Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the fiscal year ended January 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number.: 0-23434
HIRSCH INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2230715
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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.[X] Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X]No
The aggregate market value of the Class A Common Stock held by
non-affiliates of the registrant was $1,092,500 based upon the closing price on
the Nasdaq SmallCap Market on the last business day of the registrant's most
recently completed second fiscal quarter. All executive officers and directors
of the registrant have been deemed, solely for the purpose of the foregoing
calculation, to be "affiliates" of the registrant.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Class of Common Equity Number of Shares
---------------------- ----------------
Class A Common Stock 6,120,611
Par value $.01
Class B Common Stock 2,668,139
Par value $.01
DOCUMENTS INCORPORATED BY REFERENCE
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, 2003.
Hirsch International Corp.
Form 10-K
For the Fiscal Year ended January 31, 2003
Table of Contents
Part I Page
Item 1. Business 3-11
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Part II
Item 5. Market for Common Equity and Related Stockholder
Matters 12-13
Item 6. Selected Financial Data 13-15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-23
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 23
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements on Accounting
And Financial Disclosure 24
Part III
Item 10. Directors and Executive Officers of the
Registrant 25
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial
Owners and Management 25
Item 13. Certain Relationships and Related Transactions 25
Item 14. Controls and Procedures 25
Part IV
Item 15. Exhibits, Financial Statement Schedules and
Reports on Form 8K 26-27
Signatures and Certifications 28-33
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. In addition, Hirsch provides a comprehensive
service program, and user training and support. 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 the year ended January 31,
2000 (fiscal 2000) and continuing through the year ended January 31, 2003
(fiscal 2003), 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 domestic demand for
large embroidery machines. As a result, in the year ended January 31, 2002
(fiscal 2002) 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") and certain
non-exclusive rights to distribute to U S based customers who expand their
operating facilities into the Caribbean region. 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 certain exclusive rights to
distribute Tajima machines in the continental United States and Hawaii.
The Company enjoys a good relationship with Tajima, having spanned more
than 25 years. Hirsch is one of Tajima's largest distributors 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"), Tajima's parent company's manufacturing arm.
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 is now a
distributor in the United States of software developed by its former software
subsidiary, Pulse Microsystems Ltd. ("Pulse")(See Note 7 to the Consolidated
Financial Statements). Pulse develops and supplies proprietary application
software programs which enhances and simplifies the embroidery process, as well
as enables the customization of designs and reduction of production costs.
Throughout fiscal 2001 until the fourth quarter of fiscal 2002 the
Company's leasing subsidiary, HAPL Leasing Co., Inc. ("HAPL Leasing"), had
provided a wide range of financing options to customers wishing to finance their
purchases of embroidery equipment. In the fourth quarter of fiscal 2002, the
Company determined that its HAPL Leasing subsidiary was not strategic to its
business objectives and discontinued its operations (see Note 7 to the
Consolidated Financial Statements). The Company has continued to work with
customers to help them obtain financing through independent leasing and
financing companies, as an attractive alternative for purchasers looking to
begin or expand operations. Accordingly, the Company has reported its
discontinued operations in accordance with APB 30. The consolidated financial
statements have been reclassified to segregate the assets and liabilities for
fiscal 2002 and operating results of these discontinued operations for all
periods presented.
Hirsch also sells a broad range of embroidery supplies, machine parts,
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, an 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.
In the fourth quarter of fiscal 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, to reduce its cost structure and
improve efficiency. The restructuring initiatives involved the consolidation of
the parts and supplies operation with existing Hirsch operations, the provision
for the downsizing of three of its existing sales offices and reduction in the
overall administrative personnel. The reduction in personnel during this period
represented 25% of its workforce or 56 people. The severance payable at year-end
is expected to paid approximately by June 30, 2003. (See Note 8 to the
Consolidated Financial Statements.)
During the fourth quarter of fiscal 2002 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 the balance of $3,477,000 of
Goodwill as an impairment charge to operations. During the fourth quarter of
fiscal 2001, 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 digitzing embroidery business
assets of All Pro Punching, Inc. (See Note 7 to the Consolidated Financial
Statements).
The Embroidery Industry
The development of electronic computer-controlled embroidery machines has
led to new embroidery applications and markets, cost savings, higher profit
margins for users 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. 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. 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)
distributes Pulse's proprietary application software programs for embroidery
machines, (iii) sells a broad range of embroidery supplies, accessories and
proprietary products, (iv) reconditions, remanufactures and sells used
embroidery machinery, and (v) 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. In addition, the Company,
through its Hometown Threads, LLC subsidiary ("Hometown Threads"), is currently
marketing its franchise 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:
Embroidery Machines. 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 Tajima
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. Embroidery equipment may contain single or
multiple sewing heads. The selling prices of these machines range from
approximately $10,000 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.
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.
Pulse Microsystems Ltd. Software. Pulse, the Company's former subsidiary,
offers a wide range of proprietary application software products to enhance and
simplify the embroidery process. Pulse's computer-aided design software packages
target the different functions performed by embroiderers, and are contained in
an integrated product line. A majority of the Pulse'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, Windows(R) XP and Windows(R) NT
environments that the Company believes will enhance creativity, ease of use and
user flexibility. All Tajima machines, as well as other manufacturers'
embroidery machines can be networked through Pulse software. It is the Company's
established practice to aggressively market this 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.
Embroidery Supplies, Accessories, Machine Parts 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 as well as 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.
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.
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 in Hauppauge, New York. After the
Company delivers an embroidery machine to a customer, the Company's 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.
Pulse provides telephone-based software support for the Pulse software
distributed by the Company. 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.
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) continues to expand the number of locations in Wal*Mart(R) stores
and other mall and shopping center locations throughout the United States,
through its franchise program, and had 17 franchise locations in addition to its
own company operated store at the end of fiscal 2003.
Discontinued Operations
In the fourth quarter of fiscal 2002, the Company determined that its HAPL
Leasing subsidiary was not strategic to its ongoing objectives and discontinued
HAPL's Leasing's operations. Accordingly, the Company has reported its
discontinued operations in accordance with APB 30. The consolidated financial
statements have been reclassified to segregate the assets, liabilities and
operating results of these discontinued operations for all periods presented
(See Note 7 to the Consolidated Financial Statements).
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 its entire equity interest 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 quarterly installments beginning April 30,
2003 and including interest accruing on the principal 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.
Marketing and Customer Support
The Company has been selling embroidery equipment since 1976 and believes
it is one of the leading distributors of Tajima equipment in the world. The
Company reinforces recognition of its name through trade magazine advertising
and participation in seminars and over 20 trade shows annually. The Company's
sales staff is headed by Paul Gallagher, President and Chief Operating Officer
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 generally considered by the industry to consist of
the highest quality embroidery equipment available, and consequently the Company
does not attempt 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 profit margins to the best degree
possible. While in the short-term this may result in reduced market share, the
Company believes that this strategy presents the most promising way to sustain
and grow its business 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 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 its customers with
proprietary videotapes and manuals as training tools. Company personnel also
provide technical support by telephone, field maintenance services and quality
control testing, as well as advice with respect to matters generally affecting
embroidery operations. Telephone software support is provided by Pulse.
The Company maintains a training center 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.
The Company provides its customers with a limited warranty of up to five
years against malfunctions from defects in material or workmanship on the Tajima
machines it distributes. The warranty covers specific classes of parts and
labor. Tajima provides the Company with a six month warranty. As a consequence,
the Company absorbs a portion of the cost of providing warranty service on
Tajima products.
Supplier Relationships with Tajima
The Company has four separate distributorship agreements with Tajima which,
collectively, provide the Company the exclusive right to distribute Tajima's
complete line of standard embroidery, chenille embroidery and certain specialty
embroidery machines in 39 States. The main agreement (the "East Coast/Midwest
Agreement") which covers 33 States, became effective on February 21, 1991 and
has an initial 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 had an initial term of five years. This agreement was
renewed until February 22, 2004. 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 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 initial term of the
West Coast Agreement, expired on February 20, 2002; the first renewal expired on
February 20, 2003 and the second renewal terminates on February 20, 2004. 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. During fiscal 2003, the
Company failed to meet these minimum sales quotas; however, Tajima waived
meeting these minimum sales quotas for fiscal 2003. Furthermore, the East
Coast/Midwest Agreement may be terminated, among other reasons, 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 or, subject to certain conditions contained therein
in the event of the death, physical or mental disability of a duration of six
months or longer or the 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.
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 one of Tajima's largest distributors; (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 supports Tajima's development activities; (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, Happy, Melco Industries and SWF, 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 its knowledge and experience
in the marketplace, name recognition, customer service and the quality of the
embroidery equipment it distributes.
Further, the Company's customers are subject to competition from importers
of embroidered products, which could materially and adversely 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.
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.
Employees
As of January 31, 2003, the Company employed approximately 137 persons
engaged in sales, service and supplies, product development, finance,
administration and management for the Company and TUI. 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, 2003, approximately 72.7% 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 an initial 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 had an initial term of five
years. The Southwest Agreement has been renewed and currently expires on
February 22, 2004. 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 had an initial term of
five years, became effective on February 21, 1997. The first renewal expired on
February 20, 2003 and the second renewal expires on February 20, 2004. 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. Although the Caribbean Agreement has not been formally
renewed, activity under this arrangement 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. The Company failed to satisfy these quotas in 2003. In
recognition of difficult general industry conditions, Tajima waived meeting
these specific targets in fiscal year 2003. The Company believes that meeting
the quotas for the foreseeable future are unlikely and, therefore, unless the
contract is modified, it will continue to require a waiver. 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, subject to certain conditions contained
therein, 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 (other than the Caribbean Agreement) 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 competition from the
introduction by other manufacturers of technological advances and new products.
