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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 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 September 04, 2004.
Class of Common Equity Number of Shares
---------------------- ----------------
Class A Common Stock, 5,677,344
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 - July 31, 2004
and January 31, 2004 3-4
Condensed Consolidated Statements of Operations for
the Three and Six Months Ended July 31, 2004 and 2003
5
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended July 31, 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 11-13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 13
Item 4. Controls and Procedures 14
Part II. Other Information
-------- -----------------
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Certifications 17-24
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, January 31,
2004 2004
-------------------- -------------------
-------------------- -------------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,899,000 $ 8,963,000
Restricted cash (Note 6) 5,650,000 3,000,000
Accounts receivable, net 4,630,000 6,562,000
Inventories, net (Note 3) 6,312,000 6,923,000
Other current assets 420,000 264,000
Assets of discontinued
operations held for sale 1,225,000 1,361,000
(Note 5)
-------------------- -------------------
Total current assets 24,136,000 27,073,000
-------------------- -------------------
PROPERTY, PLANT AND EQUIPMENT, net of 2,201,000 2,397,000
accumulated depreciation and amortization
OTHER ASSETS 777,000 877,000
-------------------- -------------------
TOTAL ASSETS $27,114,000 $30,347,000
==================== ===================
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, January 31,
2004 2004
-------------------- -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (Unaudited)
CURRENT LIABILITIES:
Trade acceptances payable $ 0 $ 1,324,000
Accounts payable and accrued expenses 8,447,000 8,150,000
(Notes 4 and 5)
Customers deposits and other 839,000 625,000
Liabilities of discontinued operations 1,797,000 2,254,000
(Note 5)
-------------------- -------------------
Total current liabilities 11,083,000 12,353,000
-------------------- -------------------
Capitalized lease obligations, less current 1,347,000 1,418,000
portion
Deferred gain on sale of building 668,000 728,000
-------------------- -------------------
Total liabilities 13,098,000 14,499,000
-------------------- -------------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized: 0 0
1,000,000 shares; issued: none
Class A common stock, $.01 par value; authorized: 68,000 68,000
20,000,000 shares, issued : 6,841,000 and 6,827,000 shares,
respectively
Class B common stock, $.01 par value; authorized: 27,000 27,000
3,000,000 shares, outstanding: 2,668,000 shares
Additional paid-in capital 41,412,000 41,408,000
Accumulated Deficit (25,474,000) (23,638,000)
-------------------- -------------------
Less: Treasury Class A Common stock at cost, 1,164,000 shares 2,017,000 2,017,000
-------------------- -------------------
Total stockholders' equity 14,016,000 15,848,000
-------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $27,114,000 $30,347,000
==================== ===================
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
July 31, July 31,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
NET SALES $ 10,617,000 $ 11,096,000 $ 20,004,000 $23,048,000
COST OF SALES 7,050,000 7,377,000 13,356,000 15,191,000
------------ ------------ ------------ ------------
GROSS PROFIT 3,567,000 3,719,000 6,648,000 7,857,000
Selling, General & Administrative Expenses 4,135,000 4,627,000 8,210,000 9,062,000
Restructuring Costs (Note 5) 0 (200,000) 0 (697,000)
------------ ------------ ------------ ------------
Total Operating Expenses 4,135,000 4,427,000 8,210,000 8,365,000
------------ ------------ ------------ ------------
OPERATING LOSS (568,000) (708,000) (1,562,000) (508,000)
OTHER EXPENSE (INCOME)
Interest Expense (Income) 38,000 (171,000) 76,000 (122,000)
Other Income (69,000) (95,000) (90,000) (144,000)
------------ ------------ ------------ ------------
Total Other Income (31,000) (266,000) (14,000) (266,000)
------------ ------------ ------------ ------------
