
Selling, general and administrative expenses 32,541,000 40,491,000 44,381,000
Impairment of Goodwill (Note 18) 7,640,000 - -
Restructuring costs (Note 3 & 8) - - 2,377,000
---------------- ---------------- ----------------
Total operating expenses 40,181,000 40,491,000 46,758,000
---------------- ---------------- ----------------
OPERATING (LOSS) (16,225,000) (9,516,000) (4,266,000)
---------------- ---------------- ----------------
OTHER EXPENSE (INCOME)
Interest expense (Note 9) 389,000 1,308,000 1,567,000
Other (828,000) (455,000) 233,000
---------------- ---------------- ----------------
Total other (income) expense - net (439,000) 853,000 1,800,000
---------------- ---------------- ----------------
(LOSS) BEFORE (BENEFIT) PROVISION
FOR INCOME TAXES AND MINORITY
INTEREST IN NET EARNINGS OF
CONSOLIDATED SUBSIDIARY (15,786,000) (10,369,000) (6,066,000)
INCOME TAX (BENEFIT) PROVISION (Note 10) (224,000) 972,000 (1,848,000)
MINORITY INTEREST IN NET EARNINGS
OF CONSOLIDATED SUBSIDIARY (Note 1) 109,000 294,000 390,000
---------------- ---------------- ----------------
(LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (15,671,000) (11,635,000) (4,608,000)
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (Note 2 & 14) - (2,187,000) -
---------------- ---------------- ----------------
NET (LOSS) ($15,671,000) ($13,822,000) ($4,608,000)
================ ================ ================
(LOSS) PER SHARE:
Basic:
(Loss) before cumulative effect
of accounting change ($1.72) ($1.25) ($0.49)
Cumulative effect of accounting - (.23) -
change (Notes 2 and 14)
---------------- ---------------- ----------------
Net (Loss) per share ($1.72) ($1.48) ($0.49)
================ ================ ================
Diluted:
(Loss) before cumulative
effect
of accounting change ($1.72) ($1.25) ($0.49)
Cumulative effect of accounting - ($0.23) -
change (Notes 2 and 14)
---------------- ---------------- ----------------
Net (Loss) per share ($1.72) ($1.48) ($0.49)
================ ================ ================
WEIGHTED AVERAGE NUMBER OF SHARES
IN THE CALCULATION OF (LOSS)
PER SHARE (Note 16)
Basic 9,112,200 9,348,500 9,413,000
================ ================ ================
Diluted 9,112,000 9,348,500 9,436,000
================ ================ ================
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
- ------------------------------------------------------------------------------------------------------------------
Class A Class B
Common Stock Common Stock
(Note 11) (Note 11) Additional
---------------------- ---------------------- Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
BALANCE, JANUARY 31, 1998 6,811,000 $ 68,000 2,668,000 $ 27,000 $ 41,377,000
Exercise of stock options 4,000 -- -- -- 20,000
Purchase of treasury shares (Note 12) -- -- -- -- --
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 12) -- -- -- -- --
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
Purchase of treasury shares (Note 12) -- -- -- -- --
Comprehensive income:
Gain on Foreign Currency Translation -- -- -- -- --
Net loss -- -- -- --
Total comprehensive income: -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, JANUARY 31, 2001 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, 1998 $ -- $34,151,000 $ -- $75,623,000
Exercise of stock options -- -- -- 20,000
Purchase of treasury shares (Note 12) -- -- (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 12) -- -- (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
Purchase of treasury shares (Note 12) -- -- ( 171,000) (171,000)
Comprehensive income:
Gain on Foreign Currency Translation (133,000) -- --
Net loss -- (15,671,000) --
Total comprehensive income: -- -- -- (15,804,000)
------------ ------------ ------------ ------------
BALANCE, JANUARY 31, 2001 $ 88,000 $ 50,000 ($ 1,352,000) $ 40,278,000
============ ============ ============ ============
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
- -------------------------------------------------------------------------------
2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) ............................................. $(15,671,000) $(13,822,000) $ (4,608,000)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization ......................... 3,425,000 3,920,000 3,754,000
Provisions for reserves ............................... 436,000 5,151,000 1,643,000
Deferred income taxes ................................. 130,000 4,542,000 (2,826,000)
Minority interest ..................................... 108,000 294,000 390,000
Write-off of goodwill ................................. 7,640,000 -- 711,000
Changes in assets and liabilities:
Accounts receivable .................................. 5,836,000 1,630,000 10,598,000
Net investments in sales-type leases ................. 2,104,000 2,870,000 213,000
Inventories .......................................... 11,738,000 9,506,000 (3,467,000)
Other current assets and other assets ................ 197,000 228,000 614,000
Trade acceptances payable ............................ (2,225,000) 4,035,000 (13,122,000)
Accounts payable and accrued expenses ................ (4,879,000) (4,533,000) (3,375,000)
Prepaid income taxes and income taxes payable ........ 1,781,000 (1,887,000) (2,521,000)