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 including price competition. 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 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, Far East and South America,
all of which have had a material 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. These transactions are not currently hedged through
any derivative currency product.
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 in configurations of up to eight heads. Tajima provides
the Company with technical assistance and support. TUI operations are
predominately dependent on continued demand for embroidery machines generated by
the Hirsch sales organization.
Retail Embroidery Services
The Company's Hometown Threads venture was created for the purpose of
establishing retail embroidery service centers within Wal-Mart(R) retail
locations. At the end of fiscal 2001, Hometown Threads concluded a pilot test of
its concept at two Wal-Mart(R) centers located in Texas and was authorized by
Wal-Mart(R) to implement a strategy to expand to 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. In addition,
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 franchises are developed. As of the end of fiscal
2003, the Company's net investment in Hometown Threads was approximately $2.0
million. Although the Company believes it will be able to access the market for
retail embroidery services, there is no guarantee that it will be successful in
doing so, or that it will be able to do so on a profitable basis.
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. 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. If other manufacturers develop embroidery machines
which are more technologically advanced than Tajima's or if 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 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.
Effective October 31, 2002, the Company has entered into a three-year
agreement with Pulse to act as its distributor of software in the US market. The
Company entered into a three year minimum purchase commitment with Pulse under
which the Company is obligated to purchase $100,000 of software each month. The
commitment was effective November 1, 2002 and runs until October 31, 2005.
Dependence on Existing Management
Changes in the embroidery industry and recent restructuring of the
Company's business have resulted in increased responsibilities for management
and have placed increased demands upon the Company's operating, financial and
technical resources. 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,
Vice Chairman of the Company and Chief Executive Officer of Hometown Threads;
and Paul Gallagher, its President and Chief Operating Officer. Mr. Gallagher is
bound by a 3 year agreement that commenced on September 11, 2001. The loss of
the services of Messrs. Arnberg, Levine, Gallagher, 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. During fiscal 2002, this facility was sold to Brandywine
Realty Trust and approximately 24,500 square feet was leased back in a
concurrent transaction (see Note 9B to the Consolidated Financial Statements).
During fiscal year 2003, and as part of the Company's restructuring plans (see
Note 8 to the Consolidated Financial Statements), the Company leased back the
25,500 square feet of the building that had remained empty since March 2001 in
order to consolidate certain operations in Hauppauge, NY. This property houses
the Company's executive offices, the Northeast sales office, technical services,
machine and parts warehousing, order fulfillment and used machine storage and
repair facilities.
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 has been renewed until
April 30, 2007.
In addition to the Company's headquarters and the assembly facility
occupied by TUI, the Company leases 15 regional satellite offices. These offices
consist of regional sales offices and training centers. 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 Small Cap 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 by the
NASDAQ Stock Market. Trading began in the Class A Common Stock on February
17, 1994.
Fiscal 2003 High Low
- ----------- ---- ---
First Quarter ended April 30, 2002..................................... $ 0.63 $ 0.40
Second Quarter ended July 31, 2002..................................... $ 0.55 $ 0.15
Third Quarter ended October 31, 2002................................... $ 0.35 $ 0.15
Fourth Quarter ended January 31, 2003.................................. $ 0.44 $ 0.19
Fiscal 2002 High Low
- ----------- ---- ---
First Quarter ended April 30, 2001..................................... $ 1.44 $ 0.90
Second Quarter ended July 31, 2001..................................... $ 1.24 $ 0.90
Third Quarter ended October 31, 2001................................... $ 1.17 $ 0.56
Fourth Quarter ended January 31, 2002.................................. $ 0.75 $ 0.40
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 March 21, 2003, the Company believes that there were approximately
1,791 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.
(d) Equity Compensation Plan Information
(c) Number of securities
(a) Number of remaining available
securities to be (b) Weighted-average for future issuance
issued upon exercise price under equity
exercise of of outstanding compensation plans
outstanding options, [excluding
options, warrants warrants and securities reflected
Plan category and rights rights in column (a)]
----------------------------- ------------------------ ----------------------- ---------------------------
Equity compensation plans 1,118,000 $0.50 1,243,000
approved by security holders
Equity compensation plans not
approved by security holders 100,000 $0.50 -
------- ---------
TOTAL 1,218,000 $0.50 1,243,000
========= =========
Two of the non-affiliated Board members were granted warrants to purchase 50,000
shares of Class A Common Stock at $0.50 per share for their past and ongoing
services to the Company. The Board of Directors approved these grants on January
25, 2002. These non-affiliated Board members were also granted certain
registration rights for the shares of Class A Common Stock issuable upon the
exercise of the warrants pursuant to the terms of a registration rights
agreement between the Company and such non-affiliated Board members.
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, 2003 and 2002 and for the fiscal years ended January 31, 2003, 2002,
and 2001 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, 2001, 2000
and 1999 and for the fiscal years ended January 31, 2000 and 1999 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 2003 2002 2001 2000 1999
- ------------------------------------------------- ----------- ----------- -------------- -------------- -----------
Statement of Operations Data:
Net sales................................... $47,141 $50,887 $64,039 $ 83,839 $ 117,798
Cost of sales............................... 31,529 37,006 44,515 60,144 84,803
Operating Expenses (2)...................... 17,954 30,544 34,502 33,864 38,154
Loss before income tax provision (benefit) (2,113) (16,080) (14,517) (10,999) (9,082)
Income tax provision (benefit).............. (431) ( 5,881) 162 350 (3,041)
Loss before discontinued operations and
cumulative effect of accounting change... (1,878) (10,199) (14,788) (11,643) (6,432)
(Loss) Earnings on discontinued operations .(3) (3,672) (8,126) ( 883) 8 1,824
Cumulative effect of accounting change...... -- -- -- ( 2,187) --
Net loss (1)................................ (5,550) (18,325) (15,671) (13,822) (1) (4 ,608)
Basic and diluted net loss per share from
...continuing operations..................... $ (0.21) $ (1.15) $ (1.62) $ ( 1.25) $ ( 0.68)
Basic and diluted net loss income per share. $ (0.63) $ (2.06) $ (1.72) $ ( 1.48) $ ( 0.49)
Shares used in the calculation of basic and
diluted net loss per share.................. 8,789 8,893 9,112 9,348 9,413
(1) Net of the cumulative effect of SAB 101 accounting change for revenue
recognition.
(2) Fiscal year 2002 SG&A includes a write-down of impaired goodwill of $3.5
million and restructuring costs of $2.7 million and Fiscal 2001 includes a
write-down of impaired goodwill of $7.6 million
(3) Fiscal years 2003, 2002, 2001, 2000 and 1999 have been restated to reflect
the discontinued operations of the Company.
January 31,
(in thousands of dollars)
-----------------------------------------------------------------------
Hirsch International Corp. and Subsidiaries 2003 2002 2001 2000 1999
---------- --------- ---------- ----------- ---------------
Balance Sheet Data:
Working capital............................. $16,261 $22,001 $25,214 $29,627 $ 51,939
Total assets.................................. 36,002 46,892 54,030 80,216 106,935
Long-term debt, less current maturities....... 2,388 2,608 79 989 15,640
Stockholders' equity.......................... 16,065 21,459 40,278 56,253 70,207
Hirsch International Corp
Summarized Quarterly Data**
$ in thousands, except for per share amounts Fiscal Quarter
------------------------------------------------------------
First Second Third Fourth
2003 ------------ ------------ ------------ ------------
Revenue......................................... $12,421 $12,718 $11,430 $10,572
Gross Profit.................................... 4,461 4,517 3,755 2,879
Income(Loss) On Discontinued Operations......... (3,794) 9 94 19
Net (Loss)...................................... (4,517) (434) (502) (97)
------------ ------------ ------------ ------------
Basic and Diluted (Loss) Per Share.............. $(0.51) $(0.05) $(0.06) $(0.01)
============ ============ ============ ============
2002 ------------ ------------ ------------ ------------
Revenue......................................... $14,552 $13,049 $14,183 $9,103
Gross Profit.................................... 5,229 3,866 3,684 1,102
Impairment of Goodwill.......................... - - - 3,477
Restructuring................................... - - - 2,466
Income (Loss) On Discontinued Operations 93 (171) 293 (8,341)
Net (Loss)...................................... (964) (2,821) (2,254) (12,286)
------------ ------------ ------------ ------------
Basic and Diluted (Loss) Per Share.............. $(.011) $(0.32) $(0.25) $(1.38)
============ ============ ============ ============
**Note: The quarterly data has been restated to reflect the discontinued
operations of Pulse Microsystems, LTD.
ITEM 7. 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 through Pulse 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 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 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 eight 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 operations into the Caribbean region.
The Company grew rapidly from the time of its initial public offering
through fiscal 1998. Growth during this period 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.
Fiscal 2003 continued the trend toward retrenchment 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 2002 the Company initiated a restructuring program
to address the market shifts in the industry, including closing and
consolidating certain divisions, reducing total employment, and consolidating
facilities that were no longer required to support its new business model (See
Note 7 of Notes to Consolidated Financial Statements). The Company believes the
continued implementation of the cost reduction program coupled with its
reorganization of operational functions will allow it to position itself to
return to profitable operations.
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, 2003, 2002
and 2001.
2003 2002 2001
------------ ------------ -------------
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 66.9% 72.7% 69.5%
Operating expenses.......................................... 38.1% 60.0% 53.9%
Interest expense, net....................................... 0.5% 0.6% 0.6%
Other expense (income), net................................. -1.0% -1.8% -1.3%
------------ ------------ -------------
(Loss) income before income taxes and minority interest..... -4.5% -31.6% -22.7%
Income tax (benefit) provision.............................. -0.9% -0.3%
-11.6%
Minority Interest........................................... 0.4% 0.0% 0.2%
Loss on Discontinued Operations............................. -7.8% -16.0% -1.4%
----- ------ -----
Net (loss) income........................................... -11.8% -36.0% -24.5%
============ ============ =============
** Note: The results of operations have been restated to reflect the
discontinued operations of HAPL and Pulse.