LOSS FROM CONTINUTING OPERATIONS BEFORE INCOME
TAX PROVISION AND DISCONTINUED OPERATIONS (537,000) (442,000) (1,548,000) (242,000)
INCOME TAX PROVISION 3,000 0 16,000 25,000
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (540,000) (442,000) (1,564,000) (267,000)
(LOSS) INCOME FROM DISCONTINUED OPERATIONS
(NOTE 5) (110,000) 1,592,000 (193,000) 1,523,000
------------ ------------ ------------ ------------
NET LOSS (Income) $ (650,000) $ 1,150,000 $ (1,757,000) $ 1,256,000
============ ============ ============ ============
Basic and Diluted
LOSS FROM CONTINUING OPERATIONS ($ 0.07) ($ 0.04) ($ 0.19) ($ 0.03)
(LOSS) INCOME FROM DISCONTINUED OPERATIONS ($ 0.01) 0.17 ($ 0.02) 0.17
------------ ------------ ------------ ------------
NET (LOSS) INCOME PER SHARE ($ 0.08) $ 0.13 ($ 0.21) $ 0.14
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
IN THE CALCULATION OF (LOSS) INCOME PER SHARE
Basic and Diluted 8,344,206 8,687,626 8,339,188 8,738,188
============ ============ ============ ============
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
July 31,
--------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($1,757,000) $ 1,256,000
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Gain on sale of fixed assets 0 (50,000)
Depreciation and amortization 390,000 444,000
Recognized Gain on Sale of Building (60,000) (60,000)
Provision for reserves (100,000) 230,000
Reversal of Restructuring Accrual 0 (697,000)
Reversal of Reserve on Discontinued Operations 0 (1,500,000)
Minority interest 0 113,000
Changes in assets and liabilities:
Accounts receivable 2,035,000 (2,714,000)
Net investment in sales-type leases (21,000) 342,000
Inventories 607,000 1,441,000
Prepaid taxes (8,000) 0
Other assets (209,000) (305,000)
Trade acceptances payable (1,324,000) 269,000
Accounts payable and accrued expenses 294,000 (951,000)
----------- -----------
Net cash used in
operating activities (153,000) (2,182,000)
----------- -----------
See notes to condensed consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
July 31,
2004 2003
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ($ 116,000) ($ 328,000)
Site Development Costs for Hometown Threads 0 (71,000)
Proceeds from sale of fixed assets 0 100,000
Proceeds from sale of subsidiary 0 500,000
----------- -----------
Net cash (used in) provided by
investing activities (116,000) 201,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long term debt (71,000) (42,000)
Restricted Cash (2,650,000) (2,288,000)
Purchase of Treasury Shares 0 (231,000)
Exercise of Stock Options 4,000 0
Payment of Dividends (78,000) 0
----------- -----------
Net cash used in financing activities (2,795,000) (2,561,000)
----------- -----------
DECREASE IN CASH AND
CASH EQUIVALENTS (3,064,000) (4,542,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,963,000 7,707,000
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,899,000 $ 3,165,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 96,000 $ 108,000
=========== ===========
Income taxes paid $ 23,000 $ 320,000
=========== ===========
See notes to condensed consolidated financial statements.
Hirsch International Corp. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Three and Six Months Ended July 31, 2004 and 2003
1. Organization and Basis of Presentation
The accompanying Condensed Consolidated financial statements as of and
for the three and six month periods ended July 31, 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 and six month periods ended July 31, 2004 and 2003,
the financial position at July 31, 2004 and cash flows for the six month
periods ended July 31, 2004 and 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.
For the three months For the six months
ended July 31, ended July 31,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands, except for per share amounts)
Net income (loss), as reported ($ 650) $ 1,150 ($1,757) $ 1,256
Deduct: Total stock-based employee
compensation expense determined under fair
value based method
9 16 17 32
Pro-forma net loss ($ 659) $ 1,134 ($1,774) $ 1,224
Loss per share:
Basic and diluted - as reported ($ 0.08) $ 0.13 ($ 0.21) $ 0.15
Basic and diluted - pro-forma ($ 0.08) $ 0.13 ($ 0.21) $ 0.15
There were no options grated during the second quarter ended July 31, 2004.
