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 April 30, 2004
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 Exchange Act). Yes [] No [x]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of June 02, 2004.
Class of Number of
Common Equit Shares
Class A Common Stock, 5,667,081
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 Page
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - April 30, 2004
and January 31, 2004 3-4
Condensed Consolidated Statements of Operations for
the Three Months Ended April 30, 2004 and 2003 5
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended April 30, 2004 and 2003 6-7
Notes to Condensed Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 14
Part II. Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Certifications 17-20
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, 2004 January 31, 2004
----------------------------- ------------------------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,438,000 $ 8,963,000
Restricted cash 5,650,000 3,000,000
Accounts receivable, net of an allowance for possible
losses of $665,000 and $680,000,
respectively 4,665,000 6,562,000
Inventories, net (Note 3) 7,297,000 6,923,000
Other current assets 211,000 264,000
Assets of discontinued operations (Note 5) 1,253,000 1,361,000
----------------------------- ------------------------------
Total current assets 24,514,000 27,073,000
----------------------------- ------------------------------
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation
and amortization of $8,156,000 and $8,009,000,
respectively 2,291,000 2,397,000
Other Assets 824,000 877,000
----------------------------- ------------------------------
Total Assets $27,629,000 $30,347,000
============================= ==============================
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, 2004 January 31, 2004
----------------------------- ------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
CURRENT LIABILITIES:
Trade acceptances payable $ 573,000 $ 1,324,000
Accounts payable and accrued expenses
(Note 4) 7,539,000 8,150,000
Customers deposits and other 701,000 625,000
Liabilities of discontinued operations (Note 5) 1,988,000 2,254,000
----------------------------- ------------------------------
Total current liabilities 10,801,000 12,353,000
----------------------------- ------------------------------
Capitalized lease obligations-Less current
maturities 1,384,000 1,418,000
Deferred gain on sale of building 698,000 728,000
----------------------------- ------------------------------
Total liabilities 12,883,000 14,499,000
----------------------------- ------------------------------
COMMITMENTS AND CONTINGENCIES (Note 6)
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 : 6,830,000 and
6,827,000 shares, respectively 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 41,409,000 41,408,000
Accumulated deficit (24,741,000) (23,638,000)
----------------------------- ------------------------------
16,763,000 17,865,000
Less: Treasury stock, at cost 1,164,000 shares 2,017,000 2,017,000
----------------------------- ------------------------------
Total stockholders' equity 14,746,000 15,848,000
----------------------------- ------------------------------
Total Liabilities and Stockholders' Equity $ 27,629,000 $ 30,347,000
============================= ==============================
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
April 30, 2004 April 30, 2003
------------------------ ------------------------
NET SALES $ 9,387,000 $ 11,951,000
COST OF SALES 6,305,000 7,814,000
------------------------ ------------------------
GROSS PROFIT 3,082,000 4,137,000
------------------------ ------------------------
OPERATING EXPENSES
Selling, General & Administrative Expenses 4,075,000 4,435,000
Restructuring costs - (497,000)
------------------------ ------------------------
Total operating expenses 4,075,000 3,938,000
------------------------ ------------------------
OPERATING INCOME (LOSS) (993,000) 199,000
------------------------ ------------------------
OTHER EXPENSE (INCOME)
Interest expense 49,000 54,000
Other income (32,000) (54,000)
------------------------ ------------------------
Total other expense 17,000 -
------------------------ ------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX PROVISION AND DISCONTINUED
OPERATIONS (1,010,000) 199,000
INCOME TAX PROVISION 14,000 25,000
------------------------ ------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (1,024,000) 174,000
LOSS FROM DISCONTINUED OPERATIONS,
NET ( NOTE 5) (83,000) (69,000)
------------------------ ------------------------
NET INCOME (LOSS) ($ 1,107,000) $ 105,000
======================== ========================
EARNINGS (LOSS) PER SHARE
Basic and Diluted