Use of Estimates and Critical Accounting Policies
The preparation of Hirsch's financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and revenues and
expenses during the period. Future events and their effects cannot be determined
with absolute certainty; therefore, the determination of estimates requires the
exercise of judgment. Actual results inevitably will differ from those
estimates, and such differences may be material to our financial statements.
Management continually evaluates its estimates and assumptions, which are based
on historical experience and other factors that are believed to be reasonable
under the circumstances. These estimates and Hirsch's actual results are subject
to the risk factors listed above under Item 1 Business -- "Risk Factors".
Critical Accounting Policies
Management believes the following critical accounting policies affect its
more significant estimates and assumptions used in the preparation of its
consolidated financial statements:
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. In fiscal year 2003, 2002 and 2001, most sales of new
equipment did not require installation within the terms of the sales contract
and accordingly sales are booked when shipped. The Company's policy is to accrue
the estimate cost of installation on a quarterly basis. 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. Sales
of parts and supplies are recognized when shipped.
Long lived Assets - 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. During the fourth
quarter of Fiscal 2002, the remaining balance of $3,477,000 of goodwill
associated with the acquisitions of SMX Corporation and Sedeco Corporation was
written off. (See Note 15 to the Consolidated Financial Statements.)
Income Taxes - Current income tax expense is the amount of income taxes
expected to be payable for the current year. A deferred income tax asset or
liability is established for the expected future consequences resulting from
temporary differences in the financial reporting and tax bases of assets and
liabilities. The Company provides a valuation allowance for its deferred tax
assets when, in the opinion of management, it is more likely than not that such
assets will not be realized.
Allowance for Doubtful Accounts - The Company maintains an allowance for
estimated losses resulting from the inability of its customers to make required
payments. An estimate of uncollectable amounts is made by management based upon
historical bad debts, current customer receivable balances, age of customer
receivable balances, the customer's financial condition and current economic
trends. If the actual uncollected amounts significantly exceed the estimated
allowance, then the Company's operating results would be significantly adversely
affected.
Inventories - Inventories are valued at the lower of cost or market. Cost
is determined using the average cost for supplies and parts and specific cost
for embroidery machines and peripherals. The inventory balance is recorded net
of an estimated allowance for obsolete or unmarketable inventory. The estimated
allowance for obsolete or unmarketable inventory is based upon management's
understanding of market conditions and forecasts of future product demand. If
the actual amount of obsolete or unmarketable inventory significantly exceeds
the estimated allowance, the Company's cost of sales, gross profit and net
income would be significantly adversely affected.
Warranty - The Company instituted a five-year limited warranty policy for
its embroidery machines. The Company's policy is to accrue the estimated cost of
satisfying future warranty claims on a quarterly basis. In estimating its future
warranty obligations, the Company considers various relevant factors, including
the Company's stated warranty policies and practices, the historical frequency
of claims, and the cost to replace or repair its products under warranty. If the
number of actual warranty claims or the cost of satisfying warranty claims
significantly exceeds the estimated warranty reserve, the Company's cost of
sales, gross profit and net income would be significantly adversely affected.
Reserves for Discontinued Operations - In the fourth quarter of Fiscal 2002
and the first quarter of Fiscal 2003 the Company made provisions for the winding
down of the HAPL Leasing subsidiary. Management regularly reviews these reserves
and in Management's opinion adequate provisions have been made for the winding
down of HAPL's operations.
Fiscal Year 2003 as Compared to Fiscal Year 2002
Net sales. Net sales for fiscal year 2003 were $47.1 million, a decrease of
$3.8 million, or 7.5% compared to $ 50.9 million for fiscal year 2002. The
Company believes that the reduction in the sales level for the fiscal year ended
January 31, 2003 is primarily attributable to a decrease in overall demand for
new multi-head embroidery machines, as well as increased pricing pressure from
the marketplace on new and used machine sales. Sales of the Company's new and
used machines, computer hardware and software, application software for fiscal
year 2003 aggregated approximately $42.2 million as compared to $43.8 million
for fiscal year 2002, a decrease of $1.6 million or 3.7%. Sales of parts and
supplies dropped $2.7 million, or 46%, which is indicative of the reduced
activity of the embroidery market in the US. Other revenues, including franchise
revenues increased $0.5 million from fiscal 2002.
Cost of sales. For fiscal year 2003, cost of sales decreased $5.5 million
or 15.9%, to $31.5 million from $37.0 million for fiscal year 2002. The $5.5
million decrease was a result of the related decrease in net sales for fiscal
year 2003 as compared to fiscal year 2002. The Company's gross margin as a
percent of sales increased for fiscal year 2003 to 33.1%, as compared to 27.3%
for fiscal year 2002. Included in cost of sales for 2002 was a write-down of
inventory of approximately $1.8 million (see Note 4 to the Consolidated
Financial Statements). Excluding the writedown of inventory, gross margin as a
percent of sales would have been 30.8%. The increase in gross margins is
attributable to the increase in other revenue (which includes franchise
revenues), which carries higher gross margins contribution.
Operating Expenses. Operating expenses for fiscal year 2003, decreased
$12.5 million or 41.0 %, to $18.0 million from $30.5 million for fiscal year
2002. Excluding the non recurring charges for goodwill impairment and
restructuring costs, operating expenses were $18.0 million in fiscal 2003, a
decline of $6.6 million or 26.8% from $24.6 million in fiscal 2002. This decline
was attributable to the cost reduction initiatives the Company put into place at
the end of fiscal 2002. The Company performed an impairment evaluation during
the fourth quarter of fiscal 2002 for the SMX Corporation and Sedeco Corporation
territories and as a result wrote off the balance of the goodwill associated
with these acquisitions. The goodwill write-off represented a per-share net loss
of $ 0.39 both on a basic and diluted basis for fiscal year 2002. Operating
expenses for 2002 also include restructuring charges reflecting the Company's
plan to reduce operating costs relative to the anticipated sales volume.
Included in this non-recurring charge are $.6 million in employee severance
costs and $2.1 million in facilities combinations/lease restructures (see Note 8
to the Consolidated Financial Statements).
Interest Expense. Interest expense for fiscal year 2003 was $.3 million
versus interest expense of $.3 million for fiscal year 2002. The Company
continued its aggressive inventory reduction program in fiscal year 2003. The
results of this program directly reflect increased liquidity and meant no
increase in interest expense as a result of the eliminations of working capital
borrowings outstanding against the Company's Revolving Credit Agreements during
both fiscal 2003 and fiscal 2002. The sale of the corporate headquarters during
fiscal 2002 also reduced the need for working capital borrowings.
Income tax (benefit) provision. The income tax provision reflected an
effective tax rate of approximately 20% for the twelve months ended January 31,
2003 as compared to an income tax benefit rate of 36.6 % for fiscal year 2002.
The tax provision for fiscal 2003 represents Federal and State taxes on the
Company's 55% owned subsidiary and was reduced by the actual NOL carryback for
the prior year. The benefit rate for the fiscal 2002 year is a direct result of
the Job Creation and Worker Assistance Act temporarily extending the carryback
of Net Operating Losses from two years to five years. This change has enabled
the Company to carryback its two most recent years losses and obtain a refund of
approximately $6 million. The difference of the above rate to the federal
statutory rate for 2003 is the valuation allowance established on deferred tax
assets since the Company cannot determine the future utilization of those
assets, as well as minimum franchise taxes for fiscal 2003.
Loss on Discontinued Operations. In the fourth quarter of Fiscal 2002, the
Company determined that its HAPL Leasing subsidiary was not strategic to the
Company's ongoing objectives and discontinued operations. The Company has made
provisions for the cost of winding down the operations as well as the potential
losses that could be incurred in disposing of its minimum lease payments and
residual receivables. The operating loss in fiscal 2002 includes $4.6 million
provision for the Ultimate Net Loss ("UNL") liability and the sale of the
residual receivable associated with it; $2.6 million increase in the Minimum
Lease Payment Receivable ("MLPR") provision; as well as $1.1 million in other
costs. The operating loss in fiscal 2003 includes an additional $4.0 million to
account for expected additional losses in liquidating the leasing subsidiary's
remaining lease portfolio. The prior year's Statement of Operations have been
restated to reflect the results of the HAPL Leasing subsidiary as a loss on
discontinued operations. Effective October 31, 2002, Hirsch International Corp.
("Hirsch") completed the sale of all of the outstanding equity interests in its
wholly-owned subsidiary, Pulse Microsystems Ltd. ("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. (See Note 7 to the Consolidated
Financial Statements.)
Net (Loss). The net loss for fiscal year 2003 was $5.5 million, a decrease
of $12.8 million, compared to a net loss of $ 18.3 million for fiscal year 2002.
This decrease is attributable to the decrease in operating expenses associated
with the restructuring charge of $2.5 million and the Impairment of Goodwill of
$ 3.5 million and a reduction in the Loss on Discontinued Operations of $4.5
million as well as the reduction in Selling, General and Administrative expenses
of $6.5 million and an increase in Gross Profit of $1.7 million, offset by a
drop in tax benefit of $5.5 million.
Fiscal Year 2002 as Compared to Fiscal Year 2001
Net sales. Net sales for fiscal year 2002 were $50.9 million, a decrease of
$13.1 million, or 20.5% compared to $ 64.0 million for fiscal year 2001. The
Company believes that the reduction in the sales level for the fiscal year ended
January 31, 2002 is primarily attributable to a decrease in overall demand for
new multi-head embroidery machines, as well as increased pricing pressure from
the marketplace. Sales of the Company's used machines, computer hardware and
software, parts and service, application software and embroidery supplies for
fiscal year 2002 aggregated approximately $16.1 million as compared to $25.8
million for fiscal year 2001, a decrease of $9.7 million or 37.6%.
