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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended October 31, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _______________ to ________________.
Commission File No.: 0-23434
HIRSCH INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2230715
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Wireless Boulevard, Hauppauge, New York 11788
(Address of principal executive offices)
Registrant's telephone number, including area code: (631) 436-7100
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 1, 2001.
Class of Number of
Common Equity Shares
------------- ------
Class A Common Stock, 6,121,000
par value $.01
Class B Common Stock,
par value $.01 2,668,000
HIRSCH INTERNATIONAL CORP. and SUBSIDIARIES
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - October 31, 2002 and January
31, 2002
Condensed Consolidated Statements of Operations for the Nine and
Three Months Ended October 31, 2002 and 2001
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended October 31, 2002 and 2001
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Certifications
Exhibit Index
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, January 31,
2002 2002
---------------- ----------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $6,361,000 $3,121,000
Restricted Cash (Note 5) 1,983,000 0
Short Term Note Receivable (Note 4) 636,000 0
Accounts receivable, net 6,502,000 7,509,000
Inventories, net (Note 2) 7,312,000 12,664,000
Prepaid and refundable income taxes 2,426,000 6,932,000
Other current assets 2,196,000 324,000
Net assets of discontinued operations (Note 4) 636,000 3,420,000
---------------- ----------------
Total current assets 28,052,000 33,970,000
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 2,523,000 3,515,000
Long Term Note Receivable (Note 4) 450,000 0
OTHER ASSETS 847,000 794,000
---------------- ----------------
TOTAL ASSETS $31,872,000 $38,279,000
================ ================
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, January 31,
2002 2002
---------------- ----------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade acceptances payable $1,506,000 $2,185,000
Accounts payable and accrued expenses (Note 3) 8,399,000 10,088,000
Customer deposits and other 1,415,000 202,000
---------------- ----------------
Total current liabilities 11,320,000 12,475,000
---------------- ----------------
Capitalized lease obligations, less
current portion 1,568,000 1,642,000
Deferred gain on sale of building 877,000 966,000
---------------- ----------------
Total liabilities 13,765,000 15,083,000
---------------- ----------------
MINORITY INTEREST 2,010,000 1,737,000
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized:
1,000,000 shares; issued: none 0 0
Class A common stock, $.01 par value; authorized:
20,000,000 shares, issued : 6,815,000 shares 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 (deficit) (23,728,000) (18,275,000)
Accumulated other comprehensive income (loss) (65,000) (156,000)
Treasury stock, at cost; 695,000 shares (1,602,000) (1,602,000)
---------------- ----------------
Total stockholders' equity 16,097,000 21,459,000
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $31,872,000 $38,279,000
================ ================
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended Three Months Ended
October 31, October 31,
-------------------------------------- -----------------------------------
2002 2001 2002 2001
------------- ------------- ------------ ------------
NET SALES $ 36,569,000 $ 41,785,000 $ 11,430,000 $ 14,183,000
COST OF SALES 23,859,000 29,005,000 7,697,000 10,500,000
------------- ------------- ------------ -------------
GROSS PROFIT 12,710,000 12,780,000 3,733,000 3,683,000
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 13,863,000 19,099,000 4,322,433 5,929,000
------------- ------------- ------------ -------------
OPERATING LOSS (1,153,000) (6,319,000) (589,000) (2,246,000)
OTHER EXPENSE (INCOME)
Interest expense 200,000 203,000 71,000 92,000
Other expense (income) (400,000) (519,000) (464,000) 19,000
------------- ------------- ------------ -------------
Total other expense (income) (200,000) (316,000) (393,000) 111,000
------------- ------------- ------------ -------------
LOSS BEFORE INCOME TAX PROVISION,
MINORITY INTEREST IN NET EARNINGS
OF CONSOLIDATED SUBSIDIARY
AND DISCONTINUED OPERATIONS (953,000) (6,003,000) (196,000) (2,357,000)
INCOME TAX PROVISION 411,000 150,000 166,000 114,000
MINORITY INTEREST IN NET EARNINGS
OF CONSOLIDATED SUBSIDIARY (Note 1) 273,000 100,000 108,000 76,000
