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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 29, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file number 0-23434
HIRSCH INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2230715
----------------------------------- -----------------------------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
200 Wireless Boulevard, Hauppauge, NY 11788
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 436-7100
Securities registered pursuant to Section 12(b) of the Act: NONE
Title of each class Name of each exchange on which registered
---------------------- -------------------------------------------------
(None) (None)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par value
(CLASS A)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [x]Yes [ ]No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes[ ] No [x]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates* computed by reference to the closing price on July 31, 2004
(the last business day of the registrant's most recently completed second fiscal
quarter), was approximately $6,134,000.
The number of shares outstanding of each of the registrant's classes of
common stock, as of April 18, 2005 were:
Class of Common Equity Number of Shares
---------------------- ----------------
Class A Common Stock 7,902,010
Par Value $.01
Class B Common Stock 550,018
Par Value $.01
*For purpose of this report, the number of shares held by non-affiliates
was determined by aggregating the number of shares held by Officers and
Directors of Registrant, and subtracting those shares from the total number of
shares outstanding.
Hirsch International Corp.
Form 10-K
For the Fiscal Year ended January 29, 2005
Table of Contents
Part I Page
----
Item 1. Business 4-12
Item 2. Properties 12-13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II
Item 5. Market for Common Equity and Related Stockholder
Matters 13-14
Item 6. Selected Financial Data 14-16
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-24
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 24
Item 8. Financial Statements and Supplementary Data 24-25
Item 9. Changes in and Disagreements on Accounting
And Financial Disclosure 25
Item 9A. Controls and Procedures 25
Item 9B. Other Information 25
Part III
Item 10. Directors and Executive Officers of the Registrant 26-28
Item 11. Executive Compensation 29-36
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder
Matters 37-38
Item 13. Certain Relationships and Related Transactions 38-39
Item 14. Principal Accountant Fees and Services 39-40
Part IV
Item 15. Exhibits and Financial Statement Schedules 40
Exhibit Index 40-42
Signatures and Certifications 42
PART I
ITEM 1. BUSINESS
General
Hirsch International Corp. ("Hirsch" or the "Company"), a Delaware
Corporation, was founded in 1970 and has become a leading single source provider
of electronic computer-controlled embroidery machinery and related value-added
products and services. The Company markets itself under the brand "Tajima USA
Sales and Support by Hirsch International Corp." and offers a complete line of
technologically advanced single- and multi-head embroidery machines, proprietary
application software, a diverse line of embroidery parts, supplies, accessories
and embroidery products. In addition, Hirsch provides a comprehensive service
program, and user training and support. The Company believes its wide-range of
product offerings together with its related value-added products and services
place it in a competitively advantageous position within its marketplace.
The application of new technologies has transformed the embroidery industry
from one which was labor-intensive, utilizing machinery with limited production
capabilities to an industry where investment in electronic, computer-controlled
machinery and related application software has increased labor efficiencies and
production capacities while expanding the flexibility and complexity of
embroidery designs. These developments have not only resulted in the expansion
of existing markets but have also led to the creation of new markets for
embroidery. The industry on a world-wide basis has benefited in the past from
the growth in consumer demand for licensed products carrying the names, logos
and designs of professional and collegiate sports teams, entertainment companies
and their characters, as well as branded merchandise and related goods. Until
fiscal 1999, these trends and others contributed to an increase in demand for
machinery, software and services provided by Hirsch. However, beginning in the
fiscal year ended January 31, 2000 (fiscal 2000) and continuing through the
present day, the Company and the U.S. embroidery industry as a whole experienced
a decrease in overall demand driven by the relocation offshore of large,
multi-head equipment customers that resulted in reduced domestic demand for
large embroidery machines. As a result, in the year ended January 31, 2002
(fiscal 2002) the Company initiated a restructuring program designed to address
the market shifts in the industry, including closing and consolidating certain
divisions, reducing total employment and disposing of facilities no longer
required to support its new business model (See Management's Discussion and
Analysis of Financial Condition and Results of Operations).
The Company's customer base includes large operators who run numerous
machines (which accounts for a smaller percentage of the Company's business than
in years past) as well as individuals who customize products on a single
machine. Principal customer groups include: (i) contract embroiderers, who serve
manufacturers that outsource their embroidery requirements; (ii) manufacturers,
who use embroidery to embellish their apparel, accessories, towels, linens and
other products with decorative appeal; and (iii) embroidery entrepreneurs, who
produce customized products for individuals, sports leagues, school systems,
fraternal organizations, promotional advertisers and other groups.
Hirsch has certain exclusive United States rights to sell new embroidery
machines manufactured by Tajima Industries Ltd. ("Tajima") and certain
non-exclusive rights to distribute to US based customers who expand their
operating facilities into the Caribbean region. Tajima, located in Nagoya,
Japan, is one of the world's leading manufacturers of embroidery machines, and
is regarded as a technological innovator and producer of high quality, reliable
and durable embroidery equipment. The Company has certain exclusive rights to
distribute Tajima machines in the continental United States and Hawaii.