Cost of sales. For fiscal year 2002, cost of sales decreased $7.5 million
or 16.8%, to $37.0 million from $44.5 million for fiscal year 2001. The decrease
was a result of the related decrease in net sales for fiscal year 2002 as
compared to fiscal year 2001. The Company's gross margin declined for fiscal
year 2002 to 27.3%, as compared to 30.5% for fiscal year 2001. Included in cost
of sales was a writedown of inventory of approximately $1.8 million (see Note 4
to the Consolidated Financial Statements). While 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,
increased cost of sales reflects the continuing product mix shift from larger
equipment with higher gross margins to smaller equipment with lower gross
margins. The lower gross margins also reflect the aggressive pricing used to
meet market demand.
Operating Expenses. As reported for fiscal year 2002, operating expenses
decreased $4.0 million or 11.5%, to $30.5 million from $34.5 million for fiscal
year 2001. Excluding the non recurring charges for goodwill impairment and
restructuring costs, operating expenses were $24.6 million, a decline of $2.3
million or 8.6% from $26.9 million. 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 performed
another impairment evaluation during the fourth quarter of 2002 for the SMX
Corporation and Sedeco Corporation territories and as a result wrote off the
balance of the goodwill associated with these acquisitions. The goodwill
write-off represented a per-share net loss of $ 0.39 both on a basic and diluted
basis for fiscal year 2002. Operating expenses also include restructuring
charges reflecting the Company's plan to reduce operating costs relative to the
anticipated sales volume. Included in this non-recurring charge are $.6 million
in employee severance costs and $2.1 million in facilities combinations/lease
restructures (see Note 8 to the Consolidated Financial Statements). The Company
also continued to incur development costs associated with the Hometown Threads
business initiative, which were partially offset, by the sale of its first
franchises.
Interest Expense. Interest expense for fiscal year 2002 was $0.3 million
versus interest expense of $0.4 million for fiscal year 2001. The Company
continued its aggressive inventory reduction program in fiscal year 2002. 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 2002 as compared
to fiscal 2001. The sale of the corporate headquarters also reduced the need for
working capital borrowings.
Income tax (benefit) provision. The income tax provision reflected an
effective tax benefit rate of approximately 35.9% for the twelve months ended
January 31, 2002 as compared to an income tax benefit rate of 1.4% for fiscal
year 2001. The benefit rate for the fiscal 2002 year is a direct result of the
Job Creation and Worker Assistance Act temporarily extending the carryback of
Net Operating Losses from two years to five years. This change has enabled the
Company to carryback its two most recent years losses and obtain a refund of
approximately $6 million. The difference of the above rate to the federal
statutory rate for 2001 is the valuation allowance established on deferred tax
assets since the Company cannot determine the future utilization of those
assets.
Loss on Discontinued Operations. In the fourth quarter of Fiscal 2002, the
Company determined that its HAPL Leasing subsidiary was not strategic to the
Company's ongoing objectives and discontinued operations. The Company has made
provisions for the cost of winding down the operations as well as the potential
losses that could be incurred in disposing of its minimum lease payments and
residual receivables. The operating loss in fiscal 2002 includes $4.6 million
provision for the UNL liability and the sale of the residual receivable
associated with it; $2.6 million increase in the MLPR provision; as well as $1.1
million in other costs. The prior year's Statement of Operations have been
restated to reflect the results of the HAPL Leasing subsidiary as a loss on
discontinued operations. (See Note 7 to the Consolidated Financial Statements.)
Net (Loss). The net loss for fiscal year 2002 was $18.3 million, an
increase of $2.6 million, compared to a net loss of $15.7 million for fiscal
year 2001. This increase is attributable to the decrease in net sales, an
increase in the cost of sales, an increase operating expenses associated with
the restructuring charge of $2.7 million and a loss on discontinued operations
of $7.7 million. These charges were offset by the reduction in goodwill
impairment charge of $4.2 million, a reduction in selling, general and
administrative expenses of $2.9 million and an increase in tax benefit of $5.7
million.
Liquidity and Capital Resources
The Company's working capital was $16.3 million at January 31, 2003,
decreasing $5.7 million or 25.9%, from $22.0 million, at January 31, 2002. The
decrease in working capital was principally due to decrease in the net assets of
discontinued operations as well as continued reductions in inventory, accounts
receivable and refundable income taxes. This reduction reflects a reduced level
of business activity and receipt of Federal Income Taxes based on the carry-back
of prior year losses. The Company has financed its operations principally
through cash provided by decreases in Inventory, Accounts Receivable and the
receipt of the tax refund.
During fiscal year 2003, the Company's cash increased by $4.6 million to
$7.7 million. Net cash of $5.9 million was provided by the Company's operating
activities and was largely driven by the converting receivables and inventory
into cash as well as the reduction in the net assets of discontinued operations.
This was offset in part by decreases in accounts payable and accrued expenses.
Cash used for investing activities of $547,000 was used for the purchase of
Fixed Assets and was offset by the cash received from the sale of the Pulse
subsidiary.
Cash used for Financing Activities was for additional collateral for the
LCs outstanding, used to pay for embroidery machines as well as the repayment of
long-term debt and for the cost of the credit line with Congress Financial Corp.
Future Commitments
The following table shows the Company's contractual obligations related to
long-term obligations (See Notes 9 and 14 to the Consolidated Financial
Statements).
Payments due by period (in thousands)
Less More
than 1 1 - 3 4-5 years than 5
Contractual Obligations Total year years years
- ---------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Capital lease obligations....................... $1,642 $101 $446 $451 $644
Operating Lease obligations..................... 4,399 959 2,143 842 455
Purchase Commitments 3,300 1,200 2,100
Employment Agreements 1,120 820 300 0 0
---------- ---------- ---------- ---------- ----------
Total $10,461 $3,080 $4,989 $1,293 $1,099
========== ========== ========== ========== ==========
Revolving Credit Facility and Borrowings
On November 26, 2002 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 ("Congress") 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 covenants.
Future Capital Requirements
Subsequent to the close of fiscal 2002, the Federal Government passed the
Job Creation and Worker Assistance Act temporarily extending the carry back of
Net Operating Losses from two years to five years. This should provide
approximately $6.0 million in cash available for operations. Approximately $3.0
million was received during the fiscal year ended January 31, 2003 and the
balance should be received during the second quarter of fiscal 2004. The Company
believes these proceeds, with its existing cash and funds generated from
operations, together with its new 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 - The Financial Accounting Standards Board
("FASB") has issued the following:
June 2002 - SFAS No. 146 - "Accounting for Costs Associated with Exit
or Disposal Activities." This Statement 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)."
The principal difference between this Statement and EITF 94-3 relates to
its requirements for recognition of a liability for a cost associated with
an exit or disposal activity. This Statement requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF 94-3, a liability was recognized at the
date of an entity's commitment to an exit plan. This Statement is effective
for exit or disposal activities that are initiated after December 31, 2002.
The Company does not expect the adoption of SFAS No. 146 to have a material
impact on its financial position or results of operations.
December 2002 - SFAS No. 148, "Accounting for Stock Based
Compensation-Transition and Disclosure." This statement was issued to
provide alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. This statement is effective for financial statements for
fiscal years ending after December 15, 2002. This statement does not have
any impact on the Company because the Company does not plan to implement
the fair value method.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others",("FIN45"). FIN 45
addresses the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantees. The
disclosure requirements in this Interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. We
do not expect this Interpretation to have an effect on the consolidated
financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities." This interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN No. 46 is
effective February 1, 2003 for variable interest entities created after
January 31, 2003, and July 1, 2003 for variable interest entities created
prior to February 1, 2003. The Company does not expect the adoption of FIN
No. 46 to have a material impact on its financial position, results of
operations or cash flows.
ITEM 7A. 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 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-20 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement to be filed
pursuant to Regulation 14A not later than 120 days after the end of the
fiscal year (January 31, 2003) are incorporated by reference in Part III,
Items 10-13 hereof.
ITEM 10. Directors and Executive Officers of the Registrant
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 201(d) of Regulation S-K is incorporated
by reference from Item 5(d) of this Annual Report on Form 10-K.
ITEM 13. Certain Relationships and Related Transactions
Effective October 31, 2002, the Company completed the sale of all of the
outstanding equity interests in its Pulse Microsystems Ltd. subsidiary ("Pulse")
to an entity affiliated with Tas Tsonis, a former director of the Company and
Chief Executive Officer of Pulse and Brian Goldberg, a former Vice President of
the Company and President of Pulse. The consideration received by the Company
was approximately equal to Pulse's net asset value. The terms of the transaction
were the product of an extensive arms-length negotiation between Management and
the purchaser and were approved by the Board of Directors after presentation by
and consultation with Management. Management and the Board believe that the
consideration received by the Company for the transferred equity interests to be
within a range of value that was fair to the Company. (See Note 7 to
Consolidated Financial Statements).