------------ ------------ ------------
Net cash (used in) provided by operating activities 10,620,000 11,934,000 (11,996,000)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................... (848,000) (1,029,000) (1,314,000)
------------ ------------ ------------
Net cash (used in) investing activities ........... (848,000) (1,029,000) (1,314,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of bank financing ............................. -- 6,952,000 26,021,000
Repayments of long-term debt ........................... (3,214,000) (19,513,000) (11,781,000)
Proceeds from issuance of stock and
exercise of stock options and warrants ............... -- -- 20,000
Purchase of treasury shares ............................ (171,000) (353,000) (828,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities ..... (3,385,000) (12,914,000) 13,432,000
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ................. (133,000) 221,000 --
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........ 6,254,000 (1,788,000) 122,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ............ 1,290,000 3,078,000 2,956,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR .................. $ 7,544,000 $ 1,290,000 $ 3,078,000
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest and bank fees paid ........................... $ 389,000 $ 1,308,000 $ 1,483,000
============ ============ ============
Income taxes paid ..................................... $ 400,000 $ 527,000 $ 3,537,000
============ ============ ============
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
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"), Hirsch Business Concepts LLC ("HBC"), Hometown Threads LLC
("Hometown"), and Tajima USA, Inc. ("TUI") (collectively, the "Company").
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 reporting 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.
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). In fiscal year
2001 most sales of new equipment did not require installation within the
terms of the sales contract.
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 year ended January 31, 1999.
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.
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 may be up to 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, 2001, 2000 and 1999
was approximately $191,000, $100,000 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 (goodwill) 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 will be less than
the carrying amount of the assets. During the fourth quarter of fiscal
2001, $7,640,000 of goodwill associated with the acquisitions of SMX
Corporation, Sedeco Corporation and All Pro Punching, Inc. was written off
in accordance with SFAS121. (See Note 16).
j. Excess of Cost Over Net Assets Acquired (Goodwill) - Goodwill represents
the difference between the purchase price and the fair market value of net
assets acquired in business combinations treated as purchases. Goodwill is
amortized on a straight-line basis. Management has reassessed the useful
life of goodwill for these acquisitions from an original life of 15 years
to a remaining life of 5 years for SMX and 2 years for Sedeco in fiscal
2001 which changes were applied prospectively from the fourth quarter of
fiscal 2001. This change in accounting estimate did not materially change
amortization expense in the fourth quarter of fiscal year 2001.
k. 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.
l. 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.
m. 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.
n. 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, 2001, 2000 and 1999.
o. 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").
p. 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.
q. Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America 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.
r. 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, 2001 and
2000, the fair value of the Company's financial instruments approximated
the carrying value.
s. Recent Accounting Pronouncements - In December 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, the
Company has implemented the recommendations contained in SAB 101. SAB 101
establishes and clarifies the basis for revenue recognition.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("FAS 133"),
"Accounting for Derivative Instruments and Hedging Activities." FAS 133 is
required for transactions entered into by the Company after January 31,
2001. FAS 133 requires that all derivative instruments be recorded on the
balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of the hedge
transaction and the type of hedge transaction. The ineffective portion of
all hedges will be recognized in earnings.
In June 2000, the FASB issued Statement of Financial Accounting Standards
No. 138 ("FAS 138"), "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" which amended FAS 133. The amendments in FAS
138 address certain implementation issues and relate to such matters as the
normal purchases and normal sales exception, the definition of interest
rate risk, hedging recognized foreign currency denominated assets and
liabilities, and intercompany derivatives.