The Company enjoys a good relationship with Tajima, having spanned more
than 25 years. Hirsch is one of Tajima's largest distributors in the world and
collaborates with Tajima in the development of new embroidery equipment and
enhancements to existing equipment. Until early 1997, all Tajima equipment sold
in the US was assembled in Japan. At that time, Hirsch formed a new subsidiary,
Tajima USA, Inc ("TUI"), to assemble two, four, six and eight-head Tajima
machines in the United States. In December 1997, Hirsch sold a forty-five (45%)
percent interest in TUI to Tokai Industrial Sewing Machine Company, Ltd.
("Tokai"), Tajima's parent company's manufacturing arm. As of January 31, 2004,
the Company sold its remaining interest in TUI to Tajima Industries, Ltd. The
sale has been reflected in the financial statements as a discontinued operation
for all periods presented. (See Note 7 to the Consolidated Financial
Statements).
In addition to offering a complete line of technologically-advanced
embroidery machines and customer training, support and service, Hirsch provides
an array of value-added products to its customers. The Company is now a
distributor in the United States of software developed by its former software
subsidiary, Pulse Microsystems Ltd. ("Pulse") (See Note 7 to the Consolidated
Financial Statements). Pulse develops and supplies proprietary application
software programs which enhances and simplifies the embroidery process, as well
as enables the customization of designs and reduction of production costs.
Until the fourth quarter of fiscal 2002 the Company's leasing subsidiary,
HAPL Leasing Co., Inc. ("HAPL Leasing"), had provided a wide range of financing
options to customers wishing to finance their purchases of embroidery equipment.
In the fourth quarter of fiscal 2002, the Company determined that its HAPL
Leasing subsidiary was not strategic to its business objectives and discontinued
its operations (See Note 7 to the Consolidated Financial Statements). The
Company has continued to work with customers to help them obtain financing
through independent leasing and financing companies, as an attractive
alternative for purchasers looking to begin or expand operations. Accordingly,
the Company has reported its discontinued operations in accordance with APB 30.
The consolidated financial statements have been reclassified to segregate the
assets and liabilities and operating results of these discontinued operations
for all periods presented.
Hirsch also sells a broad range of embroidery supplies, machine parts,
accessories and proprietary embroidery products. The Company's equipment and
value-added products are marketed directly by an employee sales force, whose
efforts are augmented by trade journal advertising, informational "open house"
seminars, an e-commerce presence and trade shows. The Company's long-term goal
is to leverage its reputation, knowledge of the marketplace, Tajima distribution
rights, industry expertise and technological innovation to enable it to increase
the overall size of the embroidery equipment market and its market share.
The Embroidery Industry
The embroidery industry today uses electronic computer-controlled machinery
that, on a world-wide basis, benefits from the demand for licensed products
distributed by apparel and other manufacturers. Licensed names, logos and
designs provided by, among other sources, professional and collegiate sports
teams and the entertainment industry appear on caps, shirts, outerwear, luggage
and other softgoods for sale at affordable prices. In addition, the intricacy of
the designs capable of being embroidered have attracted commercial appeal for
special event promotional marketing. Embroidery equipment may contain single or
multiple sewing heads, each sewing head consisting of one to a group of needles
that are fed by spools of thread attached to the equipment. The design and
production capabilities of the sewing heads are enhanced through the application
and integration of computers and specialized software.
During fiscal 2005, Tajima introduced MicroSmart(TM) technology and
launched the all-new M series family of computer-controlled embroidery
equipment. MicroSmart(TM) - a Tajima exclusive - is a groundbreaking proprietary
technology that acts as the "brains" of the machine. MicroSmart(TM) Technology
optimizes microchip integration into the design and operation of the machine and
simultaneously executes each task command in the stitch production process -
thereby producing the world's smartest and easiest machine to operate.
MicroSmart(TM) Technology integrates certain mechanical innovations into the
production process creating the most powerful capabilities available anywhere.
Frame drive is MicroSmart(TM) controlled yielding a more precise stitch length
and higher quality embroidery.