ITEM 14. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. The Company's Chief
Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in Sections 13(a)-14(c) of the Securities and Exchange Act of 1934) as of a date
(the "Evaluation Date") not more than ninety (90) days before the filing of this
Annual Report, have concluded that as of the Evaluation Date, the Company's
disclosure controls and procedures were effective and designed to ensure that
material information relating to the Company and its consolidated subsidiaries
is accumulated and would be made known to them by others within those entities
as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Controls. The Company does not believe that there are
significant deficiencies in the design or operation of its internal controls
that could adversely affect its ability to record, process, summarize and report
financial data. Although there were no significant changes in the Company's
internal controls or in other factors that could significantly effect those
controls subsequent to the Evaluation Date, the Company's senior management, in
conjunction with its Board of Directors, continuously reviews overall Company
policies and improves documentation of important financial reporting and
internal control matters. The Company is committed to continuously improving the
state of its internal controls, corporate governance and financial reporting.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS PAGE(S)
------------
Index to Consolidated Financial Statements....................... F1
Signature Page................................................... 26
Independent Auditors' Report F-2
Consolidated Balance Sheets...................................... F-3 to F-4
Consolidated Statements of Operations............................ F-5
Consolidated Statements of Stockholders' Equity.................. F-6 -F-7
Consolidated Statements of Cash Flows............................ F-8
Notes to Consolidated Financial Statements....................... F-9 to F-20
(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 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")
@10.2 Amendment Number Two to Hirsch Distributorship Agreement, Dated June 7, 1996
@10.3 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.
@10.4 West Coast Distributorship Agreement, Dated February 21, 1997, among Tajima Industries, Ltd., Nomura Trading Co.
Ltd. and Nomura (America) Corp., and Hirsch International Corp.
+10.5 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
+++10.6 Stock Option Plan, as amended
+++10.7 1994 Non-Employee Director Stock Option Plan, as amended
**10.8 Lease Agreement dated March 8, 2001 between the Company and Brandywine Operating Partnership, L.P.
++10.9 First Amendment to Lease dated December 2001 between the Company and Brandywine Operating Partnership, L.P.
***10.10 Share Purchase Agreement dated as of October 31, 2002, by and between Hirsch International Corp. and 2017146 Ontario
Limited.
****10.11 Loan and Security Agreement dated as of November 26, 2002, by and between Congress Financial Corporation, as Lender
and Hirsch International Corp., as Borrower.
10.12 Amendment No. 1 to Loan and Security Agreement dated as of April 20, 2003.
21.1 List of Subsidiaries of the Registrant
23.1 Independent Auditor's Consent
99.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ---------------------------
%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 Form 10-K filed for the year
ended January 31, 1997.
+Incorporated by reference from Registrant's Form 10-Q filed for the quarter
ended October 31, 1999.
*Incorporated by reference from the Registrant's Registration Statement on Forms
S-1, Registration Number 33-72618.
**Incorporated by reference from Registrant's Report on Form 8-K filed with the
Commission March 15, 2001.
++Incorporated by reference from Registrant's Form 10-K for the fiscal year
ended January 31, 2002.
+++Incorporated by reference from Registrant's definitive proxy statement filed
with the Commission on May 30, 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 with the
Commission on December 6, 2002.
- ---------------------------
(b) REPORTS ON FORM 8-K
(i) On November 15, 2002, the Company filed a report on Form 8-K with
the Securities and Exchange Commission announcing the sale of
Pulse Microsystems, Ltd., its wholly-owned subsidiary.
(ii) On December 6, 2002, the Company filed a report on Form 8-K with
the Securities and Exchange Commission announcing the execution
of Loan and Security Agreement with Congress Financial
Corporation.
(iii)On February 28, 2003, the Company filed a report on Form 8-K
with the Securities and Exchange Commission announcing the
appointment of Paul Levine as Vice Chairman of the Company's
Board of Directors and Chief Executive Officer of Hometown
Threads, LLC and Paul Gallagher as President of the Company.
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: April 29, 2003
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 Executive April 29, 2003
- ----------------- Officer (Principal Executive Officer)
Henry Arnberg
/s/ Paul Levine Vice Chairman of the Board of Directors and Chief April 29, 2003
- --------------- Executive Officer of Hometown Threads, LLC
Paul Levine
/s/ Paul Gallagher President and Chief Operating Officer and Director April 29, 2003
- ------------------
Paul Gallagher
/s/ Beverly Eichel Vice President-Finance and Administration, and Chief April 29, 2003
- ------------------ Financial Officer (Principal Accounting and Financial
Beverly Eichel Officer), Secretary
/s/ Daniel Vasquez Corporate Controller April 29, 2003
- ------------------
Daniel Vasquez
/s/ Ronald Krasnitz President TUI, and Director April 29, 2003
- -------------------
Ronald Krasnitz
/s/ Marvin Broitman Director April 29, 2003
- -------------------
Marvin Broitman
/s/ Mary Ann Domuracki Director April 29, 2003
- ----------------------
Mary Ann Domuracki
/s/ Herbert M. Gardner Director April 29, 2003
- ----------------------
Herbert M. Gardner
CERTIFICATION
Pursuant to 18 U.S. Section 1350,
As adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Henry Arnberg, certify that:
1. I have reviewed this annual report on Form 10-K of Hirsch International
Corp. (the "registrant");
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 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 annual 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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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 officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons fulfilling 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 registrant's other certifying officer and I have indicated in this
annual report whether or not here were significant changes in 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 significant deficiencies and material weaknesses.
Date: April 29, 2003
/s/ Henry Arnberg
-----------------
Henry Arnberg, Chairman and
Chief Executive Officer
CERTIFICATION
Pursuant to 18 U.S. Section 1350,
As adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Beverly Eichel, certify that:
1. I have reviewed this annual report on Form 10-K of Hirsch International
Corp. (the "registrant");
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 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 annual 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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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 officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons fulfilling 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 registrant's other certifying officer and I have indicated in this
annual report whether or not here were significant changes in 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 significant deficiencies and material weaknesses.
Date: April 29, 2003
/s/ Beverly Eichel
------------------
Beverly Eichel, Vice President -
Finance, Chief Financial Officer
and Secretary
Index to Financial Statements
Hirsch International Corp.
Independent Auditors' Report F-2
Consolidated Financial Statements
Balance Sheet as of January 31, 2003 and January 31, 2002 F-3 - F-4
Statements of Operations for the years ended
January 31, 2003, January 31, 2002 and January 31, 2001 F-5
Statements of Stockholders Equity for the years ended
January 31, 2003, January 31, 2002 and January 31, 2001 F-6 - F-7
Statements of Cash Flows for the years ended
January 31, 2003, January 31, 2002 and January 31, 2001 F-8
Notes to the Consolidated Financial Statements F-9 - F-20
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, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended January 31, 2003. 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, 2003 and 2002 and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 2003 in conformity with accounting principles generally accepted in
the United State of America.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Melville, New York
April 10, 2003, except for Note 14, which is as of April 28, 2003
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2003 AND 2002
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS 2003 2002
CURRENT ASSETS:
Cash and cash equivalents $7,707,000 $3,121,000
Restricted cash (Note 2) 900,000 -
Short term note receivable (Note 7) 500,000 -
Accounts receivable, net of an allowance for possible
losses of approximately $1,451,000 and $2,893,000,
respectively (Notes 4 and 14) 4,354,000 7,077,000
Inventories, net (Notes 3, 4 and 14) 9,498,000 12,618,000
Prepaid and refundable income taxes 3,319,000 6,120,000
Other current assets 686,000 367,000
Assets of discontinued operations (Note 7) 4,914,000 13,786,000
--------- ----------
Total current assets 31,878,000 43,089,000
---------- ----------
PROPERTY, PLANT AND EQUIPMENT - Net of accumulated
depreciation and amortization (Note 6) 2,868,000 3,206,000
OTHER ASSETS 1,256,000 597,000
--------- -------
TOTAL ASSETS $36,002,000 $46,892,000
=========== ===========
See notes to consolidated financial statements.