Effective February 1, 2001, the Company will adopt FAS 133 and FAS 138. The
initial impact of adoption on the Company's financial statements will be
recorded in the first quarter of 2001 and will not be material. The ongoing
effect of adoption on the Company's consolidated financial statements will
be determined each quarter by several factors, including the specific
hedging instruments in place and their relationships to hedged items, as
well as market conditions at the end of each period.
In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140 ("FAS 140"), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities a replacement of FAS
125". This Statement replaces FAS 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. It
revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of FAS 125's provisions without
reconsideration. This Statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March
31, 2001. This Statement is effective for recognition and reclassification
of collateral and for disclosures relating to securitization transactions
and collateral for fiscal years ending after December 15, 2000. The Company
believes the adoption of this standard will not have a material effect on
its operating results and disclosures.
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 the year ended January 31, 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 (Note 8).
4. INVENTORIES
January 31,
2001 2000
---- ----
New machines $ 9,732,000 $20,455,000
Used machines 2,567,000 4,795,000
Parts and accessories 5,305,000 4,092,000
Less: Reserve for slow-moving inventory (2,450,000) (3,631,000)
----------- ----------
Total $15,154,000 $25,711,000
5. CHANGES IN RESERVES
Allowance for Possible Losses:
- ------------------------------
Opening Additions Write Offs Ending
------- --------- ---------- ------
Balance Balance
------- -------
Year ended January 31, 2001 $ 5,632,000 $ 274,000 $(3,336,000) $2,570,000
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
Inventory Reserve
- -----------------
Opening Additions Write Offs Ending
------- --------- ---------- ------
Balance Balance
------- -------
Year ended January 31, 2001 $ 3,631,000 $ 162,000 $(1,343,000) $2,450,000
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
6. NET INVESTMENT IN SALES-TYPE LEASES
January 31,
2001 2000
---- ----
Total minimum lease payments receivable $6,267,000 $9,688,000
Estimated residual value of leased property (unguaranteed) (A) 5,251,000 4,848,000
Reserve for estimated uncollectible lease payments (1,100,000) (1,100,000)
Less: Unearned income (1,732,000) (2,646,000)
---------- ----------
Net investment 8,686,000 10,790,000
Less: Current portion 2,576,000 2,583,000
---------- ----------
Non-current portion $6,110,000 $8,207,000
========== ==========
(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.
At January 31, 2001 future annual lease payments receivable (including
estimated residual values) under sales-type leases are as follows:
Fiscal Year
Ending
January 31,
-----------
2002 $ 3,863,000
2003 2,419,000
2004 2,276,000
2005 2,028,000
2006 916,000
Thereafter 16,000
-----------
$11,518,000
7. PROPERTY, PLANT AND EQUIPMENT
January 31,
2001 2000
---- ----
Land and building $ 2,767,000 $ 2,767,000
Machinery and equipment 6,903,000 6,514,000
Furniture and fixtures 2,038,000 1,936,000
Rental Equipment 722,000 1,113,000
Automobiles 296,000 322,000
Leasehold improvements 1,705,000 1,650,000
---------- ----------
Total 14,431,000 14,302,000
Less: Accumulated depreciation and
amortization (8,984,000) (7,758,000)
---------- ----------
Property, plant and equipment, net $ 5,447,000 $6,544,000
========== ==========
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
January 31,
2001 2000
---- ----
Accounts payable $ 5,864,000 $ 7,573,000
Accrued restructuring costs (A) - 776,000
Accrued commissions payable 72,000 236,000
Accrued payroll costs 421,000 276,000
Accrued warranty and installation costs 560,000 580,000
Customer deposits payable 344,000 562,000
Deferred revenue 64,000 1,237,000
Other accrued expenses 599,000 1,565,000
----------- -----------
Total accounts payable and accrued
expenses $7,924,000 $12,805,000
=========== ===========
(A) In the fourth quarter of the year ended January 31, 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. All of the
remaining restructuring costs were 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.