Business Strategy
The Company's objective is to establish and maintain long-term
relationships with its customers by providing them with a single source solution
for their embroidery equipment, software and related services. To achieve this
goal, the Company has developed a comprehensive approach under which it (i)
sells a broad range of Tajima embroidery machines, (ii) distributes Pulse's
proprietary application software programs for embroidery machines, (iii) sells a
broad range of embroidery supplies, accessories and products, (iv) reconditions,
remanufactures and sells used embroidery machinery, and (v) provides
comprehensive customer training, support and service for these embroidery
machines. The Company believes that this comprehensive approach positions it to
become its customers' preferred vendor for their embroidery equipment and
related services. To complement its comprehensive approach effectively and
efficiently, the Company's business strategy includes the following:
Embroidery Machines. The Company believes that offering Tajima embroidery
equipment provides it with a competitive advantage because Tajima produces
technologically advanced embroidery machines that are of high quality, reliable
and durable. The Company markets and distributes over 80 models of Tajima
embroidery machines, ranging in size from 1 head per machine, suitable for
sampling and small production runs, to 30 heads per machine, suitable for high
production runs for embroidered patches and small piece goods which become parts
of garments and other soft goods. Embroidery equipment may contain single or
multiple sewing heads. The selling prices of these machines range from
approximately $10,000 to $150,000. Each sewing head consists of a group of
needles that are fed by spools of thread attached to the equipment. The needles
operate in conjunction with each other to embroider the thread into the cloth or
other surface in such configuration as to produce the intended design. Thread
flowing to each needle can be of the same or varying colors. Each head creates a
design and heads operating at the same time create the same size and shape
designs, although designs created at the same time can differ in color. Thus, a
30-head machine with all heads operating simultaneously creates an identical
design on thirty surfaces. The design and production capabilities are enhanced
through the integration of computers and specialized software applications.
Former Assembly Operations. The Company's former subsidiary Tajima USA,
Inc. ("TUI") maintains a facility located in Ronkonkoma, New York, near the
Company's headquarters. Assembly of Tajima machines of up to eight heads are
completed at this location, using both Tajima supplied sub-assembly kits and
locally supplied components. Shorter lead times and production flexibility
enables the Company to be responsive to changing needs of the market.
Pulse Microsystems Ltd. Software. Pulse, a former subsidiary of the
Company, offers a wide range of proprietary application software products to
enhance and simplify the embroidery process. Pulse's computer-aided design
software packages target the different functions performed by embroiderers, and
are contained in an integrated product line. A majority of Pulse's proprietary
application software products are designed to operate in the Microsoft(R),
Windows(R) 98 and Windows(R) XP environments that the Company believes will
enhance creativity, ease of use and user flexibility. All Tajima machines, as
well as other manufacturers' embroidery machines, can be networked through Pulse
software. It is the Company's established practice to aggressively market this
software with embroidery equipment and as an upgrade to its installed base of
over 20,000 embroidery machines. The Company believes that these products have
broad appeal to purchasers of single-head and multi-head embroidery machines and
present opportunities for the Company to increase sales of embroidery equipment
and software as the Company continues to emphasize marketing activities.
Embroidery Supplies, Accessories, Machine Parts and Products. The Company's
parts, supplies and accessories division offers a broad range of embroidery
supplies, accessories and proprietary products, which is an integral part of the
Company's single source strategy. Moreover, the expansion of the Company's
marketing efforts is directed toward trade publications, advertising as well as
both industry and trade show participation. During fiscal 2005, the Company
launched an on-line embroidery store allowing customers to order parts and
supplies 24 hours a day, 7 days a week. The Company offers a full line of
consumable supplies, parts and materials utilized in the embroidery process and
continues to market special purpose embroidery replacement parts and products
which act to simplify the embroidery process.
Used Embroidery Machinery. The Company accepts used embroidery machines
from customers on a trade-in basis as a condition to the sale of a new machine
on a case by case basis. The Company's ability to accept used machines is an
important sales tool and necessary element in the Company's sales strategy. On
occasion, the Company will also purchase used machines from customers and
third-party leasing companies. The Company believes that the market for used
embroidery machines represents an established share of the machine market.
Customer Support. The Company provides comprehensive customer training,
support and service for the embroidery machines and software that it sells. The
Company's service department includes field service technicians throughout the
US who are directed by two centrally located regional technicians. After the
Company delivers an embroidery machine to a customer, the Company's trained
personnel may assist in the installation, setup and operation of the machine.
The Company employs a staff of technical service representatives who provide
assistance to its customers by telephone. While many customer problems or
inquiries can be handled by telephone, where necessary the Company dispatches
one of its field service technicians to the customer.
Pulse provides telephone-based software support for the Pulse software
distributed by the Company. In addition, the Company provides introductory and
advanced training programs to assist customers in the use, operation and
maintenance of the embroidery machines and software it sells.
Discontinued Operations
In the fourth quarter of fiscal 2002, the Company determined that its HAPL
Leasing subsidiary was not strategic to its ongoing objectives and discontinued
HAPL's Leasing's operations. Accordingly, the Company has reported its
discontinued operations in accordance with SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
provides updated guidance concerning the recognition and measurement of an
impairment loss for certain types of long-lived assets. The consolidated
financial statements have segregated the assets, liabilities and operating
results of these discontinued operations for all periods presented.