(Continued)
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2003 AND 2002
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
CURRENT LIABILITIES:
Trade acceptances payable $969,000 $2,185,000
Accounts payable and accrued expenses (Notes 4 and 8) 6,924,000 9,530,000
Customers Deposits and other 865,000 202,000
Liabilities of discontinued operations (Note 7) 6,859,000 9,171,000
--------- ---------
Total current liabilities 15,617,000 21,088,000
CAPITALIZED LEASE OBLIGATIONS - Less current maturities (Note 9) 1,541,000 1,642,000
DEFERRED GAIN - (Note 9) 847,000 966,000
------- -------
Total liabilities 18,005,000 23,696,000
---------- ----------
MINORITY INTEREST (Note 1) 1,932,000 1,737,000
COMMITMENTS AND CONTINGENCIES (Note 14)
STOCKHOLDERS' EQUITY (Note 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 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) (23,825,000) (18,275,000)
Accumulated other comprehensive income (loss) - (156,000)
- ---------
17,667,000 23,061,000
Less: Treasury Class A Common stock at cost, 695,000 shares 1,602,000 1,602,000
---------- ---------
Total stockholders' equity 16,065,000 21,459,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $36,002,000 $46,892,000
=========== ===========
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
Three Years Ended January 31,
2003 2002 2001
---- ---- ----
NET SALES $ 47,141,000 $ 50,887,000 $ 64,039,000
COST OF SALES (Note 14) 31,529,000 37,006,000 44,515,000
------------ ------------ ------------
GROSS PROFIT 15,612,000 13,881,000 19,524,000
------------ ------------ ------------
OPERATING EXPENSES
Selling, general and administrative expenses 17,954,000 24,601,000 26,862,000
Impairment of Goodwill (Note 15) -- 3,477,000 7,640,000
Restructuring costs (Note 8)
-- 2,466,000 --
------------ ------------ ------------
Total operating expenses 17,954,000 30,544,000 34,502,000
------------ ------------ ------------
OPERATING LOSS (2,342,000) (16,663,000) (14,978,000)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (259,000) (317,000) (378,000)
Other income - net 488,000 900,000 839,000
------------ ------------ ------------
Total other income 229,000 583,000 461,000
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR
INCOME TAXES, MINORITY INTEREST IN NET EARNINGS OF
CONSOLIDATED SUBSIDIARY AND DISCONTINUED OPERATIONS (2,113,000) (16,080,000) (14,517,000)
INCOME TAX PROVISION (BENEFIT) (Note 10) (431,000) (5,881,000) 162,000
MINORITY INTEREST IN NET EARNINGS OF CONSOLIDATED
SUBSIDIARY (Note 1) 196,000 0 109,000
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (1,878,000) (10,199,000) (14,788,000)
LOSS ON DISCONTINUED OPERATIONS - NET OF TAX EXPENSE
(BENEFIT) OF $308,000, $(863,000) AND $0, RESPECTIVELY
(NOTE 7) (3,672,000) (8,126,000) (883,000)
------------ ------------ ------------
NET LOSS $ (5,550,000) ($18,325,000) ($15,671,000)
============ ============ ============
LOSS PER SHARE:
Basic and diluted:
Loss from continuing operations ($ 0.21) ($ 1.15) ($ 1.62)
Loss on discontinued operations (0.42) (0.91) (0.10)
------------ ------------ ------------
Basic and diluted ($ 0.63) ($ 2.06) ($ 1.72)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES IN THE
CALCULATION OF LOSS
Basic and diluted 8,789,000 8,892,900 9,112,200
============ ============ ============
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED JANUARY 31, 2003, 2002 AND 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Class A Class B
Common Stock Common Stock
(Note 11) (Note 11)
-------------- ------------- -------------- -------------
Additional
Shares Amount Shares Amount Paid-In Capital
------ ------ ------ ------ ---------------
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
Comprehensive income:
Gain on Foreign Currency Translation -- -- -- -- --
Net loss -- -- -- -- --
Total comprehensive income -- -- -- -- --
--------- ------ --------- ------ ----------
BALANCE, JANUARY 31, 2002 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, 2003 6,815,000 $ 68,000 2,668,000 $27,000 $41,397,000
========= ======== ========= ======= ===========
Accumulated
other
Comprehensive Retained Earnings Treasury
Income (Loss) (Deficit) Stock Total
------------- --------- ----- -----
(Note 2)
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:
Loss 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
Purchase of treasury shares (Note 12) -- -- ( 250,000) ( 250,000)
Comprehensive income:
Loss on Foreign Currency Translation (244,000) -- -- --
Net loss -- (18,325,000) -- --
Total comprehensive income -- -- -- (18,569,000)
--------- ----------- ------------ ------------
BALANCE, JANUARY 31, 2002 $(156,000) $ (18,275,000) $(1,602,000) $21,459,000
Comprehensive income:
Loss on Foreign Currency Translation 156,000 -- -- --
Net loss -- (5,550,000) -- --
Total comprehensive income -- -- -- (5,394,000)
--------- ----------- ------------ ------------
BALANCE, JANUARY 31, 2003 $-- $ (23,825,000) $(1,602,000) $16,065,000
========= =========== ============ ============
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED JANUARY 31,
- -----------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,550,000) $(18,325,000) $(15,671,000)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 809,000 2,186,000 3,425,000
Recognized gain on sale of assets (119,000) (170,000) 0
Provisions for reserves 410,000 3,275,000 436,000
Deferred income taxes (130,000) 0 130,000
Minority interest 196,000 0 108,000
Write-off of goodwill 0 3,477,000 7,640,000
Changes in assets and liabilities:
Accounts receivable 4,680,000 1,461,000 5,836,000
Net investments in sales-type leases 5,365,000 (2,897,000) 2,104,000
Inventories 2,910,000 (466,000) 11,738,000
Other current assets and other assets (1,431,000) 160,000 197,000
Trade acceptances payable (1,216,000) (1,790,000) (2,225,000)
Accounts payable and accrued expenses (3,718,000) 10,634,000 (4,879,000)
Prepaid income taxes and income taxes payable 3,742,000 (5,124,000) 1,781,000
------------ ------------ ------------
Net cash provided by (used in) operating
activities 5,948,000 (7,579,000) 10,620,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (547,000) (533,000) (848,000)
Proceeds from sale of assets -- 4,236,000 --
Proceeds from sale of subsidiary 530,000 -- --
------------ ------------ ------------
Net cash provided by (used in) investing
activities (17,000) 3,703,000 (848,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted Cash (900,000) -- --
Repayments of long-term debt (83,000) (53,000) (3,214,000)
Payment of Deferred Financing Costs (518,000) -- --
Purchase of treasury shares -- (250,000) (171,000)
------------ ------------ ------------
Net cash used in financing activities (1,501,000) (303,000) (3,385,000)
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 156,000 (244,000) (133,000)
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,586,000 (4,423,000) 6,254,000
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,121,000 7,544,000 1,290,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,707,000 $ 3,121,000 $ 7,544,000
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest and bank fees paid $ 259,000 $ 419,000 $ 389,000
============ ============ ============
Income taxes paid $ 9,000 $ 7,000 $ 400,000
============ ============ ============
Supplemental Disclosure of non-cash investing activity: On October 31, 2002 the
Company received a note in the amount of $500,000 from the sale of its Pulse
subsidiary. See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 2003, 2002 AND 2001
- -------------------------------------------------------------------------------
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. through October 31, 2002 (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 Sheets 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.
Due to the discontinuation of the leasing services subsidiary, the Company
only operates in a single reportable segment.
See Note 7 to the Consolidated Financial Statements for discontinued
operations of the leasing subsidiary as of January 31, 2002.
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 the majority interest in the operations of TUI. All material
inter-company balances and transactions have been eliminated in
consolidation.
b. Revenue Recognition - The Company distributes embroidery equipment.
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.
In fiscal year 2003, 2002 and 2001, most sales of new equipment did
not require installation within the terms of the sales contract; these
sales were recorded at the time of shipment, at which time title is
transferred to the customer.
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. As of January 31,
2003 the Company had $.9 million in restricted cash which is being
used to collateralize letters of credit outstanding.
d. Allowance for Possible Losses - The Company maintains an allowance for
estimated losses resulting from the inability of its customers to make
required payments. An estimate of uncollectable amounts is made by
management based upon historical bad debts, current customer
receivable balances, age of customer receivable balances, the
customer's financial condition and current economic trends. If the
actual uncollected amounts significantly exceed the estimated
allowance, then the Company's operating results would be significantly
adversely affected.
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 Currency Transactions - Trade acceptances payable are
denominated in Japanese yen and are related to the purchase of
equipment from the Company's major supplier. Gains and losses from
foreign currency transactions are included in net loss and are not
significant.
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:
Furniture and fixtures 3-7
Machinery and equipment 3-7
Software 3
Automobiles 3-5
Leasehold improvements 3-20
h. Impairment of Long-Lived Assets - In August 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" (SFAS 144"), which supersedes Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets to be disposed of, and was adopted by the Company
on February 1, 2002. The Company reviewed certain long-lived assets
and identifiable intangibles for impairment. The adoption SFAS 144 did
not have a material effect on the Company's consolidated financial
statements. Whenever events or changes in circumstances indicate that
the carrying value of any of these assets may not be recoverable, the
Company will assess the recoverability of such assets based upon
estimated undiscounted cash flow forecasts. During the fourth quarter
of Fiscal 2002, the remaining balance of $3,477,000 of goodwill
associated with the acquisitions of SMX Corporation and Sedeco
Corporation was written off. (See Note 18).
i. Warranty - The Company instituted a five-year limited warranty policy
for its embroidery machines. The Company's policy is to accrue the
estimated cost of satisfying future warranty claims on a quarterly
basis. In estimating its future warranty obligations, the Company
considers various relevant factors, including the Company's stated
warranty policies and practices, the historical frequency of claims,
and the cost to replace or repair its products under warranty. If the
number of actual warranty claims or the cost of satisfying warranty
claims significantly exceeds the estimated warranty reserve, the
Company's cost of sales, gross profit and net loss would be
significantly adversely affected.
j. Leases - Leases (in which the Company is lessee) which transfer
substantially all of the risks and benefits of ownership are
classified as capital leases, and assets and liabilities are recorded
at amounts equal to the lesser of the present value of the minimum
lease payments or the fair value of the leased properties at the
beginning of the respective lease terms. Interest expense relating to
the lease liabilities is recorded to effect constant rates of interest
over the terms of the leases. Leases which do not meet such criteria
are classified as operating leases and the related rentals are charged
to expense as incurred.
k. Income Taxes - The Company records 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.
l. Income (Loss) Per Share - 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,
2003, 2002 and 2001.
m. Stock-Based Compensation - The Company accounts for stock-based awards
to employees using the intrinsic value method.
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 at
the date of the grant using the Black-Scholes option pricing model
with the following weighted average assumptions for 2003, 2002 and
2001: expected life, 3.6 years; stock volatility, 79.0 percent in
2003, 79.0 percent in 2002 and 69.4 percent in 2001; risk free
interest rate of 3.97 percent in 2002, risk free interest rate of 6.7
percent in 2001 and 6.0 percent in 2000, 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. The weighted average fair value of the options granted during
2003, 2002 and 2001was $0.16, $0.53 and $0.38, respectively.
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,
2003 2002 2001
---- ---- ----
Net (loss):
Net Loss as reported $(5,550,000) $(18,325,000) $(15,671,000)
Deduct Total stock-based
employee compensation expense
determined under fair value
method 82,000 182,000 424,000
------ ------- -------
Pro forma net loss $(5,632,000) $(18,507,000) $(16,095,000)
============ ============== =============
Basic and diluted loss per share:
As reported $(0.63) $ (2.06) $ (1.72)
Pro forma $(0.64) $ (2.08) $ (1.77)
n. Comprehensive Income - 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 loss, and foreign
exchange translation adjustments and is presented in the consolidated
statements of stockholders' equity.
o. Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted 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.
p. Fair Value of Financial Instruments - Financial instruments consist
primarily of investments in cash, cash equivalents, trade account
receivables, accounts payable and debt obligations. Where quoted
market prices are not available, fair values are estimated based on
assumptions concerning the amount and timing of estimated future cash
flow and assumed discount rates reflecting varying degrees of credit
risk, at January 31, 2003 and 2002, the fair value of the Company's
financial instruments approximated the carrying value.
q. Recent Accounting Pronouncements - The Financial Accounting Standards
Board ("FASB") has issued the following:
June 2002 - SFAS No. 146 - "Accounting for Costs Associated with Exit
or Disposal Activities." This Statement 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)." The principal difference between this Statement and
EITF 94-3 relates to its requirements for recognition of a liability
for a cost associated with an exit or disposal activity. This
Statement requires that a liability for a cost associated with an exit
or disposal activity be recognized when the liability is incurred.