------------- ------------- ------------ -------------
LOSS FROM CONTINUINING OPERATIONS (1,637,000) (6,253,000) (470,000) (2,547,000)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (3,816,000) 214,000 (31,000) 293,000
------------- ------------- ------------ -------------
NET LOSS ($5,453,000) ($ 6,039,000) ($501,000) ($ 2,254,000)
============= ============= ============ =============
LOSS PER SHARE BASIC AND DILUTED
Loss from continuining operations ($0.19) ($0.69) ($0.05) ($ 0.29)
Income (Loss) from discontinued operations (0.43) .02 (0.01) 0.03
------------- ------------- ------------ -------------
LOSS PER SHARE ($0.62) ($0.67) ($0.06) ($0.26)
============= ============= ============ =============
WEIGHTED AVERAGE NUMBER OF SHARES
IN THE CALCULATION OF LOSS PER SHARE
Basic and Diluted 8,788,750 8,967,000 8,788,750 8,939,000
============= ============= ============ =============
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
October 31,
----------------------------------------------
2002 2001
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($5,453,000) ($ 6,039,000)
Adjustments to reconcile net loss to net cash Provided by (used
in)operating activities:
Depreciation and amortization 652,000 1,865,000
Recognized Gain on Sale of Building (89,000) (80,000)
Gain on Disposal of Equipment (38,000) 0
Provision for reserves (153,000) 729,000
Minority interest 273,000 100,000
Changes in assets and liabilities:
Accounts receivable 2,280,000 1,188,000
Net investment in sales-type leases 433,000 (5,135,000)
Inventories 5,406,000 (1,566,000)
Prepaid taxes 4,369,000 726,000
Other assets (2,844,000) (62,000)
Trade acceptances payable (678,000) 376,000
Accounts payable, accrued expenses and other 1,205,000 1,445,000
---------------- ----------------
Net cash provided by (used in)
operating activities 5,363,000 (6,453,000)
---------------- ----------------
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
October 31,
----------------------------------------------
2002 2001
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (140,000) ($ 258,000)
Proceeds from the Sale of the Building 0 4,236,000
---------------- ----------------
Net cash (used in) provided by
investing activities (140,000) 3,978,000
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long term debt (92,000) (90,000)
Restricted Cash (1,983,000) 0
Purchase of treasury shares 0 (250,000)
---------------- ----------------
Net cash used in financing activities (2,075,000) (340,000)
---------------- ----------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 92,000 (267,000)
---------------- ----------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 3,240,000 (3,082,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,121,000 7,544,000
---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $6,361,000 $ 4,462,000
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $200,000 $ 304,000
================ ================
Income taxes paid $9,000 $ 7,000
================ ================
See notes to condensed consolidated financial statements.
Hirsch International Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Information as of October 31, 2002 and for the Three and Nine Months
Ended October 31, 2002 and 2001 is unaudited (in thousands)
1. Organization and Basis of Presentation
The accompanying Condensed Consolidated financial statements as of and for
the three and nine month periods ended October 31, 2002 and 2001 include the
accounts of Hirsch International Corp.("Hirsch"), HAPL Leasing Co., Inc.
("HAPL"), Pulse Microsystems Ltd. ("Pulse"), Tajima USA, Inc. ("TUI"), Hometown
Threads, LLC ("Hometown"), and Hirsch Business Concepts, LLC
("HBC")(collectively, the "Company").
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all the adjustments, consisting of
normal accruals, necessary to present fairly the results of operations for each
of the three and nine month periods ended October 31, 2002 and 2001, the
financial position at October 31, 2002 and cash flows for the nine month periods
ended October 31, 2002 and 2001, respectively. Such adjustments consisted only
of normal recurring items. The condensed consolidated financial statements and
notes thereto should be read in conjunction with the Company's Annual Report on
Form 10-K for the fiscal year ended January 31, 2002 as filed with the
Securities and Exchange Commission.
The interim financial results are not necessarily indicative of the results
to be expected for the full year. Certain amounts from prior periods have been
reclassified to conform to the current period's presentation.