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.
3. Inventories
July 31, 2004 January 31, 2004
------------- ----------------
New Machines $ 3,946,000 $ 5,194,000
Used Machines 358,000 344,000
Parts 3,648,000 2,967,000
--------- ---------
7,952,000 8,505,000
Less: Reserve for slow (1,640,000) (1,583,000)
moving inventory ---------- ----------
Inventories, net $ 6,312,000 $ 6,922,000
=========== ===========
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 six months ended July 31, 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.
Summary operating results of the discontinued operations of HAPL Leasing
(in thousands) are as follows:
For the three months For the Six months
ended July 31, ended July 31,
2004 2003 2004 2003
---- ---- ---- ----
Revenue 15 205 82 500
Gross profit 15 109 60 215
Income from discontinued 0 1,500 0 1,500
Operations.
The operating loss during the six months ended July 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. During the three months ended July 31, 2003, the
Company entered into a transaction whereby the Company assigned its
interest in the remaining UNL (Ultimate Net Loss) lease portfolio from 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 $375,000. The Company has reversed, as part of
discontinued operations, $1.5 million of reserves associated with the UNL
lease portfolio. The Company plans to sell the remaining assets by January
2005.
Assets and Liabilities of discontinued operations (in thousands) are as
follows:
July 31, 2004 January 31, 2004
-------------------- ---------------------
Assets:
Accounts Receivable $ 10 $ 0
MLPR and residuals 905 1,103
Inventory 0 23
Prepaid Taxes and other assets 12 11
-------------------- ---------------------
Total Assets $927 $ 1,137
==================== =====================
Liabilities:
Accounts Payable & Accruals $1,315 $ 1,548
Long Term Debt 0 0
Income Taxes Payable 87 87
-------------------- ---------------------
Total Liabilities $1,402 $ 1,635
==================== =====================
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
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):
July 31, January 31,
2004 2004
---- ----
Assets:
Accounts receivable $22 26
Property, plant and equipment, net 88 22
Prepaid taxes and other assets 188 176
--- ---
Total Assets $298 $224
==== ====
Liabilities:
Accounts payable and accrued expenses $ 395 $619
----- ----
Total Liabilities $ 395 $ 619
===== =====
Summary operating results of the discontinued operations of Hometown Threads,
LLC (in thousands) are as follows:
For the three months For the six months
ended July 31, ended July 31,
2004 2003 2004 2003
---- ---- ---- ----
Revenue $ 724 $ 661 $ 1,331 $ 1,024
Gross profit 505 369 854 663
Loss from discontinued Operations $ (110) $ (92) $ (193) $ (304)
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. 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 For the six
months ended months ended
July 31, 2003 July 31, 2003
------------- -------------
Revenue $ 3,276 $ 5,728
Gross profit 421 690
Income from discontinued operations $ 184 $ 327
6. Commitments and Contingencies
As of July 31, 2004, the Company had $5.7 million in restricted cash
which is used to collateralize standby letters of credit in the amount of
$4.7 million opened against the credit line at Congress Financial.
On July 16, 2004, the Company notified NASDAQ that due to the recent
resignation of Herbert Gardner the Company no longer complies with NASDAQ's
independent director and audit committee requirements as set forth in
Marketplace Rule 4350-1. On July 19, 2004 the Company received notice from
NASDAQ that it will be provided a cure period until the Company's next
annual shareholders' meeting. As of the date of this report, the Company
has not gained compliance.
On August 20, 2004, the Company received notice from NASDAQ that its
common stock failed to maintain a minimum bid price of $1.00 over the
previous 30 consecutive trading days as required by NASDAQ Small Cap Market
Marketplace Rule 4310(c)(4), and that in accordance with Marketplace Rule
4310(c)(8)(D), the Company has until February 16, 2005 to regain
compliance. In the event that at anytime before February 16, 2005, the bid
price of the Company's Class A common stock closes at $1.00 per share or
more for a minimum of ten consecutive trading days, NASDAQ staff will
notify the Company in writing that the Company complies with the Rule.