Under EITF 94-3, a liability was recognized at the date of an entity's
commitment to an exit plan. This Statement is effective for exit or
disposal activities that are initiated after December 31, 2002. The
Company does not expect the adoption of SFAS No. 146 to have a
material impact on its financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others",("FIN45").
FIN 45 addresses the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under
guarantees. The disclosure requirements in this Interpretation are
effective for financial statements of interim or annual periods ending
after December 15, 2002. We do not expect this Interpretation to have
an effect on the consolidated financial statements.
December 2002 - SFAS No. 148, "Accounting for the Stock Based
Compensation-Transition and Disclosure." This statement was issued to
provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both
annual and interim financial statement about the method of accounting
for stock-based employee compensation and the effect of the method
used on reported results. This statement is effective for financial
statements for fiscal years ending after December 15, 2002. This
statement does not have any impact on the Company because the Company
does not plan to implement the fair value method.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities." This interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from
other parties. FIN No. 46 is effective February 1, 2003 for variable
interest entities created after January 31, 2003, and July 1, 2003 for
variable interest entities created prior to February 1, 2003. The
Company does not expect the adoption of Fin No. 46 to have a material
impact on its financial position, results of operations or cash flows.
r. Reclassifications - As a result of discontinued operations, certain
reclassifications have been applied to prior year amounts to conform
to current year presentation.
s. Shipping and handling expenses - The Company records shipping and
handling expenses in operating expenses on the statement of
operations. These expenses were approximately $1,012,000, $1,194,000
and $1,297,000 during the years ended January 31, 2003, 2002 and 2001,
respectively. Amounts billed to customers are immaterial.
3. INVENTORIES
January 31,
2003 2002
-------------------------- -------------------------
New machines $8,061,000 $11,398,000
Used machines 796,000 935,000
Parts and accessories 2,587,000 2,470,000
Less reserve for slow-moving inventory (1,946,000) (2,185,000)
-------------------------- -------------------------
Total $9,498,000 $12,618,000
-------------------------- -------------------------
4. CHANGES IN RESERVES
Allowance for Possible Losses:
- ------------------------------
Opening Ending
Balance Additions Write Offs Balance
------- --------- ---------- -------
Year ended January 31, 2003 $ 2,893,000 $ 151,000 $(1,593,000) $ 1,451,000
Year ended January 31, 2002 $ 2,570,000 $ 870,000 $ (547,000) $ 2,893,000
Year ended January 31, 2001 $ 5,632,000 $ 274,000 $(3,336,000) $ 2,570,000
Inventory Reserve:
- ------------------
Opening Ending
Balance Additions Write Offs Balance
------- --------- ---------- -------
Year ended January 31, 2003 $ 2,185,000 $ 259,000 $ (498,000) $ 1,946,000
Year ended January 31, 2002 $ 2,450,000 $ 2,405,000 $(2,670,000) $ 2,185,000
Year ended January 31, 2001 $ 3,631,000 $ 162,000 $(1,343,000) $ 2,450,000
Warranty Liability
The Company offers to its customers limited warranties against product
defects for periods ranging from 30 days to 5 years, depending on the specific
product and terms of the customer purchase agreement. The Company's typical
warranties require it to repair or replace the defective products during the
warranty period at no cost to the customer for parts or labor. At the time the
product revenue is recognized, the Company records a liability for estimated
costs under its warranty. The costs are based on historical experience. The
Company periodically assesses the adequacy of its recorded warranty liability
and adjusts the amount necessary. While the Company believes that its estimated
liability for product warranties is adequate and that the judgement applied is
appropriate, the estimated liability for the product warranties could differ
materially from future actual warranty costs. Taking into account the reduced
sales of new machines and the increase in the warranty period for those machines
the Company's estimated warranty liability remained at $543,000 for January 31,
2003 and January 31, 2002.
5. NET INVESTMENT IN SALES-TYPE LEASES
January 31,
2003 2002
------------ ------------
Total minimum lease payments receivable $ 2,331,000 $ 9,033,000
Estimated residual value of leased property (unguaranteed) (A) 3,920,000 5,648,000
Reserve for estimated uncollectible lease payments (1,165,000) (1,165,000)
Less: Unearned income (413,000) (1,997,000)
------------ ------------
Net investment - Amount in Net Assets of Discontinued Operations $ 4,673,000 $ 11,519,000
============ ============
(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.
6. PROPERTY, PLANT AND EQUIPMENT
January 31,
2003 2002
--------------------- -------------------
Property Under Capital Lease Obligation $1,786,000 $1,786,000
Software 458,000 0
Machinery and equipment 5,642,000 5,863,000
Furniture and fixtures 1,968,000 1,968,000
Automobiles 294,000 294,000
Leasehold improvements 504,000 485,000
----- --------
Total 10,652,000 10,396,000
Less: Accumulated depreciation and amortization (7,784,000) (7,190,000)
----------- -----------
Property, plant and equipment, net $ 2,868,000 $ 3,206,000
============ ===========
7. DISCONTINUED OPERATIONS
In the fourth quarter of Fiscal 2002, the Company determined that its HAPL
Leasing subsidiary was not strategic to the Company's ongoing objectives and
discontinued its operations. Accordingly, the Company reported its discontinued
operations in accordance with APB 30. The consolidated financial statements have
been reclassified to segregate the assets, liabilities and operating results of
these discontinued operations for all periods presented. Management intends to
sell the net assets by January 2004.
Summary operating results of the discontinued operations of HAPL Leasing (in
thousands) are as follows:
For the year ended January 31,
2003 2002 2001
---- ---- ----
Revenue ........................... $ 1,554 $3,488 $4,590
Gross profit ...................... 128 1,575 1,653
Loss from discontinued
Operations ...................... (4,000) (7,686) (70)
The operating loss in fiscal 2003 includes a reserve of $4 million as an
additional provision for the liquidation of the lease portfolio. The operating
loss in fiscal 2002 includes $4.6 million provision for the CIT/UNL liability
and the sale of the residual receivables associated with it; $2.6 million
increase in the MLPR provision; $0.6 million employee severance costs; and $0.5
million in asset write off and provision for future losses until termination.
The UNL (Ultimate Net Loss) represents the Company's liability of up to
approximately 10% of all contracts purchased by CIT. The increase in the MLPR
(Minimum Lease Payments Receivable) provision was to reserve against a probable
loss on the sale of the remaining portfolio.
Effective October 31, 2002, Hirsch International Corp. ("Hirsch") completed the
sale of all of the outstanding equity interests in its wholly-owned subsidiary,
Pulse Microsystems Ltd. ("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. The sale price was at Pulse's book value
so there was no gain or loss recorded on the sale. 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 year ended January 31,
2003 2002 2001
---- ---- ----
Revenue . . . . . . . . . . . . . . . . . . $3,731 $4,547 $4,500
Gross profit . . . . . . . . . . . .. . . . 2,510 2,906 2,779
(Loss)Income from discontinued Operations . $184 $(440) ($813)
Assets and Liabilities of discontinued operations (in thousands) are as follows:
For the year ended January 31,
2003 2002
---- ----
Assets:
Accounts Receivable ........... $ 16 $ 432
MLPR and residuals ............. 4,673 11,519
Property, Plant & Equipment ... 33 569
Inventory ..................... 113 260
Prepaid Taxes ................. 79 1,006
------- -------
Total Assets ........................ $ 4,914 $13,786
======= =======
Liabilities:
Accounts Payable & Accruals ... $ 6,758 $ 8,717
Customer Deposits Payable ..... - 312
Long Term Debt ................ 14 55
Income Taxes Payable .......... 87 87
------- -------
Total Liabilities ................... $6,859 $ 9,171
====== =======
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
January 31,
2003 2002
---- ----
Accounts payable $3,244,000 $4,342,000
Accrued restructuring costs (A) 1,368,000 2,464,000
Accrued commissions payable 108,000 158,000
Accrued payroll costs 460,000 543,000
Accrued warranty and installation costs 543,000 543,000
Customer deposits payable 0 64,000
Deferred revenue 179,000 97,000
Other accrued expenses 1,022,000 1,319,000
---------- ----------
Total accounts payable and accrued expenses $6,924,000 $9530,000
========== ==========
(A) 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 involve the consolidation of the
parts and supplies operations with existing Hirsch operations, the
provision for the downsizing of three of its existing sales offices and
reduction in the overall administrative personnel. The reduction in
personnel represents 25% of its work force or 56 people. The severance
payable at year-end is expected to be paid by June 30, 2003.