9. LONG TERM DEBT
January 31,
2001 2000
---- ----
Revolving credit facility (A) $ - $2,064,000
Long-term bank debt
Mortgage (B) - 1,090,000
Other 117,000 177,000
----------- -----------
Total 117,000 3,331,000
Less: Current maturities 38,000 2,342,000
----------- -----------
Long-term maturities $ 79,000 $ 989,000
=========== ===========
(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, collateralized by assets,
primarily accounts receivable and inventory. The Agreement is used for
working capital loans, letters of credit and deferred payment letters of
credit and bears interest as scheduled and defined in the Agreement. The
terms of the Agreement, as amended, restrict additional borrowings by the
Company and require the Company to maintain an interest coverage ratio, as
defined therein. There were no outstanding working capital borrowings
against the Agreement as of January 31, 2001. The Agreement was also used
to support trade acceptances payable of approximately $4.0 million as of
that date. The Company was in compliance with all financial covenants at
year-end.
(B) As reported in the Company's first quarter financial report as filed on
Form 10Q, the Company satisfied 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.
(C) Long-term debt (including capitalized lease obligations) of the Company at
January 31, 2001 matures as follows:
Fiscal Year
Ending
January 31,
-----------
2002 $ 38,000
2003 39,000
2004 40,000
----------
$ 117,000
==========
10. INCOME TAXES
The income tax (benefit) provision for each of the periods presented herein is
as follows:
January 31,
2001 2000 1999
---- ---- ----
Current:
Federal $ 23,000 $(3,074,000) $ 456,000
State and foreign (377,000) (770,000) 522,000
----------- ---------- ----------
Total current (354,000) (3,844,000) 978,000
----------- ---------- ----------
Deferred:
Federal 100,000 3,853,000 (2,491,000)
State and foreign 30,000 963,000 (335,000)
----------- ---------- ----------
Total deferred 130,000 4,816,000 (2,826,000)
----------- ---------- ----------
Total income tax (benefit) provision $ (224,000) $ 972,000 $(1,848,000)
=========== ========== ==========
The tax effects of temporary differences that give rise to deferred income tax
liabilities at January 31, 2001 and deferred income tax assets at January 31,
2000 are as follows:
January 31, 2001 January 31, 2000
Net Current Net Long- Net Current Long-Term
Deferred Tax Term Deferred Deferred Tax Deferred Tax
Assets Tax Assets Assets Assets
--------------------------------- ---------------------------------
Accounts receivable $ 471,000 $ - $ 1,840,000 $ -
Inventories 1,083,000 - 1,625,000 -
Accrued warranty costs 224,000 - 232,000 -
Other accrued expenses 25,000 - 214,000 -
Purchased technologies and goodwill - 2,175,000 - 258,000
Net operating loss - 5,295,000 754,000 -
Net investments in sales-type leases
(allowance for possible losses) - 540,000 - 820,000
Capitalized software development
costs - - - -
------------ ---------- ------------ ----------
1,803,000 8,010,000 4,665,000 1,078,000
Less valuation allowance (1,803,000) (8,010,000) (4,665,000) (1,078,000)
------------ ---------- ------------ ----------
A valuation allowance for such deferred tax assets has been established at
January 31, 2001 and January 31, 2000, since the Company cannot determine the
future utilization of those assets.
At January 31, 2001 a deferred tax liability of $130,000 resulted from temporary
differences in unrealized foreign currency exchange gain and is included in
accrued expenses.
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,
2001 2000 1999
---- ---- ----
Federal statutory income tax rate (34.0)% (34.0)% 34.0%
State income taxes, net of Federal benefit 5.0 5.0 5.0
Permanent differences - 2.1) (1.5)
Valuation Allowance 27.6 36.5 -
------ ------- -----
Effective income tax rate (1.4)% 9.6 % (30.5)%
====== ======= =====
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 option 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, 2001, 2000 and
1999 for the 1993 Plan are summarized below:
Exercise Weighted Average
Shares Price Range Exercise Price
------ ----------- --------------
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 canceled (49,000) $1.75 - $24.20 $ 9.91
Options issued 20,000 $0.91 - 3.00 $ 1.86
------- -------------- ----------
Options outstanding - January 31, 2001 682,000 $0.91 - $24.20 $ 9.45
------- --------------- ----------
Options exerciseable at January 31, 2001 495,000 $1.75 - $24.20 $ 14.87
======= =============== ==========
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
--------------- ----------- ---------- ----- ------------ -----
$0.91 - $5.25 271,000 4.0 $ 3.39 84,000 $ 3.50
$14.50 - $18.37 401,000 0.5 $ 16.48 401,000 $ 16.48
$22.00 - $24.20 10,000 1.5 $ 23.10 10,000 $ 23.10
------- --------
682,000 495,000
All options granted for the fiscal year ended January 31, 1995 were
exercisable one year from the date of grant and expired 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.