On August 30, 2004, The Company entered into new consolidated
distribution agreements (the "Consolidated Agreements") with Tajima
Industries Ltd. ("Tajima") granting the Company certain rights to
distribute the full line of Tajima commercial embroidery machines and
products.
The Consolidated Agreements grant the Company distribution rights on
an exclusive basis in 39 states for the period February 21, 2004 through
February 21, 2011. In addition, the Company was also granted certain
distributorship rights in the remaining 11 western states for the period
February 21, 2004 through February 21, 2005. The Consolidated Agreements
supercede all of the other distribution agreements between the Company and
Tajima.
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 six months ended July 31, 2004
as compared to the three and six months ended July 31, 2003.
Net sales. Net sales for the three months ended July 31, 2004 were
$10.6 million, a decrease of $0.5 million, or 4.5%, compared to $11.1
million for the three months ended July 31, 2003, and $20.0 million for the
six months ended July 31, 2004, a decrease of $3.0 million or 13.0%,
compared to $23.0 million for the six months ended July 31, 2003. The
Company believes that the reduction in the sales level for the six months
and three months ended July 31, 2004 is mainly attributable to a decrease
in demand for large head embroidery machines and greater competition in the
small machine market which resulted in lower prices for embroidery
machines.
Cost of sales. For the three months ended July 31, 2004, cost of sales
decreased $0.3 million, or 4.1%, to $7.1 million from $7.4 million for the
three months ended July 31, 2003, and for the six months ended July 31,
2004 decreased $1.8 million, or 11.8%, to $13.4 million from $15.2 million
for the six months ended July 31, 2003. The decrease is directly related to
the decrease in sales volume over the same period. The Company's gross
margin decreased to 33.2% for the six months ended July 31, 2004 as
compared to 34.1% for the six months ended July 31, 2003 and remained
relatively constant at 33.5% for the three months ended July 31, 2003
compared to 33.6% for the three months ended July 31, 2004. The recent
fluctuation of the dollar against the yen, which is the currency the
Company's embroidery machines are price 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 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 July 31, 2004,
operating expenses decreased by $0.3 million to $4.1 million from $4.4
million for the three months ended July 31, 2003 and for the six months
ended July 31, 2004, decreased by $0.9 million, to $8.2 million from $8.4
million for the six months ended July 31, 2003. The decrease in SG & A
expenses for the three and six months ended July 31, 2004 is directly
related to the Company's continuing efforts to control operating costs in
relation to the sales decline. Operating expense for the three months ended
July 31, 2004 included a reversal of the provision for doubtful accounts of
$100,000. Operating expense for the three months ended July 31, 2003 and
for the six months ended July 31, 2003 were further decreased by $200,000
and $696,000, respectively as a result of the reversal of restructuring
costs associated with the completion of the restructuring plan.
Interest Expense (Income). For the three months ended July 31, 2004,
interest expense was $38,000 as compared to interest income of $177,000 for
the three months ended July 31, 2003. For the six months ended July 31,
2004 interest expense was $76,000 as compared to interest income of
$122,000 for the six months ended July 31, 2003. Interest expense is
primarily associated with the sale/leaseback transaction of the Corporate
headquarters. Interest income of $225,000 associated with the income tax
refund was recognized during the three months ended July 31, 2003.
Other Income (Expense). For the three months ended July 31, 2004,
other income decreased $26,000, to $69,000 from $95,000 in other income for
the three months ended July 31, 2003. For the six months ended July 31,
2004 other income was $90,000 as compared to other income of $144,000 for
the six months ended July 31, 2003. The change in other expense is due to
currency translation fluctuations for yen.
Income tax provision. The income tax expense recorded for the three
and six months ended July 31, 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.