2. Inventories
October 31, 2002 January 31, 2002
---------------- ----------------
New Machines......................... $5,583 $11,398
Used Machines........................ 746 935
Parts................................ 2,930 2,516
----- -----
9,259 14,849
Less: Reserve for slow moving inventory (1,947) (2,185)
------- -------
Inventories, net $7,312 $12,664
===================== ==================
3. Plan of Restructuring
In the fourth quarter of the year ended January 31, 2002, the Company
initiated a restructuring plan in connection with its continuing operations. The
plan was designed to meet the changing needs of the Company's customers and to
reduce its cost structure and improve efficiency. The restructuring initiatives
involved the consolidation of the parts and supplies operations with existing
Hirsch operations, providing for the downsizing of three of its existing sales
offices and reducing its overall administrative personnel. The reduction in
personnel represented approximately 25% of its workforce or 56 people.
The following table shows amounts paid against the restructuring accrual
included in accounts payable and accrued expenses during the nine months ended
October 31, 2002.
Balance at Payments Balance at
January 31, 2002 October 31, 2002
--------------------- --------------------- ----------------------
Severance costs...................... $479 $(360) $119
Facility closing costs............... 1,975 (630) 1,345
Other professional and consulting.... 10 (9) 1
--------------------- --------------------- ----------------------
$2,464 $(999) $1,465
--------------------- --------------------- ----------------------
During the nine months ended October 31, 2002, 23 employees received
severance and 2 were owed severance at October 31, 2002. The severance payable
is expected to be paid by January 31, 2003.
4. Discontinued Operations
In the fourth quarter of Fiscal 2002, the Company determined that its HAPL
subsidiary was not strategic to the Company's ongoing objectives and
discontinued its operations. Management intends to sell/liquidate all the net
assets by January 31, 2003.
Summary operating results of the discontinued operations of HAPL Leasing
are as follows:
For the nine months For the three months
ended October 31, ended October 31,
2002 2001 2002 2001
---- ---- ---- ----
Revenue.................................... $1,285 $2,520 $384 $839
Gross profit............................... 316 955 63 556
(Loss)Income from discontinued Operations.. $(4,000) $345 $0 $110
The operating loss in the nine months ended October 31, 2002 from the
discontinued operations of HAPL includes an additional $4.0 million increase in
the provision for possible losses related to the MLPR (Minimum Lease Payments
Receivable). The provision was to provide for the probable loss on the
sale/liquidation of the remaining portfolio.
Assets and Liabilities of discontinued operations are as follows:
October 31, 2002 January 31, 2002
---------------- ----------------
Assets:
MLPR and Residuals...................... $11,084 $11,519
Property, Plant & Equipment............. 81 260
Inventory............................... 332 214
Prepaid Taxes........................... 22 40
Other Assets............................ 38 0
---------------------- ---------------------
Total Assets.............................. 11,557 12,033
---------------------- ---------------------
Liabilities:
Accounts Payable & Accruals............. 10,761 8,159
Customer Deposits Payable............... 48 312
Long Term Debt.......................... 25 55
Income Taxes Payable.................... 87 87
Total Liabilities......................... 10,922 8,613
---------------------- ---------------------
Net Assets Of Discontinued Operations..... $636 $3,420
---------------------- ---------------------
Effective October 31, 2002, the Company completed the sale of all of the
outstanding equity interests in Pulse; pursuant to the terms of the purchase
agreement by and between Hirsch and 2017146 Ontario Limited ("Purchaser") dated
as of October 31, 2002 (the "Agreement").
Pursuant to the Agreement, Hirsch sold all of its equity interests in Pulse
to the Purchaser for an aggregate consideration of $5.0 million to be paid as
follows: (a) $0.5 million cash, (b) a $0.5 million note payable in 11 quarterly
installments beginning April 30, 2003 and including interest accruing on the
principal balance at the rate of US Prime +1% per annum, and (c) the assumption
of $4.0 million of Hirsch obligations. All periods presented have been restated
to reflect the discontinued operations of Pulse.
Summary operating results of the discontinued operations of Pulse
Microsystems, Ltd are as follows:
For the nine months For the three months
ended October 31, ended October 31,
2002 2001 2002 2001
---- ---- ---- ----
Revenue.................................... $3,731 $2,278 $1,338 $1,144
Gross profit............................... 2,510 1,415 866 697
(Loss)Income from discontinued Operations.. $ 184 $(131) $ (31) $183
5. Contingencies
CIT Leasing had demanded the Company repurchase the remaining UNL (Ultimate
Net Loss) lease portfolio, which the Company estimates to be approximately $8.7
million at October 31, 2002. The Company and CIT entered into a standstill
agreement pursuant to which CIT agreed to refrain from requiring the Company to
repurchase the remaining UNL portfolio until January 11, 2003 at which time the
Company may be required to repurchase the remaining portfolio or enter into a
new agreement with CIT Leasing.
