UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2003
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ________________.
Commission File No.: 0-23434
HIRSCH INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2230715
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Wireless Boulevard, Hauppauge, New York 11788
(Address of principal executive offices)
Registrant's telephone number, including area code: (631) 436-7100
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the ExchangeAct). Yes [ ] No [X].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 07, 2003.
Class of Number of
Common Equity Shares
Class A Common Stock, 5,661,178
par value $.01
Class B Common Stock, 2,668,139
par value $.01
HIRSCH INTERNATIONAL CORP. and SUBSIDIARIES
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - October 31, 2003 and January 31, 2003
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended October 31,
2003 and 2002
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2003 and 2002
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, January 31,
2003 2003
---------- ----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,668,000 $ 7,707,000
Restricted cash 3,988,000 900,000
Short term note receivable (Note 6) - 500,000
Accounts receivable, net 6,743,000 4,354,000
Inventories, net (Note 3) 7,310,000 9,498,000
Prepaid and refundable income taxes 3,139,000 3,319,000
Other current assets 692,000 686,000
Assets of discontinued operations (Note 6) 1,133,000 4,914,000
---------- ----------
Total current assets 26,673,000 31,878,000
----------- ----------
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation and amortization 2,566,000 2,868,000
OTHER ASSETS 1,076,000 1,256,000
---------- ----------
TOTAL ASSETS $30,318,000 $36,002,000
========== ==========
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, January 31,
2003 2003
---------- ----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade acceptances payable $ 2,334,000 $ 969,000
Accounts payable and accrued expenses (Notes 4 and 5) 4,565,000 6,924,000
Customers deposits and other 703,000 865,000
Liabilities of discontinued operations
(Note 6) 1,699,000 6,859,000
---------- ----------
Total current liabilities 9,301,000 15,617,000
Capitalized lease obligations, less
current portion 1,450,000 1,541,000
Deferred gain on sale of building 758,000 847,000
---------- ----------
Total liabilities 11,509,000 18,005,000
---------- ----------
MINORITY INTEREST 2,144,000 1,932,000
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized:
1,000,000 shares; issued: none -- --
Class A common stock, $.01 par value; authorized:
20,000,000 shares, issued : 6,826,000
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 41,407,000 41,397,000
Retained earnings (deficit) (22,821,000) (23,825,000)
---------- ----------
18,681,000 17,667,000
Less: Treasury Class A Common stock
at cost, 1,165,000 shares 2,016,000 1,602,000
---------- ----------
Total stockholders' equity 16,665,000 16,065,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $30,318,000 $36,002,000
========== ==========
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
October 31, October 31,
----------------------------- ----------------------------
2003 2002 2003 2002
------------- ------------- ------------ ------------
NET SALES $ 13,021,000 $ 11,430,000 $ 37,561,000 $ 36,569,000
COST OF SALES 8,342,000 7,697,000 23,977,000 23,859,000
------------ ------------ ------------ ------------
GROSS PROFIT 4,679,000 3,733,000 13,584,000 12,710,000
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 4,791,000 4,322,000 14,623,000 13,863,000
RESTRUCTURING COSTS (Note 5) 0 0 (697,000) 0
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 4,791,000 4,322,000 13,926,000 13,863,000
------------ ------------ ------------ ------------
OPERATING LOSS (112,000) (589,000) (342,000) (1,153,000)
OTHER EXPENSE (INCOME)
INTEREST EXPENSE (INCOME) 52,000 71,000 (70,000) 200,000
OTHER EXPENSE (INCOME) 170,000 (464,000) 1,000 (400,000)
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSE (INCOME) 222,000 (393,000) (69,000) (200,000)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAX PROVISION,
MINORITY INTEREST IN NET EARNINGS
OF CONSOLIDATED SUBSIDIARY
AND DISCONTINUED OPERATIONS (334,000) (196,000) (273,000) (953,000)
INCOME TAX PROVISION 146,000 166,000 338,000 411,000
MINORITY INTEREST IN NET EARNINGS
OF CONSOLIDATED SUBSIDIARY (Note 1) 98,000 108,000 211,000 273,000
------------ ------------ ------------ ------------
LOSS BEFORE DISCONTINUED OPERATIONS (578,000) (470,000) (822,000) (1,637,000)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (NOTE 6) 500,000 (31,000) 2,000,000 (3,816,000)