Loss from Continuing Operations. The loss from Continuing Operations
for the three months ended July 31, 2004 was $0.5 million, and increase of
$0.1 million from $0.4 for the three months ended July 31, 2003. For the
six months ended July 31, 2004 the loss from Continuing Operations was $1.6
million, a increase of $1.3 million from $0.3 million for the six months
ended July 31, 2003.
Income (Loss) from Discontinued Operations. Income from Discontinued
Operations decreased $1.7 million to $(0.1) million for the three months
ended July 31, 2004, from $1.6 million for the three months ended July 31,
2003. Income from Discontinued Operations decreased $1.6 million to $(0.2)
million for the six months ended July 31, 2004, from $1.5 million for the
six months ended July 31, 2003. The loss on discontinued operations for the
three and six months ended July 31, 2004 is solely attributable to the
Hometown Threads operation. The income from discontinued operations for the
three months ended July 31, 2003 is the net result of a $1.5 million dollar
HAPL discontinued operations reserve reversal in connection with a
transaction whereby the company assigned its interest in the UNL lease
portfolio from CIT to Beacon Funding Corporation plus net income of
$184,000 from the operations of TUI offset by a $(92,000) loss from the
operations of Hometown Threads. The income from discontinued operations for
the six months ended July 31, 2003 is the net result of the $1.5 million
dollar HAPL discontinued operations reserve reversal plus net income of
$327,000 from the operations of TUI offset by a $(304,000) loss from the
operations of Hometown Threads.
Net Income (Loss). The net loss for the three months ended July 31,
2004 was $.7 million, a decrease of $0.5 million, from a net loss of $1.2
million for the three months ended July 31, 2003. Net loss for the six
months ended July 31, 2004 was $1.8 million, an increase of $0.5 million,
from the net loss of $1.3 million for the six months ended July 31, 2003.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $13.1 and $14.7 million at July 31,
2004 and January 31, 2004, respectively.
During the six months ended July 31, 2004, the Company's cash and cash
equivalents decreased by $3.1 million to $5.9 million primarily due to the
increase in restricted cash of $2.7 million. Net cash of $0.2 million was
used by the Company's operating activities and $2.8 million was used in
financing activities $2.7 million of which was used as additional
collateral for the Company's credit line, plus capital expenditures of $0.1
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 Le s than 1 ye r 4-5 ye rs 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 July 31, 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)
Total Less 1-3 4-5 More
than 1 years years than 5
Contractual Obligations year years
- -------------------------------------------------------------------------
Capital lease obligations $1,482 $ 135 $ 577 $ 570 $ 200
Operating Lease obligations 2,132 630 712 443 347
Purchase Commitments 1,500 1,200 300 0 0
Employment Agreements 783 558 225 0 0
------ ------ ------ ------ ------
Total $5,897 $2,523 $1,814 $1,013 $ 547
====== ====== ====== ====== ======
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 July 31, 2004. The agreement was also used
to support standby Letters of Credit of approximately $4.7 million and July
31, 2004.
On August 31, 2004, the Company signed the Amendment No. 4 to the Loan
and Security Agreement. This amendment provides for lower fees on the
credit facility through January 31, 2004 and the suspension of financial
covenants for the periods July 31, 2004 and October 31, 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 in the
near future.
Backlog and Inventory
The ability of the Company to fill orders quickly is an important part
of its customer service strategy. The embroidery machines held in inventory
by the Company are generally shipped within a week from the date the
customer's orders are received, and as a result, backlog is not meaningful
as an indicator of future sales.
Inflation
The Company does not believe that inflation has had, or will have in
the foreseeable future, a material impact upon the Company's operating
results.
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
fluctuation 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
The Company's 2004 Annual Meeting of Stockholders was held September
8, 2004. At the meeting, the Company's stockholders voted upon (1) the
election of directors; (2) the approval of the Company's 2004 Non-Employee
Stock Option Plan; and (3) the approval of BDO Seidman, LLP as the
Company's independent auditors for the fiscal year ended January 31, 2005.