The following table summarizes the restructuring costs and activities:
Balance at Discontinued Balance at
January 31, 2002 Cash Payments Operations January 31, 2003
---------------- ------------- ---------- ----------------
Severance and Benefits ........... $ 479,000 $ 379,000 $- $ 100,000
Excess facilities including future
lease obligations and property and
equipment ........................ 1,975,000 501,000 207,000 1,267,000
Other restructuring-related
costs ............................ 10,000 9,000 -- 1,000
---------- ---------- ---------- ----------
$2,464,000 $ 889,000 $ 207,000 $1,368,000
========== ========== ========== ==========
9. LONG TERM OBLIGATIONS
January 31,
2003 2002
----------- -----------
Obligation Under Capital Lease (A) $ 1,642,000 $ 1,724,000
Deferred Gain on Sale of Building (B) 967,000 1,086,000
Other 18,000 --
----------- -----------
Total 2,627,000 2,810,000
Less: Current maturities (239,000) (202,000)
----------- -----------
Long-term maturities $ 2,388,000 $ 2,608,000
=========== ===========
(A) Obligation Under Capital Lease of the Company at January 31, 2003 matures
as follows:
Fiscal Year
Ending
January 31,
-----------
2004 $289,000
2005 297,000
2006 306,000
2007 316,000
2008 325,000
2009 and thereafter 1,065,000
---------
Total Minimum Lease Payments $ 2,598,000
Less: Amount representing interest (956,000)
---------
Present value of net minimum lease payments 1,642,000
Less current portion 101,000
-------
Long term lease obligations $1,541,000
==========
(B) On March 8, 2001, 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.
Concurrent sale and leaseback transactions are subject to specific rules
regarding the timing of the recognition of the gain. This transaction results in
a non-recurring gain of $1.2 million deferred over the life of the lease, a
period of ten years. The related lease obligation meets the rules requiring
classification as a capital lease. The operating expense is therefore reported
as interest and depreciation on a straight-line basis over the life of the
lease, with both current and long-term portions, rather than rent expense. The
capitalized lease obligation and the related asset were booked at an aggregate
value of $1.8 million, and the term of the lease is ten years. Cash proceeds of
approximately $4.0 million were provided by the sale.
10. INCOME TAXES
The provision (benefit) for income taxes is based on income (loss) before
taxes on income, minority interest in net earnings of subsidiary and
discontinued operations as follows:
Years ended
------------------------------------------------------------------
January 31, 2003 January 31, 2002 January 31, 2001
Domestic ..................... $(2,113,000) $(16,080,000) $(14,517,000)
Foreign - included in
discontinued
operations(see note 7)........ 536,000 (306,000) (1,199,000)
------- ---------- -----------
Total .................... $(1,577,000) $(16,386,000) $(15,716,000)
============ ============= =============
The income tax (benefit) provision for each of the periods presented herein is
as follows:
January 31,
2003 2002 2001
---- ---- ----
Current:
Federal $ (356,000) $(6,000,000) $ 23,000
State 55,000 119,000 9,000
----------- ----------- -----------
Total current (301,000) (5,881,000) 32,000
----------- ----------- -----------
Deferred:
Federal (100,000) -- 100,000
State and foreign (30,000) -- 30,000
----------- ----------- -----------
Total deferred: (130,000) -- 130,000
----------- ----------- -----------
Total income tax (benefit) provision $ (431,000) $(5,881,000) $ 162,000
=========== =========== ===========
Of the tax expense (benefit) above 308,000, $0 and $262,000, for the years ended
January 31, 2003, 2002 and 2001, respectively, has been reclassified to
discontinued operations.
The tax effects of temporary differences that give rise to deferred income tax
liabilities at January 31, 2002 and deferred income tax assets at January 31,
2001 are as follows:
January 31, 2003 January 31, 2002
Net Current Net Long- Net Current Long-Term
Deferred Tax Term Deferred Deferred Tax Deferred Tax
Assets Tax Assets Assets Assets
----------------- ------------------ ------------------- ----------------
Accounts receivable $579,000 $ - $1,056,000 $ -
Inventories 849,000 - 1,141,000 -
Accrued warranty costs 217,000 - 217,000 -
Other accrued expenses 578,000 - 925,000 -
Purchased technologies and goodwill - 2,559,000 1,386,000
Net operating loss - 5,545,000 - -
Reserves for discontinued operations 3,393,000 - 3,494,000 -
Gain on sale of building 386,000 - 434,000
----------- ----------- ------------ -----------
5,616,000 8,490,000 6,833,000 1,820,000
Less valuation allowance (5,616,000) (8,490,000) (6,833,000) (1,820,000)
----------- ----------- ------------ -----------
$ 0 $ 0 $ 0 $ 0
======== ======= ======== ======
A valuation allowance for such deferred tax assets has been established at
January 31, 2003 and January 31, 2002, since the Company cannot determine the
future utilization of those assets.
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,
2003 2002 2001
---- ---- ----
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 55.1 -- --
Valuation Allowance (46.5) (7.8) 30.1
---- ---- ----
Effective income tax rate (20.4)% (36.8)% (1.1)%
==== ==== ====
11. STOCKHOLDERS' EQUITY
a. Common and Preferred 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 1,984,000 shares of Common Stock may
be granted.
The 1993 Stock Option Plan (the "1993 Plan") has 1,750,000 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, 2003, 2002 and
2001 for the 1993 Plan are summarized below:
Exercise Weighted Average
Shares Price Range Exercise Price
------ ----------- --------------
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 canceled (594,000) $0.95 - $17.00 $ 12.19
Options issued 190,000 $0.95 - 1.00 $ 0.97
-------- --------------- ------
Options outstanding - January 31, 2002 278,000 $0.95 - $17.00 $ 1.71
Options canceled (98,000) $1.00 - $17.00 $ 3.99
Options issued 878,000 $0.27 - $0.52 $ 0.29
------- ------------- -----
Options outstanding - January 31, 2003 1,058,000 $0.27 - $1.00 $ 0.50
Options exerciseable at January 31, 2003 205,000 $0.52 - $5.25 $ 1.32
======= ============= ======
Options Outstanding Options Exercisable
Weighted Avg. Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life (yrs) Price Exerciseable Price
-------------- ----------- ---------- ----- ------------ -----
$0.91 - $5.25 50,000 2.0 $2.99 45,000 $3.12
$0.95 - $1.00 130,000 4.0 $0.96 110,000 $0.95
$0.27 - $.052 878,000 5.0 $0.29 50,000 $0.52
--------- -------
1,058,000 205,000
All options issued vest in three annual installments of 33-1/3 percent each on
the first, second, and third anniversary of the date of grant except for 50,000
issued in 2003 which vested immediately. 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 10,000 shares of Common Stock upon their election to the Board of
Directors; and (ii) a non-qualified option to purchase 10,000 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, 2003, 2002 and 2001
for the Directors' Plan are summarized below:
Exercise Weighted Average
Shares Price Range Exercise Price
------ ----------- --------------
Options outstanding - January 31, 2000 44,000 $2.25 - $22.00 $ 12.44
Options cancelled (12,000) $ 9.12 $9.12
--------- ------ -----
Options outstanding - January 31, 2001 32,000 $2.25 - $22.00 $ 12.16
Options cancelled (32,000) $2.25 - $22.00 $ 12.16
Options issued 20,000 $0.96 $0.96
Warrants issued 100,000 $0.50 $0.50
------- ----- -----
Options outstanding - January 31, 2002 120,000 $0.50-0.96 $0.58
Options issued 40,000 $0.27-$0.89 $0.43
------ ----------- -----
Options outstanding - January 31, 2003 160,000 $0.27 - $0.96 $0.54
------- ------------- -----
Warrants exerciseable - January 31, 2003 100,000 $0.50 $0.50
======= ===== =====
There are approximately 182,000 shares available for future grants under the
Directors' Plan.
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.
12. TREASURY STOCK
Treasury stock at January 31, 2003 and 2002 consists of 695,000 shares of Class
A common stock purchased in open market transactions for a total cost of
approximately $1,602,000 pursuant to a stock repurchase program authorized by
the Board of Directors in fiscal year 1999. As of September 2001, the Board of
Directors rescinded its stock repurchase program.
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, 2003, 2002 and
2001. The Company funds all amounts when due.
14. 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,
2004 $959,000
2005 778,000
2006 698,000
2007 667,000
2008 494,000
2009 and after 803,000
-------
$4,399,000
Rent expense was approximately $503,587, $1,215,000 and $1,191,000 for the years
ended January 31, 2003, 2002 and 2001, respectively. The decline from previous
years is the result of termination of various facility leases.
b. 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.
c. The Company had a Revolving Credit and Security Agreement (the "Agreement")
with PNC Bank which expired in September 2002. The Agreement provided for a
commitment of $20 million for Hirsch and all subsidiaries, collateralized
by assets, primarily accounts receivable and inventory. The Agreement was
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, 2002. The
Agreement was also used to support letters of credit of approximately $0.3
million as of that date. The Company was in compliance with all financial
covenants at fiscal 2002 year-end . On November 26, 2002 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
("Congress") for three years expiring on November 26, 2005. The Congress
Agreement as amended, April 28, 2003, provides for a credit facility of $12
million for Hirsch and all subsidiaries and is collateralized by eligible
accounts receivable and inventory as defined in the agreement. 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. The Company was in
compliance with all financial covenants at fiscal 2003 year-end. The
Agreement was also used to support letters of credit and bankers
acceptances of approximately $3.8 million as of that date.
d. Dependency Upon Major Supplier - During the fiscal years ended January 31,
2003, 2002, and 2001, the Company made purchases of approximately
$21,115,000, $27,789,000, and $33,383,00 respectively, from Tajima
Industries Ltd. ("Tajima"), the manufacturer of the embroidery machines the
Company sells. This amounted to approximately 74, 85, and 86 percent of the
Company's total purchases for the years ended January 31, 2003, 2002, and
2001, 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. This agreement was renewed until February 22,
2004.
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. This agreement was
renewed. 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 for the fiscal year 2003.
e. Purchase Commitments - The Company entered into a three year minimum
purchase commitment with Pulse under which the Company is obligated to
purchase $100,000 of software each month. The commitment was effective
November 1, 2002 and runs until October 31, 2005.
15. GOODWILL IMPAIRMENT
During the fourth quarter of fiscal 2002 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 the balance
of $3,477,000 of Goodwill as an impairment charge to operations.