Effective October 31, 2002, the Company 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. All periods presented have been restated to
reflect the discontinue operations of Pulse (See Note 7 to the Consolidated
Financial Statements).
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 Tajima USA Inc.
("TUI") subsidiary owned by it to Tajima. The Company's Consolidated Financial
Statements have been restated to reflect the discontinued operations of TUI (See
Note 7 to the Consolidated Financial Statements).
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. On October 22, 2004, the Company sold substantially all of the
assets of its Hometown subsidiary to Embroidery Acquisition LLC, a wholly owned
subsidiary of PCA, LLC pursuant to the terms of a certain Asset Purchase
Agreement entered into between the Company, Hometown Threads, Buyer and PCA.
Hometown Threads, LLC was accounted for as discontinued operations in the
consolidated financial statements for all periods presented (See Note 7 to the
Consolidated Financial Statements).
Marketing and Customer Support
The Company has been selling embroidery equipment since 1976 and is one of
the leading distributors of Tajima equipment in the world and markets its
products under the name "Tajima USA Sales and Support by Hirsch International
Corp." The Company reinforces recognition of its name through trade magazine
advertising and participation in seminars and over 20 trade shows annually. The
Company's sales staff is headed by Kris Janowski, Executive Vice-President of
the Company, and currently consists of salespeople who maintain frequent contact
with customers in order to understand and satisfy each customer's needs. The
Company's products are generally considered by the industry to consist of the
highest quality embroidery equipment available, and consequently the Company
does not attempt to compete exclusively on a price basis but rather a
value-added basis, through its reputation, knowledge of the marketplace,
investment in infrastructure and experience in the industry. In a climate of
intense price competition with lower cost manufacturers, the Company attempts to
maintain a balance between market share and profit margins to the best degree
possible.
The Company believes that a key element in its business is its focus on
service, and investment in sales support and training, infrastructure and
technology to support operations. The Company provides comprehensive one to five
day training programs to assist customers in the use, operation and servicing of
the embroidery machines and software it sells. Customers are trained in the
operation of embroidery machines as well as in embroidery techniques and the
embroidery industry in general. The Company provides its customers with manuals
as training tools. Company personnel also provide technical support by
telephone, field maintenance services and quality control testing, as well as
advice with respect to matters generally affecting embroidery operations.
Telephone software support is provided by Pulse.
The Company maintains a training center at its Hauppauge, New York
headquarters for the training of service technicians. Senior service technicians
also receive formal training from Tajima in addition to technical updates
throughout the year. The Company will continue to dedicate resources to
education and training as the foundation for providing the highest level of
service.
The Company provides its customers with a limited warranty of up to five
years against malfunctions from defects in material or workmanship on the Tajima
machines it distributes. The warranty covers specific classes of parts and
labor. Tajima provides the Company with a limited two year warranty. As a
consequence, the Company absorbs a portion of the cost of providing warranty
service on Tajima products.
Supplier Relationships with Tajima
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 (the "Main Agreement"). In addition, the Company was also granted
certain distribution rights in the remaining 11 western states (the "West Coast
Distribution Agreement") for the period February 21, 2004 through February 21,
2005. The Company is currently negotiating an extension of the West Coast
Agreement. The Consolidated Agreements supercede all of the other distribution
agreements between the Company and Tajima.
Each agreement may be terminated upon the failure by the Company to achieve
certain minimum sales quotas. During fiscal 2005, the Company failed to meet
these minimum sales quotas; however, Tajima waived the Company's failure for
fiscal 2005. For fiscal 2004, the minimum sales quotas were met. Furthermore,
the agreements may be terminated if (a) Henry Arnberg is no longer Chairman
and/or CEO of the Company or (b) if Tajima determines that a change in control
of the Company has occurred.
Although there can be no assurance that the Company will be able to
maintain its relationship with Tajima, management of the Company believes it is
unlikely that the Company would lose Tajima as a source of supply because: (i)
the Company has maintained a relationship with Tajima for over 25 years and is
one of Tajima's largest distributors; (ii) Tajima's success in the United States
is, in large part, attributable to the Company's knowledge of the marketplace as
well as the Company's reputation for customer support; and (iii) the Company
supports Tajima's development activities.
Other Supplier Relationships
The Company obtains its inventory for its embroidery supplies and
accessories business from many different sources. The Company believes that
alternate sources of supply are readily available.
Customers
The Company's customers range from large operators utilizing numerous
machines to individuals who customize products on a single machine. Principal
customer groups include: (i) contract embroiderers, who serve manufacturers that
outsource their embroidery requirements; (ii) manufacturers, who use embroidery
to embellish their apparel, accessories, towels, linens and other products with
decorative appeal; and (iii) embroidery entrepreneurs, who produce customized
products for individuals, sports leagues, school systems, fraternal
organizations, promotional advertisers and other groups. There are no major
customers who exceed 10% of revenues.