Earnings (loss) from continuing operations ($0.12) $0.02
Loss from discontinued operations (0.01) ($0.01)
------------------------ ------------------------
NET (LOSS) INCOME PER SHARE ($0.13) $0.01
======================== ========================
WEIGHTED AVERAGE NUMBER OF SHARES IN THE CALCULATION OF
EARNINGS (LOSS) PER SHARE
Basic 8,334,111 8,788,750
Diluted 8,334,111 9,796,750
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
April 30, 2004 April 30, 2003
--------------------------- ---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($ 1,107,000) $ 105,000
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Gain on sale of fixed assets - (94,000)
Depreciation and amortization 192,000 219,000
Recognized Gain on Sale of Building (30,000) (30,000)
Provision for reserves - 230,000
Reversal of restructuring accrual
reserves - (497,000)
Minority interest - 40,000
Changes in assets and liabilities:
Accounts receivable 1,895,000 (3,483,000)
Net investment in sales-type leases (7,000) (125,000)
Inventories (374,000) -
Prepaid taxes (8,000) (29,000)
Other assets 42,000 (151,000)
Trade acceptances payable (751,000) 1,521,000
Accounts payable and accrued expenses (653,000) 117,000
--------------------------- ----------------------------
Net cash used in operating
activities (801,000) (2,177,000)
--------------------------- ----------------------------
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
April 30, 2004 April 30, 2003
----------------------------- ----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (40,000) (188,000)
Proceeds from sale of fixed assets - 240,000
Proceeds from sale of subsidiary - 500,000
---------------------------- -----------------------------
Net cash provided by (used in) investing (40,000) 552,000
activities
---------------------------- -----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (35,000) (11,000)
Restricted Cash (2,650,000) (2,300,000)
Exercise of stock options 1,000
---------------------------- -----------------------------
Net cash used in financing activities (2,684,000) (2,311,000)
---------------------------- -----------------------------
Decrease in cash and cash (3,525,000) (3,936,000)
equivalents
Cash and cash equivalents, beginning of period 8,963,000 7,707,000
---------------------------- -----------------------------
Cash and cash equivalents, end of period $ 5,438,000 $ 3,771,000
============================ =============================
Supplemental disclosure of cash flow information:
Interest paid $ 49,000 $ 54,000
Income taxes paid $ 21,000 $ 0
============================ =============================
See notes to condensed consolidated financial statements.
Hirsch International Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three Months Ended April 30, 2004 and April 30, 2003
1. Organization and Basis of Presentation
The accompanying condensed consolidated financial statements as of and for
the three month periods ended April 30, 2004 and 2003 include the accounts of
Hirsch International Corp.("Hirsch"), HAPL Leasing Co., Inc. ("HAPL"), Tajima
USA, Inc. ("TUI") through January 31, 2004, 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 month periods ended April 30, 2004 and April 30, 2003, the
financial position at April 30, 2004 and cash flows for the three month periods
ended April 30, 2004 and April 30, 2003, 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, 2004 as filed
with the Securities and Exchange Commission.
Our accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnote disclosures required by accounting principles
generally accepted in the United States for complete financial statements.
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires us 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.
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.
Three Months Ended
April 30, 2004 April 30, 2003
-------------------- -------------------
(in thousands)
Net income (loss), as reported ($1,107) $ 105
Deduct: Total stock-based employee compensation expense
determined under fair value based method 9 15
-------------------- -------------------
Pro-forma net income (loss) ($1,116) $ 90
==================== ===================
Earnings (loss) per share:
Basic - as reported ($0.13) $ 0.01
Basic - pro forma ($0.13) $ 0.01
Diluted - as reported ($0.13) $ 0.01
Diluted - pro forma ($0.13) $ 0.01
There were no options granted during the first quarter ended April 30, 2004.
The following weighted average assumptions were used in the Black-Scholes
option-pricing model for grants in Fiscal 2004: dividend yield of 4.0%,
volatility of 72%, risk-free interest rate of 2.37% for grants on 6/2/2003,
2.14% for grants on 6/16/2003 and 2.63% for grants on 7/9/2003; and an expected
life of 5 years.