The demand by CIT triggered a technical default in the Revolving Credit and
Security Agreement (the "Agreement") with PNC Bank. The Bank waived the default
and reduced the Company's credit facility to $4 million. The Company currently
has $1.9 million in open letters of credit for equipment that has not been
received and a $750,000 letter of credit to Brandywine Realty Services for the
security deposit under the lease for its corporate headquarters at 200 Wireless
Blvd. The Company estimates that the $4 million facility will provide sufficient
working capital through the end of the Agreement.
As of October 31, 2002, the Company had $1.9 million in restricted cash
which is used to collateralize the remaining letters of credit at PNC Bank. This
amount will be depleted by January 31,2003.
On August 14, 2002 the Company was notified by NASDAQ that since it
satisfied initial listing requirements for the The Nasdaq SmallCap Market under
Marketplace Rule 4310(c)(2)(A) it has therefore been provided an additional 180
calendar days to regain compliance for Rule 4450 (A)(5) which requires that the
Company maintain a $1.00 minimum bid price for 10 consecutive days. To date, the
Company has not satisfied this requirement.
6. Subsequent Events
On November 26 the Company satisfied all of its obligations and exited its
Revolving Credit and Security Facility with PNC Bank and replaced it with a Loan
and Security Agreement ("the Congress Agreement") with Congress Financial
Corporation for three years expiring on November 26, 2005. The Congress
Agreement provides for a credit facility of $12 million for Hirsch and all
subsidiaries. Advances made pursuant to the Congress Agreement may be used by
the Company and its subsidiaries for working capital loans, letters of credit
and deferred payment letters of credit. The terms of the Congress Agreement
require the Company to maintain certain financial convenants.
Item 2. 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 Condensed 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.
Results of Operations for the three and nine months ended October 31, 2002
as compared to the three and nine months ended October 31, 2001.
Net sales. Net sales for the three months ended October 31, 2002 were $11.4
million, a decrease of $2.8 million, or 19.7%, compared to $14.2 million for the
three months ended October 31, 2001, and $36.6 million for the nine months ended
October 31, 2002, a decrease of $5.2 million or 12.6%, compared to $41.8 million
for the nine months ended October 31, 2001. The Company believes that the
reduction in the sales level for the nine months ended October 31, 2002 is
attributable to a decrease in overall demand for new embroidery machines.
Cost of sales. For the three months ended October 31, 2002, cost of sales
declined $2.8 million, or 26.7%, to $7.7 million from $10.5 million for the
three months ended October 31, 2001, and for the nine months ended October 31,
2002 decreased $5.1 million, or 17.6%, to $23.9 million from $29.0 million for
the nine months ended October 31, 2001. 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 increased to 34.8% for the nine months ended October 31, 2002 as
compared to 30.6% the nine months ended October 31, 2001. This is due to the
reduced expenses in both TUI and Pulse, tighter inventory controls as well as
increased margins on sales of machines.
Operating Expenses. For the three months ended October 31, 2002, operating
expenses declined by $1.6 million, or 27.1%, to $4.3 million from $5.9 million
for the three months ended October 31, 2001 and for the nine months ended
October 31, 2002, declined by $5.2 million, or 27.2%, to $13.9 million from
$19.1 million for the nine months ended October 31, 2001. The reduction is
attributed to the restructuring plan that the Company implemented in the 4th
quarter of the last fiscal year to reduce its overall operating expenses.
Interest Expense. For the three months ended October 31, 2002, interest
expense decreased $21,000, or 22.8%, to $71,000 from $92,000 for the three
months ended October 31, 2001 and for the nine months ended October 31, 2002
decreased $3,000, or 1.5%, to $200,000 from $203,000 for the nine months ended
October 31, 2001. Interest expense is primarily associated with the
sale/leaseback transaction of the Corporate headquarters.