Competition
The Company competes with original equipment manufacturers, such as
Barudan, Brother International, Happy, Melco Industries and SWF, who distribute
products directly into the Company's markets. The Company believes it competes
against these competitors on the basis of its knowledge and experience in the
marketplace, name recognition, customer service and the quality of the
embroidery equipment it distributes. Due to the recent decline in overall demand
for the embroidery industry, potential customers may emphasize price over
technology when selecting a machine. Although the Company attempts to compete on
the basis of price to the best degree possible and to maintain its profit
margins, there can be no assurance that the Company will be able to do so, the
failure of which would have a material adverse effect on the Company.
Further, the Company's customers are subject to competition from importers
of embroidered products, which could materially and adversely affect the
Company's customers, and consequently could have a material adverse effect on
the Company's business, financial conditions and results of operations.
The Company's success is dependent, in part, on the ability of Tajima to
continue producing products that are technologically superior and price
competitive with those of other manufacturers. The failure of Tajima to produce
technologically superior products at a competitive price could have a material
adverse effect of the Company's business, financial condition and results of
operations.
The Company's embroidery supplies and accessories business competes with
ARC, a division of Melco Industries, MIM, a division of Brother Industries, and
other vendors of embroidery supplies. The Company believes that the market for
embroidery supplies is fragmented and that the Company will benefit from the
breadth of its product line and the fact that the Company is a single source
provider.
Employees
As of January 29, 2005, the Company employed approximately 97 persons who
are engaged in sales, service and supplies, product development, finance,
administration and management for the Company. None of the Company's employees
are represented by unions. The Company believes its relationship with its
employees is good.
Risk Factors
Dependence on Tajima
For the fiscal year ended January 29, 2005, approximately 74.2% of the
Company's revenues resulted from the sale of embroidery equipment supplied by
Tajima. Two separate distributorship agreements (collectively, the "Tajima
Agreements") govern the Company's rights to distribute Tajima embroidery
equipment in the United States and the Caribbean. The distributorship agreements
with Tajima collectively provide the Company with the exclusive rights to
distribute Tajima's complete line of standard embroidery, chenille embroidery
and certain specialty embroidery machines in 50 states. The Main Agreement,
which now covers 39 states, is effective from February 21, 2004 through February
21, 2011. The Main Agreement may be terminated by Tajima and/or the Company on
not less than two years' prior notice. Under the West Coast Agreement which
covers nine western continental states, Alaska and Hawaii, the Company is
adistributor of Tajima's complete line of standard embroidery, chenille
embroidery and certain specialty embroidery. The West Coast Agreement expired
February 20, 2005. The Company is in the process of negotiating an extension of
the West Coast Agreement, however, there can be no assurance that an agreement
can be reached on terms acceptable to the Company. The failure of the Company to
obtain an extension of the West Coast Agreement on terms acceptable to the
Company could result in a loss of the Company's right to distribute embroidery
machines in the territories covered by the West Coast Agreement which could have
a material adverse effect on the Company's business, operations and financial
condition. Each of the agreements contains language that permits termination if
the Company fails to achieve certain minimum sales quotas or annual targets. In
fiscal 2004, the Company met its sales quotas and in fiscal 2005, the Company
obtained a waiver from Tajima for failure to meet its sales quotas. Furthermore,
the agreements may be terminated, for any other reasons if (a) Henry Arnberg is
no longer Chairman and/or CEO of the Company or (b) if Tajima determines that a
change in control of the Company has occurred. The termination of the Tajima
agreements would have a material adverse effect on the Company's business,
financial condition and results of operations.
Importing Tajima's equipment from Japan subjects the Company to risks of
engaging in business overseas, including international political and economic
conditions, changes in the exchange rates between currencies, tariffs, foreign
regulation of trade with the United States, and work stoppages. The interruption
of supply or a significant increase in the cost of Tajima equipment for any
reason could have a material adverse effect on the Company's business, financial
condition and results of operation. In addition, Tajima manufactures its
embroidery machines in several locations in Japan. The Company could be
materially and adversely affected should any of these facilities be seriously
damaged as a result of a fire, natural disaster or otherwise. Further, the
Company could be materially and adversely affected should Tajima be subject to
adverse market, business or financial conditions.
Embroidery machines produced by Tajima are subject to competition from the
introduction by other manufacturers of technological advances and new products.
Current competitors or new market entrants could introduce products with
features that render products sold by the Company and products developed by
Tajima less marketable. The Company relies on Tajima's embroidery equipment to
be of the highest quality and state of the art. The Company's future success
will depend, to a certain extent, on the ability of Tajima to adapt to
technological change and address market needs, including price competition.