3. Inventories
April 30, 2004 January 31, 2004
----------------------- -----------------------
New Machines $ 5,131,000 $ 5,194,000
Used Machines 284,000 344,000
Parts 3,464,000 2,967,000
----------------------- -----------------------
8,879,000 8,505,000
Less: Reserve for slow moving
inventory (1,582,000) (1,582,000)
----------------------- -----------------------
Inventories, net $ 7,297,000 $ 6,923,000
======================= =======================
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 three months ended April 30, 2004.
5. 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
wind down or sell the assets by January 2005.
Assets and liabilities of discontinued operations of HAPL Leasing are as follows
(in thousands):
April 30, January 31,
2004 2004
------------------ --------------
Assets:
Accounts receivable................. $ 15 $ 0
MLPR and residuals (Note 5)......... 978 1,103
Property, plant and equipment, net.. 0 0
Inventory........................... 0 23
Prepaid taxes and other assets...... 11 11
------------------ --------------
Total Assets........................... $1,004 $1,137
================== ==============
Liabilities:
Accounts payable and accrued expenses $1,408 $1,548
Income taxes payable................ 87 87
Long term debt...................... 0 0
------------------ --------------
Total Liabilities...................... $1,495 $1,635
================== ==============
Summary operating results of the discontinued operations of HAPL Leasing (in
thousands) are as follows:
For the three months ended
April 30, 2004 April 30, 2003
------------------- --------------------
Revenue.......................................... $67 $295
Gross profit..................................... 45 186
(Loss) from discontinued operations.............. - -
During the quarter ended April 30, 2004, the Company determined that its
Hometown Threads, LLC subsidiary was not strategic to the Company's long-term
objectives. In May 2004, the Company entered into a non-binding Letter of Intent
with a company that has expressed an interest in acquiring Hometown Threads,
LLC. As of the date of this filing, the parties are in the process of conducting
due diligence and negotiating the terms of a potential transaction. As a result,
Hometown Threads, LLC was accounted for as discontinued operations in the
consolidated financial statements for all periods presented.
Assets and liabilities of the discontinued operations of Hometown Threads, LLC
are as follows (in thousands):
April 30, January 31,
2004 2004
------------------ --------------
Assets:
Accounts receivable.................. 28 26
Property, plant and equipment, net... 19 22
Prepaid taxes and other assets....... 202 176
------------------ --------------
Total Assets............................ $249 $224
================== ==============
Liabilities:
Accounts payable and accrued expenses $ 493 $619
------------------ --------------
Total Liabilities....................... $ 493 $ 619
================== ==============
Summary operating results of the discontinued operations of Hometown Threads,
LLC (in thousands) are as follows:
For the three months ended
April 30, 2004 April 30, 2003
------------------- --------------------
Revenue................................................. $ 523 $363
Gross profit............................................ 265 294
Loss from discontinued operations....................... ($ 83) ($ 212)
Effective January 31, 2004, the Company executed an agreement with Tajima
Industries, Ltd. ("Tajima") pursuant to which the Company sold all of the common
stock (the "Shares") constituting a 55% equity interest of its TUI subsidiary
owned by it to Tajima, upon the terms and conditions set forth in a certain
Purchase and Sale Agreement by and among the Company, Tajima and TUI (the
"Agreement"). Upon the consummation of the sale, Tajima owned 100% of TUI and
the Company no longer had an influence over the operations of TUI. TUI is
reflected as discontinued operations in the financial statements as of April 30,
2003.
The Consolidated Financial Statements for all periods presented reflect the
discontinued operations of TUI through January 31, 2004.
Summary operating results of the discontinued operations of TUI (in
thousands)are as follows:
For the three
months ended
April 30, 2003
-------------------
Revenue................................................. $ 2,452
Gross profit............................................. 269
Income from discontinued operations............... $ 143
6. Contingencies
As of April 30, 2004, the Company had $5.6 million in restricted cash
which is used to collateralize letters of credit opened against the credit line
at Congress Financial
7. Earnings per Share
The effect of assumed conversion of employee stock options for the three months
ended April 30, 2004 is anti-dilutive and has not been presented.