------------ ------------ ------------ ------------
NET INCOME(LOSS) ($ 78,000) ($ 501,000) $ 1,178,000 ($ 5,453,000)
============ ============ ============ ============
INCOME (LOSS) PER SHARE BASIC AND DILUTED:
LOSS BEFORE DISCONTINUED OPERATIONS ($ 0.07) ($ 0.05) ($ 0.09) ($ 0.19)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 0.06 (0.01) 0.23 (0.43)
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER SHARE $ (0.01) ($ 0.06) $ 0.14 ($ 0.62)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
IN THE CALCULATION OF LOSS PER SHARE
BASIC AND DILUTED 8,480,852 8,788,750 8,654,359 8,788,750
============ ============ ============ ============
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
October 31,
----------------------------------------------
2003 2002
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,178,000 ($ 5,453,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in)operating activities:
Gain on sale of fixed assets (50,000) (38,000)
Depreciation and amortization 672,000 652,000
Recognized Gain on Sale of Building (89,000) (89,000)
Provision for reserves 155,000 (153,000)
Reversal of Restructuring Accrual (697,000) 0
Reversal of Reserve on Discontinued Operations (2,000,000) 0
Minority interest 212,000 273,000
Changes in assets and liabilities:
Accounts receivable (2,103,000) 2,280,000
Net investment in sales-type leases 621,000 433,000
Inventories 2,356,000 5,406,000
Prepaid taxes 114,000 4,369,000
Other assets 577,000 (2,844,000)
Trade acceptances payable 1,365,000 (678,000)
Accounts payable and accrued expenses (2,804,000) 1,205,000
---------------- ----------------
Net cash (used in) provided by
operating activities (493,000) 5,363,000
---------------- ----------------
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
October 31,
----------------------------------------------
2003 2002
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (457,000) ($ 140,000)
Site Development Costs for Hometown Threads (21,000) 0
Proceeds from sale of fixed assets 100,000 0
Proceeds from sale of subsidiary 500,000 0
---------------- ----------------
Net cash provided by (used in)
investing activities 122,000 (140,000)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long term debt (91,000) (92,000)
Exercise of Stock Options 10,000 0
Restricted Cash (3,088,000) (1,983,000)
Purchase of treasury shares (414,000) 0
Payment of Dividends (85,000) 0
---------------- ----------------
Net cash used in financing activities (3,668,000) (2,075,000)
---------------- ----------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 0 92,000
---------------- ----------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (4,039,000) 3,240,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,707,000 3,121,000
---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $3,668,000 $ 6,361,000
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $161,000 $ 200,000
================ ================
Income taxes paid $353,000 $ 9,000
================ ================
See notes to condensed consolidated financial statements. .
Hirsch International Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three and Nine Months Ended October 31, 2003 and 2002
1. Organization and Basis of Presentation
The accompanying Condensed Consolidated financial statements as of and for the
three and nine month periods ended October 31, 2003 and 2002 include the
accounts of Hirsch International Corp.("Hirsch"), HAPL Leasing Co., Inc.
("HAPL"), Pulse Microsystems Ltd. through October 31, 2002 ("Pulse"), Tajima
USA, Inc. ("TUI"), Hometown Threads, LLC ("Hometown"), and Hirsch Business
Concepts, LLC ("HBC") (collectively, the "Company").
In the opinion of management, the accompanying unaudited Condensed Consolidated
financial statements contain all the adjustments, consisting of normal accruals,
necessary to present fairly the results of operations for each of the three and
nine month periods ended October 31, 2003 and 2002, the financial position at
October 31, 2003 and cash flows for the nine month periods ended October 31,
2003 and 2002, respectively. Such adjustments consisted only of normal recurring
items. The Condensed Consolidated financial statements and notes thereto should
be read in conjunction with the Company's Annual Report on Form 10-K for the
fiscal year ended January 31, 2003 as filed with the Securities and Exchange
Commission.
The interim financial results are not necessarily indicative of the results to
be expected for the full year. Certain amounts from prior periods have been
reclassified to conform to the current period's presentation.