There can be no assurance that Tajima will be able to keep pace with
technological change in the embroidery industry, the current demands of the
marketplace or compete favorably on price. The failure of Tajima to do so could
have a material adverse effect on the Company's business, financial conditions
and results of operations.
Decline in Domestic Embroidery Industry
The Company's growth in past years was the result, in part from the
increase in demand for embroidered products and the growth of the embroidery
industry as a whole. Beginning in fiscal 1999, the embroidery industry
experienced; (i) a decline in demand for large embroidery machines, and; (ii) a
trend toward the relocation of manufacturing facilities to Mexico, the
Caribbean, Far East and South America (which is outside of the geographic area
the Company is authorized to distribute embroidery machines pursuant to the
distribution agreements the Tajima), all of which have had a material adverse
effect on the operations of the Company, its business and financial condition. A
decrease in consumer preferences for embroidered products, a general economic
downturn or other events having an adverse effect on the embroidery industry as
a whole would also have an adverse effect on the Company.
Foreign Currency Risks
The Company pays for its Tajima embroidery machinery in Japanese Yen. Any
change in the valuation of the U.S. Dollar compared to the Japanese Yen either
increases the cost to the Company of its embroidery machine inventory or results
in competitive pressures for reduced US dollar pricing among Yen-based equipment
distributors and manufacturers. The Company has generally been able to recover
increased costs through price increases to its customers or, in limited
circumstances, price reductions from Tajima; however, dollar price reductions do
reduce dollar contribution margins and as a result create overhead coverage
pressure. There can be no assurance that the Company will be able to recover
such increased costs in the future or reduce overheads to the necessary degree
to obtain profitability. The failure on the part of the Company to do so could
have a material adverse effect on the business, operations and financial
condition. These transactions are not currently hedged through any derivative
currency product. Currency gains and losses in foreign exchange transactions are
recorded in the statement of operations.
Inventory
The Company's ordering cycle for new embroidery machines is approximately
three to four months prior to delivery to the Company. Since the Company
generally delivers new Tajima embroidery machines to its customers within one
week of receiving orders, it orders inventory based on past experience and
forecasted demand. Due to the relatively long lead times of the ordering cycle,
any significant unanticipated downturn or upturn in equipment sales could result
in an increase in inventory levels or shortage of product, respectively, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Competition
The Company competes with distributors of embroidery machines produced by
manufacturers other than Tajima and with manufacturers who distribute their
embroidery machines directly as well as with other providers of embroidery
products and services. The Company believes that competition in the embroidery
industry is based on technological capability and quality of embroidery
machines, price and service. If other manufacturers develop embroidery machines
which are more technologically advanced than Tajima's or if the quality of
Tajima embroidery machines diminishes, the Company would not be able to compete
as effectively which could have a material adverse effect on its business,
financial condition and results of operations. The Company also faces
competition in selling software, embroidery supplies, accessories and
proprietary products as well as providing customer training, support and
services. Due to the decline in overall demand in the industry which occurred
during the last several years, potential customers may emphasize price
differences over value-added services and support in purchasing new embroidery
machines. Severe price competition may impair the Company's ability to provide
its customers with value-added services and support. Although the Company
attempts to compete on the basis of price, to the best degree possible, and to
maintain profit margins, there can be no assurance that the Company will be able
to do so. The Company's failure to compete effectively in these areas could have
a material adverse effect on its business, financial condition and results of
operations.
Dependence on Existing Management
Changes in the embroidery industry and recent restructuring of the
Company's business have resulted in increased responsibilities for management
and have placed increased demands upon the Company's operating, financial and
technical resources. The Company's continued success will depend to a
significant extent upon the abilities and continued efforts of Henry Arnberg,
Chairman of the Board of the Company; and Paul Gallagher, its Chief Executive
Officer. Mr. Gallagher is bound by a 2 year agreement that commenced on
September 11, 2004. It should also be noted that the Distribution Agreements
with Tajima provide that Tajima may terminate each agreement for, among other
reasons, if (a) Henry Arnberg is no longer Chairman and/or CEO of the Company or
(b) if Tajima determines that a change in control of the Company has occurred.
The loss of the services of Messrs. Arnberg or Gallagher, or the services of
other key management personnel, could have a material adverse effect upon the
Company's business, financial condition and results of operations.
ITEM 2. PROPERTIES
The Company's corporate headquarters is in Hauppauge, New York in a 50,000
square foot facility. During fiscal 2002, this facility was sold to Brandywine
Realty Trust and approximately 24,500 square feet was leased back in a
concurrent transaction (See Note 10(B) to the Consolidated Financial
Statements). During fiscal year 2003 the Company leased back the 25,500 square
feet of the building that had remained empty since March 2001 in order to
consolidate certain operations in Hauppauge, NY. This property houses the
Company's executive offices, the Northeast sales office, technical services,
machine and parts warehousing, order fulfillment and used machine storage and
repair facilities.