A reconciliation of shares used in calculating basic and diluted earnings per
common share for the three months ended April 30, 2003 follows:
Basic......................................... 8,788,750
Effect of assumed conversion
of employee stock options................ 1,008,000
---------
Diluted....................................... 9,796,750
=========
Options to purchase approximately 208,000 shares of common stock at prices
ranging from $0.89 to $3.50 that were outstanding during the three months ended
April 30, 2003 were excluded from the computation of diluted earnings per share
because the options' exercise prices exceeded the fair market value of the
Company's common stock.
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.
Three months ended April 30, 2004 as compared to the three months ended April
30, 2003.
Net sales. Net sales for the three months ended April 30, 2004 were $9.4
million, a decrease of $2.6 million, or 21.7%, compared to $12.0 million for the
three months ended April 30, 2003. The decrease is mainly attributable to a
decrease in the demand for embroidery machines and greater competition in the
embroidery marketplace which has resulted in lower prices for embroidery
machines.
Cost of sales. For the three months ended April 30, 2004, cost of sales
decreased $1.5 million, or 19.2%, to $6.3 million from $7.8 million for the
three months ended April 30, 2003. The decrease is directly related to the
decrease in sales volume over the same period. The Company's gross margin
decreased to 32.8% for the three months ended April 30, 2004 as compared to
34.6% for the three months ended April 30, 2003. Gross margin decreased during
the three months ended April 30, 2004 as a result of pricing pressure in the
marketplace. The recent adverse fluctuations in the yen, which is the currency
the Company's embroidery machines are priced in, has affected and is likely to
continue to affect the Company's machine sales pricing competitiveness.
Embroidery machinery prices have either been maintained or risen in US dollars
due to these adverse exchange rate fluctuations. As a result, in order for the
Company to maintain various product margins for its imported embroidery
machines, its competitiveness has been adversely affected. Some but not all of
the Company's competitors face similar circumstances.
Operating Expenses. For the three months ended April 30, 2004, S G & A
expenses were $4.1 million as compared to $4.4 million for the three months
ended April 30, 2003. This represents a decrease of $0.3 million, or 6.8%. The
decrease in S G & A expenses for the three months ended April 30, 2004 is
directly related to the Company's continuing efforts to control operating costs.
Operating expenses for the quarter ended April 30, 2003 were further decreased
by $497,000 as a result of the reversal of a restructuring accrual in settling
the Solon, OH lease.
Other Income and Expense. Other expense for the three months ended April
30, 2004 increased to $17,000 from $0 for the three months ended April 30, 2003.
The increase in other expense is related to decreases in gains recognized on the
sale of fixed assets as of April 30, 2004.
Income tax expense. The income tax expense recorded for the three months
ended April 30, 2004 and 2003 represents taxes due on year end income for
various state and local income taxes, for which the Net Operating Loss
carry-forwards from prior years do not apply.
Income (Loss) from Continuing Operations. The reduction in sales volume
directly impacted the income (loss) from continuing operations which decreased
to a $1.0 million loss from income of $0.2 million.
Loss from Discontinued Operations. During the quarter ended April 30, 2004,
the Company determined that its Hometown Threads, LLC subsidiary was not
strategic to the Company's long-term objectives. In May 2004, the Company
entered into a non-binding Letter of Intent with a company that has expressed an
interest in acquiring Hometown Threads, LLC. As of the date of this filing, the
parties are in the process of conducting due diligence and negotiating the terms
of a potential transaction. As a result, Hometown Threads, LLC was accounted for
as discontinued operations in the consolidated financial statements for all
periods presented. The loss from discontinued operations was $83,000 as of April
30, 2004 an increase of $14,000 from $69,000 at April 30, 2003. The loss on
discontinued operations for April 30, 2004 is attributable to the Hometown
Threads operation. The loss on discontinued operations for April 30, 2003 is the
net result of a $143,000 income from the discontinued operations of Tajima USA
against a $212,000 loss from the operations of Hometown Threads.
Net Income (Loss). The net loss for the three months ended April 30, 2004
was $1.1 million a decrease of $1.2 million over the income of $0.1 million for
the three months ended April 30, 2003.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $13.7 million at April 30, 2004,
decreasing $1.0 million, or 6.8%, from $14.7 million at January 31, 2004.