2. Stock Based Compensation
The Company accounts for its stock-based employee compensation plans under the
recognition and measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the Common Stock on the date of grant. The following table
details the effect on net income (loss) and earnings per share if the Company
had applied the fair value recognition provisions of Statement of Financial
Accounting Statement ("SFAS") No. 123, Accounting for Stock-Based Compensation,
as amended by SFAS No. 148, to stock-based employee compensation.
For the three months For the nine months
ended October 31, ended October 31,
2003 2002 2003 2002
---- ---- ---- ----
(in thousands, except for per share amounts)
Net Income (Loss), as reported ($78) ($501) 1,178 ($5,453)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method 17 21 52 62
Pro-forma net income (loss) ($95) ($522) $1,126 ($5,515)
Earnings (loss) per share:
Basic and diluted - as reported ($.01) ($.05) ($.14) ($.56)
Basic and diluted - pro-forma ($.01) ($.06) ($.13) ($.57)
The following weighted average assumptions were used in the Black-Scholes
option-pricing model for grants in Fiscal 2004: dividend yield of 4.00%,
volatility of 72%, risk-free interest rate of 2.37% for grants on
06/02/2003,2.14% for grants on 06/16/2003 and 2.63% for grants on 07/09/2003;
and an expected life of 5 years and for Fiscal 2003: dividend yield of 0%,
volatility of 79%, risk-free interest rate of 4.48% for employees and 4.07% for
non-employees; and an expected life of 5 years.
3. Inventories
October 31, 2003 January 31, 2003
-------------- ----------------
New Machines $5,761,000 $8,061,000
Used Machines 516,000 796,000
Parts 2,988,000 2,587,000
---------- ----------
9,265,000 11,444,000
Less: Reserve for slow moving inventory 1,955,000 1,946,000
---------- ----------
Inventories, net $ 7,310,000 $9,498,000
========== ==========
4. Warranty Reserve
The warranty reserve included in Accounts Payable and Accrued Expenses was
$543,000 at year end. There has been no change in the warranty reserve during
the nine months ended October 31, 2003.
5. Plan of Restructuring
In the fourth quarter of the year ended January 31, 2002, the Company
initiated a restructuring plan in connection with its continuing operations. The
plan was designed to meet the changing needs of the Company's customers, 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 workforce and 56 people. In May
2003, the Company was able to buyout its lease obligations for $545,000 for the
Solon, OH facility that had previously been provided for in its restructuring
accrual. The Company reversed, as a reduction of operating expenses, $497,000 of
restructuring costs during the three months ended April 30, 2003. During the
second quarter of Fiscal 2004, the Company completed its plan of restructuring
and reversed, as a reduction of operating expenses, $200,000 of restructuring
costs that had been created for facilities and severance costs, leaving $19,000
remaining in facilities costs.
The following table shows amounts paid against the restructuring accrual
included in accounts payable and accrued expenses during the nine months ended
October 31, 2003. (in thousands)
Balance at Balance at
January Reversal of October 31,
31,2003 Payments Prior Accruals 2003
--------------- ------------- --------------- ----------------
Severance costs $100 $(21) $(79) $0
Facility closing costs 1,267 (631) (617) 19
Other professional and
consulting costs 1 (1)
--------------- ------------- --------------- ----------------
$1,368 $ (652) $ (697) $ 19
=============== ============= =============== ================
6. 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.
Summary operating results of the discontinued operations of HAPL Leasing (in
thousands) are as follows:
For the three months For the nine months
ended October 31, ended October 31
2003 2002 2003 2002
---- ---- ---- ----
Revenue 87 $384 588 $1,285
Gross profit 32 63 247 316
Income(Loss) from discontinued Operations 500 $0 2,000 ($4,000)
The operating loss during the nine months ended October 31, 2002 includes a
reserve of $4 million as an additional provision for the liquidation of the
lease portfolio. The increase in the MLPR (Minimum Lease Payments Receivable)
provision was to reserve against a probable loss on the sale of the remaining
portfolio. In July 2003, the Company entered into a transaction whereby the
Company assigned its interest in the remaining UNL (Ultimate Net Loss) lease
portfolio from CIT Group/Equipment Financing, Inc. ("CIT") to Beacon Funding
Corporation. As part of this transaction, the Company sold to Beacon Funding
Corporation the residual receivables associated with the lease portfolio for
approximately $375,000. The Company had reversed, as part of discontinued
operations, $1.5 million of reserves associated with the UNL lease portfolio.