In addition to the Company's headquarters, the Company leases 22 regional
satellite offices under non-cancelable operating leases. These offices consist
of regional sales offices and training centers. All leased space is considered
adequate for the operation of our business, and no difficulties are foreseen in
meeting any future space requirements.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of Security holders during
the fourth quarter of its most recent fiscal year.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's outstanding Common Stock consists of two classes, Class A
Common Stock and Class B Common Stock. The Class A Common Stock, par value
$.01 per share, trades on the NASDAQ Small Cap Market under the symbol
"HRSH". The following table sets forth for each period indicated the high
and low closing bid prices for the Class A Common Stock as reported by the
NASDAQ Stock Market. Trading began in the Class A Common Stock on February
17, 1994. Class B stock is not publicly traded.
Fiscal 2005 High Low
- ----------- ---- ---
First Quarter ended April 30, 2004 $2.48 $1.35
Second Quarter ended July 31, 2004 $1.75 $0.81
Third Quarter ended October 30, 2004 $1.13 $0.81
Fourth Quarter ended January 29, 2005 $1.63 $0.96
Fiscal 2004 High Low
- ----------- ---- ---
First Quarter ended April 30, 2003 $0.75 $0.28
Second Quarter ended July 31, 2003 $1.19 $0.65
Third Quarter ended October 31, 2003 $1.25 $0.84
Fourth Quarter ended January 31, 2004 $3.12 $1.01
The foregoing over-the-counter market quotations represent inter-dealer
prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
(b) As of August 04, 2004, the Company believes that there were approximately
1,667 beneficial owners of its Class A Common Stock.
(c) During the third and fourth quarters of fiscal 2004, and the first quarter
of fiscal 2005, the Company declared and paid a quarterly dividend of $.01
per share on its Common Stock. There were no dividends declared for the
remaining quarters of fiscal 2005. The Class A Common Stock and Class B
Common Stock share ratably in any dividends declared by the Company on its
Common Stock. Any stock dividends on the Class A Common Stock and the Class
B Common Stock will be paid in shares of Class A Common Stock.
(d) Equity Compensation Plan Information
(c) Number of securities
(a) Number of remaining
securities available for future
to be issued (b)Weighted-average issuance
Plan category upon exercise of exercise price of under equity compensation plans
outstanding options, outstanding options, [excluding securities reflected in
warrants and rights warrants and rights column (a)]
------------------------- ---------------------- ---------------------------------
Equity compensation plans approved 1,153,000 $0.55 678,000
by security holders
Equity compensation plans not 100,000 $0.50 0
approved by security holders
------------------------- ---------------------- ---------------------------------
TOTAL 1,253,000 $0.54 678,000
------------------------- ---------------------- ---------------------------------
One independent Board member and one past Board member were granted
warrants to purchase 50,000 shares each of Class A Common Stock at $0.50 per
share for their past and ongoing services to the Company. The Board of Directors
approved these grants on January 25, 2002. These individuals were also granted
certain registration rights for the shares of Class A Common Stock issuable upon
the exercise of the warrants pursuant to the terms of a registration rights
agreement between the Company and such non-affiliated Board members.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere herein. The consolidated financial statement data as of
January 29, 2005 and January 31, 2004 and for the fiscal years ended January 29,
2005, January 31, 2004 and 2003 are derived from, and qualified by reference to,
the audited Consolidated Financial Statements included elsewhere herein and
should be read in conjunction with those Consolidated Financial Statements and
the Notes thereto. The consolidated financial statement data as of January 31,
2003, 2002 and 2001 and for the fiscal years ended January 31, 2002 and 2001 are
derived from audited Consolidated Financial Statements not included herein.
Year Ended January 31,
(in thousands of dollars, except per share amounts)
-------------------------------------------------------------------------------
Hirsch International Corp. and Subsidiaries 2005 2004 2003 2002 2001
- ------------------------------------------------- ------------ ------------ --------- ------------ --------
Statement of Operations Data:
Net sales $43,641 $46,449 $42,723 $50,156 $63,980
Cost of sales 29,574 31,120 29,490 36,876 44,992
Operating expenses (1)(2) 15,874 17,488 16,793 24,925 34,378
Loss from continuing operations before income (2,139) (2,025) (3,451) (16,990) (15,346)
tax provision (benefit)
Income tax provision (benefit) 9 25 (504) (5,881) --
Loss from continuing operations (2,148) (2,050) (2,947) (11,109) (15,346)
Income (loss) from discontinued operations 376 2,494 (2,603) (7,216) (323)
Net Income (loss) (1) $(1,772) $444 $(5,550) $(18,325) $(15,669)
Basic and diluted net income (loss) per $(0.26) $(0.24) $(0.34) $(1.25) $(1.68)
share from continuing operations
Basic and diluted net income (loss) per share $(0.21) $0.05 $(0.64) $(0.81) $(0.05)
Shares used in the calculation of basic and 8,351 8,571 8,789 8,894 9,112
diluted net income (loss) per share
(1) In fiscal year 2004, the Company completed its plan of restructuring and
reversed, as a reduction of operating expenses, $716,000 of restructuring
costs that had been previously provided for facilities and severance costs.