During the three months ended April 30, 2004, the Company's cash and cash
equivalents decreased by $3.5 million to $5.4 million primarily due to the
increase in restricted cash of $2.7 million. Net cash of $0.8 million was used
by the Company's operating activities and $2.7 million was used in financing
activities as additional collateral for the Company's credit line, plus capital
expenditures of $0.04 million.
The Company's strategy is to mitigate its exposure to foreign currency
fluctuations by utilizing purchases of foreign currency on the currency 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 April 30, 2004 the Company did not own any
foreign currency futures contracts.
Future Commitments
The following table shows the Company's contractual obligations.
Payments due by period (in thousands)
Less than More than 5
Contractual Obligations Total 1 year 1 - 3 years 4-5 years years
- ------------------------------------- ------------ ------------ ----------- ---------- --------------
Capital lease obligations $1,512 $ 129 $ 534 $ 541 $ 308
Operating lease obligations 2,291 623 758 438 472
Purchase commitments 1,800 1,200 600 0 0
Employment agreements 999 707 292 0 0
------------ ------------ ----------- ---------- --------------
Total $ 6,602 $ 2,659 $ 2,184 $ 979 $ 780
============ ============ =========== ========== ==============
Revolving Credit Facility and Borrowings
The Company has 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. The Company was in compliance with its covenants at April 30, 2004.
The Agreement was also used to support bankers acceptances of approximately
$634,000 and standby Letters of Credit of approximately $4.8 million at April
30, 2004.
Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting policies and
estimates from those disclosed in Item 7 of our Annual Report on Form 10-K for
the year ended January 31, 2004.
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 recent adverse fluctuations in the
yen, which is the currency the Company's embroidery machines are priced in, has
affected and is likely to continue to affect the Company's machine sales pricing
competitiveness. Embroidery machinery prices have either been maintained or
risen in US dollars due to these adverse exchange rate fluctuations. As a
result, in order for the Company to maintain various product margins for its
imported embroidery machines, its competitiveness has been adversely affected.
Some but not all of the Company's competitors face similar circumstances. The
Company has a formal policy that prohibits the use of currency derivatives or
other financial instruments for trading or speculative purposes. The policy
permits the use of financial instruments to manage and reduce the impact of
changes in foreign currency exchange rates that may arise in the normal course
of the Company's business. Currently, the Company does not use interest rate
derivatives.
The Company may enter into forward foreign exchange contracts principally
to hedge the currency fluctuations in transactions denominated in foreign
currencies, thereby limiting the Company's risk that would otherwise result from
changes in exchange rates.
Any Company debt, if utilized, is U.S. dollar denominated and floating
rate-based. At quarter-end, there was no usage of the 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
Under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and the Chief Financial
Officer, the Company carried out an evaluation of the effectiveness of the
design and operation of the disclosure controls and procedures, as defined in
Rules 13a-15e and 15d-15e of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective, as of the end of the period covered by
this Report, in ensuring that material information relating to the Company
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rule and
forms, including ensuring that such material information is accumulated and
communicated to the Company's Management, including the Company's Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
There have been no changes in the Company's internal controls over
financial reporting that occurred during the period covered by this report that
have materially affected, or are reasonably likely to affect, the Company's
internal controls over financial reporting.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
None.
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
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(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 Henry Arnberg pursuant to Rule 13a-14(a)
or Rule 15d -14(a).
31.2 Certification of Beverly Eichel pursuant to Section Rule
13a-14(a) or Rule 15d - 14(a).
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
- -------------------------------------------------------------------------------
*Incorporated by reference from the Registrant's Form 10-Q filed for the quarter
ended July 31, 1997.
**Incorporated by reference from the Registrant's Form 10-Q filed for the
quarter ended October 31, 1997.
***Incorporated by reference from the Registrant's Registration Statement on
Form S-1, Registration Number 33-72618.
(b) Reports on Form 8K
- -------------------------------------------------------------------------------
The Registrant filed a Form 8K with the Commission on May 27, 2004 announcing
that it had executed a non-binding letter of intent with a party that had
expressed an interest in acquiring its Hometown Threads, LLC subsidiary.
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,
VP, Finance and Chief Financial Officer
Dated: June 14, 2004