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, 2001, 2000 and
1999 for the Directors' Plan are summarized below:
Exercise Weighted Average
Shares Price Range Exercise Price
------ ----------- --------------
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
Otions cancelled (12,000) $ 9.12 $ 9.12
------- -------------- -------
Options outstanding - January 31, 2001 32,000 $2.25 - $22.00 $ 12.16
======= ============== =======
Options exerciseable - January 31, 2001 24,000 $7.81 - $22.00 $ 14.67
======= ============== =======
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 3.5 $ 2.25 2,000 $ 2.25
$ 7.81 8,000 2.5 $ 7.81 5,000 $ 7.81
$15.50 9,000 1.5 $15.50 9,000 $15.50
$22.00 8,000 1.5 $22.00 8,000 $22.00
------ ------
32,000 24,000
====== ======
There are approximately 182,000 shares available for future grants under
the Directors' 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, 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 outstanding - January 31, 2001 404,000 $16.20 - $18.25 $ 16.57
======= =============== =======
Options exerciseable at January 31, 2001 404,000 $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 0.5 $16.20 331,000 $16.20
$18.25 73,000 0.6 $18.25 73,000 $18.25
------- -------
404,000 404,000
======= =======
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
warrants that were exercisable at a price of $5.90 per share expired in
February 1999.
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 2001, 2000 and 1999: expected life, five
years; stock volatility, 69.4 percent in 2001, 68.3 percent in 2000 and
128.5 percent in 1999; risk free interest rate of 6.7 percent in 2001, risk
free interest rate of 6.0 percent in 2000 and 5.0 percent in 1999, 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,
2001 2000 1999
---- ---- ----
Net (loss):
As reported $(15,671,000) $(13,822,000) $(4,608,000)
Pro forma $(16,095,000) $(16,510,000) $(5,757,000)
Basic (loss) per share:
As reported $ (1.72) $ (1.48) $ (0.49)
Pro forma $ (1.77) $ (1.77) $ (0.61)
Diluted (loss) per share:
As reported $ (1.72) $ (1.48) $ (0.49)
Pro forma $ (1.77) $ (1.77) $ (0.61)
12. TREASURY STOCK
Treasury stock at January 31, 2001 consists of 461,000 shares of Class A
common stock purchased in open market transactions for a total cost of
approximately $1,352,000 pursuant to a stock repurchase program authorized
by the Board of Directors in fiscal year 1999.
13. PROFIT SHARING PLAN
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, 2000 and 2001. The Company funds all
amounts when due.
14. 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 certain 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 year.
(All figures in $000,000) Year Ended January 31,
1999
----
Revenue:
As Reported $ 127.5
Proforma $ 135.6
Cost of sales:
As Reported $ 85.1
Proforma $ 90.4
Gross Profit:
As Reported $ 42.5
Proforma $ 45.3
Income (loss) before Provision for Taxes:
As Reported $ (6.1)
Proforma $ (3.3)
Net (loss)Income:
As Reported $ (4.6)
Proforma $ (2.5)
15. 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,
-----------
2002 $1,105,000
2003 783,000
2004 482,000
2005 272,000
2006 232,000
2007 and after 598,000
----------
$3,472,000
Rent expense was approximately $1,191,000, $1,240,000 and $1,360,000 for
the years ended January 31, 2001, 2000 and 1999, 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 may extend up to 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, 2001 and 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.