The following is a tabulation of the votes:
(1) Election of Directors
For Against
--- -------
Marvin Broitman (Class A) 5,290,572 241,737
Mary Ann Domuracki (Class A) 5,293,172 239,137
Henry Arnberg (Class B) 1,418,500 0
Paul Gallagher (Class B) 1,393,500 25,000
(2) Approval of 2004 Non-Employee Stock Option Plan
For Against Abstain
--- ------- -------
2,245,909 345,800 29,780
(3) Approval of BDO Seidman, LLP as the Company's Independent Auditors
For Against Abstain
--- ------- -------
6,888,086 27,795 9,928
Item 5. Other Information
On July 16, 2004, the Company notified NASDAQ that due to the recent
resignation of Herbert Gardner the Company no longer complies with NASDAQ's
independent director and audit committee requirements as set forth in
Marketplace Rule 4350-1. On July 19, 2004 the Company received notice from
NASDAQ that it will be provided a cure period until the Company's next
annual shareholders' meeting. As of the date of this report, the Company
has not gained compliance.
On August 20, 2004, the Company received notice from NASDAQ that its
common stock failed to maintain a minimum bid price of $1.00 over the
previous 30 consecutive trading days as required by NASDAQ Small Cap Market
Marketplace Rule 4310(c)(4), and that in accordance with Marketplace Rule
4310(c)(8)(D), the Company has until February 16, 2005 to regain
compliance. In the event that at anytime before February 16, 2005, the bid
price of the Company's Class A common stock closes at $1.00 per share or
more for a minimum of ten consecutive trading days, NASDAQ staff will
notify the Company in writing that the Company complies with the Rule.
On August 30, 2004, The Company entered into new consolidated
distribution agreements (the "Consolidated Agreements") with Tajima
Industries Ltd. ("Tajima") granting the Company certain rights to
distribute the full line of Tajima commercial embroidery machines and
products.
The Consolidated Agreements grant the Company distribution rights on
an exclusive basis in 39 states for the period February 21, 2004 through
February 21, 2011. In addition, the Company was also granted certain
distributorship rights in the remaining 11 western states for the period
February 21, 2004 through February 21, 2005. The Consolidated Agreements
supercede all of the other distribution agreements between the Company and
Tajima.
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
10.1 Amendment No. 3 to Loan and Security Agreement dated as of
September 1, 2004
10.2 Tajima Distribution Agreement dated April, 2004 - Note: portions
omitted due to confidential treatment request.
10.3 Tajima Distribution Agreement (western states) dated April, 2004 -
Note: portions omitted due to confidential treatment request.
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 8-K
The Registrant filed a Report on Form 8-K with the Commission on June 14,
2004 regarding a change in fiscal year. The Company adopted a change in fiscal
year to a 52/53 week fiscal year ending on the last Saturday in the last month
of each quarterly period, such that each quarterly period will be 13 weeks in
length.
The Registrant filed a Report on Form 8-K with the Commission on August 25,
2004 regarding a failure of the Company's Class A Common Stock to maintain the
minimum bid requirement for listing on the Nasdaq SmallCap Market. On August 20,
2004, the Company was notified by Nasdaq that its common stock failed to
maintain a minimum bid price of $1.00 over the previous 30 consecutive trading
days. The Company has until February 16, 2005 to regain compliance.
The Registrant filed a Report on Form 8-K with the Commission on August 30,
2004 regarding entry into a material definitive agreement. On August 30, 2004
the Company entered into a new consolidated distribution agreement granting the
Company certain rights to distribute the full line of Tajima commercial
embroidery machines and products.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HIRSCH INTERNATIONAL CORP.
Registrant
By: /S/Henry Arnberg
---------------------------
Henry Arnberg, Chairman and
Chief Executive Officer
By: /s/Beverly Eichel
---------------------------
Beverly Eichel,Vice
President of Finance and
Chief Financial Officer
Dated: September 14, 2004