Other Income. For the three months ended October 31, 2002, other income
increased $483,000,from an expense of $19,000 for the three months ended October
31, 2001 to income of $464,000 for the three months ended October 31, 2002 and
for the nine months ended October 31, 2002 decreased $119,000 or 22.9%, to
$400,000 from $519,000 for the nine months ended October 31, 2001. The majority
of the income was generated from the sale of the Hometown Threads Company owned
stores during the third quarter totallng $251,000. The balance is primarily due
to interest income on temporary cash investments and the favorable currency
translations for the yen compared to unfavorable currency translations for the
three months ended October 31, 2001.
Income tax provision (benefit). For the three months ended October 31, 2002
and October 31, 2001, as well as the nine months ended October 31, 2002 the
income tax provision represents taxes due on income earned by the TUI
subsidiary.
Loss from Continuing Operations. The loss from Continuing Operations for
the three months ended October 31, 2002 was $.5 million, a decrease of $2.0
million, or 80.00%, from $2.5 million for the three months ended October 31,
2001 and for the nine months ended October 31, 2002 was $1.6 million, a decrease
of $4.7 million, or 74.6%, from $6.3 million for the nine months ended October
31, 2001. The decrease is a direct result of the Company's efforts to reduce and
control expenses and to increase the efficiency of all business operations.
Loss from Discontinued Operations. The loss on discontinued operations
increased $4,030,000 from a profit of $214,000 to a loss of $3,816,000.
Management estimated in the quarter ended April 30, 2002 that there will be
additional losses of approximately $4 million in repurchasing and disposing of
the remaining UNL lease portfolio as well as its existing lease portfolio.
Accordingly, during the three months ended April 30, 2002 the provision for
possible losses was increased by $4 million. During the third quarter ended
October 31, 2002, management accrued $125,000 in estimated costs related to the
discontinued operations and sale of the Pulse Microsystems, Ltd subsidiary.
Operating results for the Pulse subsidiary have been included in these amounts
for all periods shown.
Net Loss. The net loss for the three months ended October 31, 2002 was $.5
million, a decrease of $1.8 million, or 78.3%, from $2.3 million for the three
months ended October 31, 2001 and the net loss for the nine months ended October
31, 2002 was $5.5 million, a decrease of $.6 million, or 10.0%, from $6.0
million for the nine months ended October 31, 2001. The tax benefit of these
losses has been reserved by a valuation allowance since the Company cannot
determine the future utilization of these losses.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $16.7 at October 31, 2002, a decrease of
$4.8 million, or 22.3%, from $21.5 million at January 31, 2002. The majority of
the decline was due to the change in net assets of discontinued operations which
decreased $4.0 million as a result of the additional reserves necessary to
repurchase and dispose of the UNL portfolio and its own lease portfolio.
During the nine months ended October 31, 2002, the Company's cash and cash
equivalents increased by $3.2 million to $6.4 million. Net cash of $5.4 million
was provided by the Company's operating activities.
As of October 31, 2002 the Company did not own any foreign currency futures
contracts.
Revolving Credit Facility and Borrowings
The Company's Revolving Credit and Security Agreement (the "PNC Agreement")
with PNC Bank expired November 21, 2002. The PNC Agreement provided for a
commitment of $20.0 million for Hirsch and all wholly-owned subsidiaries. The
PNC Agreement was used for working capital loans, letters of credit and deferred
payment letters of credit and bore interest as defined in the PNC Agreement. The
terms of the PNC Agreement, as amended, restrict additional borrowings by the
Company and required the Company to maintain an interest coverage ratio, as
defined therein. There were no outstanding working capital borrowings against
the PNC Agreement as of October 31, 2002. The Agreement also supported trade
acceptances payable of approximately $1.5 million as of that date.
The demand by CIT (see note 5 to the Condensed Consolidated Financial
Statements) triggered a technical default in the PNC Agreement as of October 31,
2002. The Bank waived the default and reduced the Company's credit facility to
$4 million. The Company currently has $1.9 million in open letters of credit for
equipment that has not been received and a $750,000 letter of credit to
Brandywine Realty Services for the security deposit on its corporate
headquarters at 200 Wireless Blvd.