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 an
eighteen-month period ending January 31, 2001. Effective February 1, 2001
an agreement was reached with the Compensation Committee of the Board of
Directors to raise their salary to $300,000 each. No bonus was paid to
either executive relating to the Company's fiscal 1999, 2000 or 2001
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 which continued through fiscal 2001. The Company is
currently in the fifth 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 fifth year of a
five year employment agreement with the former shareholder of Sedeco. This
agreement provides for a current annual salary of $150,000. 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,
2001, 2000, and 1999, the Company made purchases of approximately
$33,863,000, $42,193,000, and $68,255,000 respectively, from Tajima
Industries Ltd. ("Tajima"), the manufacturer of the embroidery machines the
Company sells. This amounted to approximately 86, 94, and 84 percent of the
Company's total purchases for the years ended January 31, 2001, 2000, and
1999, respectively.
The Company has several 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.
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 to Tajima under the agreement as
to the minimum quantity of embroidery machines to be sold for calendar year
2000-2001. The minimum quantity to be sold in calendar year 2001-2002 is
approximately 1,309 machines in various designations, as defined.
16. 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,
2001 2000 1999
---------------------------------- ----------------------------------- -----------------------------
Loss Shares Per Share Loss Shares Per Share Loss Shares Per Share
(In Thousands, Except Per Share Amounts)
Basic EPS
Income
available to
common
stockholders $(15,671) 9,112 $(1.72) $(13,822) 9,349 $ (1.48) $(4,608) 9,413 $(0.49)
Effect of
dilutive
securities:
Options/
warrant - - - - - - - - -
---------------------------------- ----------------------------------- -----------------------------
Diluted EPS
Income
available to
common
stockholders
plus assumed
exercises $(15,671) 9,112 $(1.72) $(13,822) 9,349 $ (1.48) $(4,608) 9,413 ($0.49)
=================================== ==================================== =============================
17. 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, 2001
- ---------------------------
Sales to unaffiliated customers $ 65,677,000 $ 4,590,000 $ - $ 70,267,000
Transfers between segments 14,362,000 - (14,362,000) -
------------ ------------ ------------ ------------
Total revenues $ 80,039,000 $ 4,590,000 $(14,362,000) $ 70,267,000
============ ============ ============ ============
Interest expense $ 372,000 $ 17,000 $ - $ 389,000
============ ============ ============ ============
Depreciation and amortization expense $ 1,437,000 $ 345,000 $ 1,643,000 $ 3,425,000
============ ============ ============ ============
Loss before income tax provision $ 6,366,000 $ 70,000 $ 9,350,000 $ 15,786,000
------------ ------------ ------------ ------------
Income tax benefit $ 224,000 $ $ - $ 224,000
============ ============ ============ ============
Total assets $ 36,782,000 $ 10,509,000 $ 6,739,000 $ 54,030,000
============ ============ ============ ============
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
============ ============ ============ ============
Total assets $ 53,048,000 $ 13,987,000 $ 13,181,000 $ 80,216,000
============ ============ ============ ============
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)
============ ============ ============ ============
Total assets $ 71,862,000 $ 17,667,000 $ 17,406,000 $106,935,000
============ ============ ============ ============
18. GOODWILL IMPAIRMENT
During the fourth quarter of fiscal 2001 in view of the overall industry
decline in demand for embroidery equipment and related products, the
resulting decline in Company revenue delivered in the territories
associated with the acquisition of SMX Corporation and Sedeco Corporation
and the Company's impairment evaluation, the Company wrote-off
approximately $7,640,000 of Goodwill as an impairment charge to operations.
This write-off includes the remaining value of goodwill associated with its
acquisition of the digitizing embroidery business assets of All Pro
Punching, Inc. of approximately $0.2 million, reflecting discontinuance of
those operations. The goodwill write-off represents a per-share net loss of
$(.84) both on a basic and diluted basis for the fiscal 2001.
19. SUBSEQUENT EVENT - SALE OF BUILDING
Subsequent to the close of the fiscal year, the corporate headquarters
facility located at 200 Wireless Boulevard, Hauppauge, New York, was sold
and partially leased back from Brandywine Realty Trust in a concurrent
transaction, the details of which were reported as filed on Form 8K dated
March 15, 2001. The financial results of the transaction will be reported
in the first quarter of fiscal year 2002.