The transaction closed in September 2003. During the three months ended October
31, 2003, the Company reversed the remaining $0.5 million of reserves associated
with the UNL lease portfolio. The Company plans to sell or liquidate the
remaining assets by January 2004.
Assets and Liabilities of discontinued operations (in thousands) are as
follows:
October 31 January 31
---------- ----------
2003 2003
---- ----
Assets:
Accounts Receivable $(40) $16
MLPR and residuals 1,163 4,673
Property, Plant & Equipment 0 33
Inventory 0 113
Prepaid Taxes 10 79
-- --
Total Assets $1,133 $4,914
====== ======
Liabilities:
Accounts Payable & Accruals 1,612 $6,758
Long Term Debt 0 14
Income Taxes Payable 87 87
-- --
Total Liabilities $1,699 $6,859
====== ======
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 including interest accruing on the
principal balance at the rate of US Prime +1% per annum, which was paid in full
in March 2003, 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 three months For the nine months
ended October 31, ended October 31,
2003 2002 2003 2002
---- ---- ---- ----
Revenue - $1,338 - $3,731
Gross profit - 866 - 2,510
(Loss)Income from discontinued Operations - ($31) - $184
7. Contingencies
As of October 31, 2003, the Company had $4.0 million in restricted cash
which is used to collateralize letters of credit in the amount of $2.9 million
opened against the credit line at Congress Financial.
8. Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 149 is effective for contracts
entered into or modified after June 30, 2003. The adoption of SFAS No. 149 will
not have a material impact on the consolidated financial statements of the
Company.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity, ("FAS 150"). This statement establishes standards
for how an issuer classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and
equity. In accordance with the standard, financial instruments that embody
obligations for the issuer are required to be classified as liabilities. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003 except for mandatorily redeemable financial
instruments which are subject to the provisions of this statement beginning on
January 1, 2004. The Company does not expect the provisions of this statement to
have a significant impact on the financial statements and disclosures.
9. Dividends
On October 23, 2003, the Board of Directors declared a quarterly cash
dividend on its common stock of $.01 per share. The record date for the holders
of common stock entitled to receive payment of such dividend was October 31,
2003. The payment date was November 14, 2003.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. When used herein, the words "anticipate",
"believe", "estimate" and "expect" and similar expressions as they relate to the
Company or its management are intended to identify such forward-looking
statements. The Company's actual results, performance or achievements could
differ materially from the results expressed in or implied by these
forward-looking statements. Factors that could cause or contribute to such
differences should be read in conjunction with, and is qualified in its entirety
by, the Company's Condensed Consolidated Financial Statements, including the
Notes thereto. Historical results are not necessarily indicative of trends in
operating results for any future period. As used herein, "fiscal year" and
"fiscal" refers to the applicable fiscal year ending January 31 of the
applicable calendar year.
Results of Operations for the three and nine months ended October 31, 2003
as compared to the three and nine months ended October 31, 2002.
Net sales. Net sales for the three months ended October 31, 2003 were $13.0
million, an increase of $1.6 million, or 14.0%, compared to $11.4 million for
the three months ended October 31, 2002, and $37.6 million for the nine months
ended October 31, 2003, an increase of $1.0 million or 2.7%, compared to $36.6
million for the nine months ended October 31, 2002. The Company believes that
the sales level increase for the nine months and three months ended October 31,
2003 is attributable to an aggressive marketing campaign targeting new and
existing customers with new value-added packages and renewed focus on growing
parts and supply sales.
Cost of sales. For the three months ended October 31, 2003, cost of sales
increased $0.6 million, or 7.8%, to $8.3 million from $7.7 million for the three
months ended October 31, 2002, and for the nine months ended October 31, 2003
increased $0.1 million, or 0.5%, to $24.0 million from $23.9 million for the
nine months ended October 31, 2002. The fluctuation of the dollar against the
yen has historically had a minimal effect on Tajima equipment gross margins
since currency fluctuations are generally reflected in pricing adjustments in
order to maintain consistent gross margins on machine revenues. The Company's
gross margin improved to 36.2% for the nine months ended October 31, 2003 as
compared to 34.8% the nine months ended October 31, 2002 and from 32.7% for the
three months ended October 31, 2002 to 36.0% for the three months ended October
31, 2003. The improvement in gross margin is mainly attributable to increased
margins on software sales pursuant to the terms of the purchase agreement with
Pulse, in addition to a reduction in sales of older inventory carried at higher
costs.