As of October 31, 2002, the Company had $1.9 million in restricted cash
which is used to collateralize the remaining letters of credit at PNC Bank. This
amount will be depleted by January 31,2003.
On November 26, 2002 the Company satisfied all of its obligations and
exited the PNC Agreement and replaced it with a Loan and Security Agreement
("the Congress Agreement") with Congress Financial Corporation for three years
expiring on November 26, 2005. The Congress Agreement provides for a facility of
$12 million for Hirsch and all subsidiaries. Advances made pursuant to the
Congress Agreement may be used by the Company and its subsidiaries for working
capital loans, letters of credit and deferred payment letters of credit. The
terms of the Congress Agreement require the Company to maintain certain
financial covenants.
Future Capital Requirements
The Company believes that its existing cash and funds generated from
operations, together with its credit facility will be sufficient to meet its
working capital and capital expenditure requirements for the foreseeable future.
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 April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB No. 13, and Technical Corrections" (SFAS NO.
145"). SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires
companies to classify certain gains and losses from debt extinguishments as
extraordinary items, eliminates the provisions of SFAS No. 44 regarding the
Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require
that certain lease modifications be treated as sale leaseback transactions. The
provisions of SFAS No. 145 related to classification of debt extinguishment are
effective for fiscal years beginning after May 15, 2002. Earlier application is
encouraged. The adoption of SFAS No. 145 is not expected to have a material
impact on the financial positions or results of operation of the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This statement also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company is currently
evaluating the impact, if any, of SFAS NO. 146 on its consolidated financial
statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
Any Company debt, if utilized, is U.S. dollar denominated and floating
rate-based. At quarter-end, there was no usage of the PNC 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 4. CONTROLS AND PROCEDURES
The Company maintains a set of disclosure controls and procedures designed
to ensure that information required to be disclosed by the Company in reports
that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Within the 90 day period
prior to the filing of this report, an evaluation was carried out under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the
effectiveness of our disclosure controls and procedures. Based on that
evaluation, the CEO and CFO have concluded that the Company's disclosure
controls and procedures are effective.
Subsequent to the date of their evaluation, there have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls.
PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*10.1 Share Purchase Agreement dated as of October
31, 2002 by and between the Company and 2017146
Ontario Limited.
**10.2 Loan and Security Agreement dated as of
November 26, 2002 by and between the Company
and Congress Financial Corporation.
99.1 Certification of Chief Executive Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
*Incorporated by reference from Registrant's Report on
Form 8-K filed with the Commission on November
15, 2002.
**Incorporated by reference from Registrant's Report on
Form 8-K filed with the Commission on December 6,
2002.
(b) Reports on Form 8K
The Registrant filed a Report on Form 8-K with the Commission on November 15,
2002 regarding the Company's sale of all of the outstanding equity interests in
its wholly-owned subsidiary, Pulse Microsystems Ltd.
The Registrant filed a Report on Form 8-K with the Commission on December 6,
2002 regarding the Company's exiting of its Revolving Credit and Security
Agreement with PNC bank and entering a three year Loan and Security Agreement
with Congress Financial Corporation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HIRSCH INTERNATIONAL CORP.
Registrant
By: /s/ Henry Arnberg
------------------------------
Henry Arnberg, Chairman and
Chief Executive Officer
By: /s/ Beverly Eichel
------------------------------
Beverly Eichel, Vice President-Finance
and Chief Financial Officer
Dated: December 12, 2002
Certification Per Section 302 of the Sarbanes-Oxley Act of 2002
I, Henry Arnberg, the Chairman and Chief Executive Officer of Hirsch
International Corp., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hirsch
International Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of , and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrants' other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significantly deficiencies and material weaknesses.
Date: December 12, 2002 /s/ Henry Arnberg
-----------------
Henry Arnberg, Chairman and
Chief Executive Officer
Certification Per Section 302 of the Sarbanes-Oxley Act of 2002
I, Beverly Eichel, the Vice President - Finance, Chief Financial Officer
and Secretary of Hirsch International Corp., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hirsch
International Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of , and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrants' other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significantly deficiencies and material weaknesses.
Date: December 12, 2002 /s/ Beverly Eichel
------------------
Beverly Eichel, Vice President - Finance,
Chief Financial Officer and Secretary