Operating Expenses. For the three months ended October 31, 2003, operating
expenses increased by $0.5 million to $4.8 million from $4.3 million for the
three months ended October 31, 2002 and for the nine months ended October 31,
2003 and 2002, remained constant at $13.9 million. For the nine and three months
ended October 31, 2003, operating expenses increased primarily due to costs the
Company incurred associated with the hiring of several new key employees,
increased professional fees associated with the maintenance of the Nasdaq
SmallCap listing and the increased costs associated with an aggressive marketing
campaign launched during the quarter. The nine month expense increase is offset
by the reversal of $.7 million of restructuring charges during the first and
second quarters.
Interest Expense (Income). For the three months ended October 31, 2003, interest
expense was $52,000 as compared to interest expense of $71,000 for the three
months ended October 31, 2002. For the nine months ended October 31, 2003
interest income was $70,000 as compared to interest expense of $200,000 for the
nine months ended October 31, 2002. Interest expense is primarily associated
with the sale/leaseback transaction of the Corporate headquarters. Interest
income of $225,000 is associated with the income tax refund that was recognized
during the nine months ended October 31, 2003.
Other (Income) Expense. For the three months ended October 31, 2003, Other
Expense increased $634,000, to $170,000 from ($464,000) in Other Expense for the
three months ended October 31, 2002. For the nine months ended October 31, 2003
Other Expense was $1,000 as compared to Other Expense of $(400,000) for the nine
months ended October 31, 2002. The change in Other Expense is due to the
unfavorable currency translations for yen payments, and a reduction of sales of
rental machinery and the related gains that would be included in Other Income.
The majority of the Other Income from Fiscal 2003 was the sale of the Hometown
Threads Company-owned stores.
Income tax provision The income tax provision represents taxes due on income
earned by the TUI subsidiary.
Loss before Discontinued Operations. The loss before Discontinued Operations for
the three months ended October 31, 2003 was $0.6 million an increase of $0.1
million, or 20% from $0.5 million for the three months ended October 31,
2003.The loss for the nine months ended October 31, 2003 was $0.7 million, an
improvement of $0.9 million, or 56.3%, from $1.6 million for the nine months
ended October 31, 2002.
Income(Loss) from Discontinued Operations. During the second quarter of Fiscal
2004, the Company entered into a transaction whereby it assigned its interest in
the UNL lease portfolio from CIT to Beacon Funding Corporation. In connection
with this transaction, the Company reversed $1.5 million in discontinued
operating reserves that were associated with the UNL lease portfolio. In the
third quarter the Company reversed the remaining $0.5 million of the UNL
reserve. In the quarter ended April 30, 2002 management estimated that there
would be additional losses of approximately $4 million in repurchasing and
disposing of the remaining UNL lease portfolio as well as its existing lease
portfolio. Accordingly, during the three months ended April 30, 2002 the
provision for possible losses was increased by $4 million.
Net Income(Loss). The net loss for the three months ended October 31, 2003 was
($78,000), an decrease of $423,000, from a net loss of ($501,000) for the three
months ended October 31, 2002. Net income for the nine months ended October 31,
2003 was $1.2 million, an increase of $6.7 million, from the net loss of ($5.5)
million for the nine months ended October 31, 2002. The increase in income from
discontinued operations was attributable to the $2.0 million reversal of the
discontinued operating reserves associated with assignment of the CIT UNL lease
portfolio.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $17.4 million at October 31, 2003, increasing
$1.1 million, or 6.7%, from $16.3 million at January 31, 2003.
During the nine months ended October 31, 2003, the Company's cash and cash
equivalents decreased by $4.0 million to $3.7 million. Net cash of $.5 million
was used by the Company's operating activities and $3.7 million was used in
financing activities as additional collateral for the Company's credit line,
offset by $0.5 million received as part of the Pulse Microsystems sale less
capital expenditures of $0.3 million.
The Company's strategy is to mitigate its exposure to foreign currency
fluctuations by utilizing purchases of foreign currency on the current market as
well as forward contracts to satisfy specific purchase commitments. Inventory
purchase commitments may be matched with specific foreign currency futures
contracts or covered by current purchases of foreign currency. Consequently, the
Company believes that no material foreign currency exchange risk exists relating
to outstanding trade acceptances payable. The cost of such contracts is included
in the cost of inventory. As of October 31, 2003 the Company did not own any
foreign currency futures contracts.
On December 8, 2003 the Company received the $3.4 million dollar carryback claim
refund due from the IRS along with applicable interest through the refund date.
Future Commitments
The following table shows the Company's contractual obligations related to
long-term obligations.
Payments due by period (in thousands)
Contractual Obligations Total Less than 1 - 3 4-5 More than
1 year years years 5 years
------------------------------- ----------- ----------- ---------- --------- -----------
Capital lease obligations $ 1,576 $ 115 $ 501 $ 501 $ 459
Operating Lease obligations 2,881 752 1,403 433 293
Purchase Commitments 2,400 1,200 1,200 0 0
Employment Agreements 618 618 0 0 0
----------- ----------- ---------- --------- -----------
Total $ 7,475 $ 2,685 $ 3,104 $ 934 $ 752
=========== =========== ========== ========= ===========
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.
Outstanding letters of credit at October 31, 2003 were $2.9 million. The Company
was in compliance with its covenants at October 31, 2003.
Future Capital Requirements
The Company believes that its existing cash and funds generated from
operations, together with its revolving credit facility, will be sufficient to
meet its working capital and capital expenditure requirements.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to various market risks, including changes in
foreign currency exchange rates and interest rates. Market risk is the potential
loss arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The Company has a formal policy that
prohibits the use of currency derivatives or other financial instruments for
trading or speculative purposes. The policy permits the use of financial
instruments to manage and reduce the impact of changes in foreign currency
exchange rates that may arise in the normal course of the Company's business.
Currently, the Company does not use interest rate derivatives.
The Company may enter into forward foreign exchange contracts principally
to hedge the currency fluctuations in transactions denominated in foreign
currencies, thereby limiting the Company's risk that would otherwise result from
changes in exchange rates.
Any Company debt, if utilized, is U.S. dollar denominated and floating
rate-based. At October 31, 2003, 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 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and its Chief Financial Officer, after
evaluating the effectiveness of the Company's disclosure controls and procedures
(as defined in the Securities Exchange Act of 1934 Rules 13a-14 (c) and 15d-14
(c) as of a date within 90 days of the filing date of this quarterly report on
Form 10-Q (the "Evaluation Date")), have concluded that, as of the Evaluation
Date, the Company's disclosure controls and procedures were adequate and
effective to ensure that material information relating to the Company and its
consolidated subsidiaries is recorded, processed, summarized and reported by
management of the Company on a timely basis in order to comply with the
Company's disclosure obligations under the Securities Exchange Act of 1934 and
the SEC rules thereunder.
Changes in Internal Controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the Company's disclosure control and
procedures subsequent to the Evaluation Date, nor any significant deficiencies
or material weaknesses in such disclosure controls and procedures requiring
corrective actions.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
The Company is, from time to time, involved in litigation, either asserted
or unasserted, which is incidental to the conduct of its business. While the
outcome of these matters cannot be predicted with certainty, management does not
believe that the outcome of these matters will have a material adverse effect on
its results of operations or cash flow.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*3.1 Restated Certificate of Incorporation of the Registrant
**3.2 Amended and Restated By-laws of the Registrant
***4.1 Specimen of Class A Common Stock Certificate
***4.2 Specimen of Class B Common Stock Certificate
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of Sarbanes-Oxley Act of 2002
(b) Reports on Form 8K
- --------------------------------------------------------------------------------
The Registrant filed a Form 8K with the Commission on May 9, 2003 regarding the
establishment of a stock repurchase program.
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HIRSCH INTERNATIONAL CORP.
Registrant
By: /s/Henry Arnberg
--------------------------
Henry Arnberg, Chairman and
Chief Executive Officer
By: /s/Beverly Eichel
--------------------------
Beverly Eichel,
Chief Financial Officer
Dated: December 15, 2003