(2) Fiscal year 2002 operating expenses included a write-down of impaired
goodwill of $3.5 million and restructuring costs of $2.7 million and Fiscal
2001 includes a write-down of impaired goodwill of $7.6 million.
(3) Fiscal years 2005, 2004, 2003, 2002 and 2001 have been restated to reflect
the discontinued operations of HTT,TUI, HAPL and Pulse.
(4) In fiscal year 2004, the Company reversed $2.0 million of reserves
associated with the UNL lease portfolio which was sold to Beacon Funding in
September 2003.
Hirsch International Corp. and Subsidiaries (in thousands of dollars)
- -------------------------------------------------- -------------------------------------------------------------------
January 29, January 31,
2005 2004 2003 2002 2001
---------- ---------- ---------- ----------- -----------
Balance Sheet Data:
Working capital........................... $13,269 $14,698 $14,616 $16,161 $18,136
Total assets.................................. 26,626 30,346 39,796 33,430 50,002
Long-term debt, less current maturities....... 1,270 1,418 1,559 1,642 16
Stockholders' equity.......................... $14,055 $15,848 $16,065 $21,459 $40,278
Hirsch International Corp
Summarized Quarterly Data**
$ in thousands, except for per share amounts Fiscal Quarter
-------------------------------------------- --------------
2005 First Second Third Fourth
- ---- ----- ------ ----- ------
Net Sales....................................... $9,387 $10,617 $11,867 $11,770
Gross profit.................................... 3,082 3,567 3,881 3,537
Gain on sale of Hometown Threads........... 0 0 943 0
Income (loss) from discontinued operations (83) (110) (374) 0
Net income (loss)............................... (1,107) (650) 508 (523)
------------ ------------ ------------ ------------
Basic and diluted income (loss) per share....... ($0.13) ($0.08) $0.06 ($0.06)
============ ============ ============ ============
2004
- ----
Net Sales....................................... $11,951 $11,096 $11,892 $11,150
Gross profit.................................... 4,138 3,719 3,738 3,734
Restructuring costs (income).................... (497) (200) 0 (19)
Income (loss) from discontinued operations (69) 1,592 765 206
Net income (loss)............................... 105 1,151 (79) (733)
------------ ------------ ------------ ------------
Basic and diluted income (loss) per share....... $0.01 $0.13 $(0.01) $(0.08)
============ ============ ============ ============
**Note: The quarterly data has been restated to reflect the discontinued
operations of Tajima USA, Inc and Hometown Threads, LLC.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. When used herein, the words "anticipate",
"believe", "estimate" and "expect" and similar expressions as they relate to the
Company or its management are intended to identify such forward-looking
statements. The Company's actual results, performance or achievements could
differ materially from the results expressed in or implied by these
forward-looking statements. Factors that could cause or contribute to such
differences should be read in conjunction with, and are qualified in their
entirety by, the Company's Consolidated Financial Statements, including the
Notes thereto. Historical results are not necessarily indicative of trends in
operating results for any future period. As used herein, "fiscal year" and
"fiscal" refers to the applicable fiscal year ending January 31 of the
applicable calendar year. Fiscal year 2005 ended on January 29, 2005.
General
The Company is a leading single source supplier of electronic
computer-controlled embroidery machinery and related value-added products and
services to the embroidery industry. The Company offers a complete line of
technologically advanced single- and multi-head embroidery machines, proprietary
application software and a diverse line of embroidery supplies and accessories.
Hirsch believes its comprehensive customer service, user training, software
support through Pulse and broad product offerings combine to place the Company
in a competitive position within its marketplace. The Company sells embroidery
machines manufactured by Tajima and TUI, as well as a wide variety of embroidery
supplies.
In fiscal 1998 Hirsch formed TUI for the purpose of assembling Tajima
embroidery machines in the United States. Production at TUI consists of models
in configurations of up to eight heads per machine. In January 1998 Tokai
Industries (Tajima's manufacturing arm) purchased a 45 percent interest in TUI.
In July 1999 Tajima granted to Hirsch the non-exclusive right to distribute to
its existing US customers who have expanded their operations into the Caribbean
region. As of January 31, 2004, the Company sold its majority interest in TUI to
Tajima Industries.
The Company grew rapidly from the time of its initial public offering
through fiscal 1998. Growth during this period was fueled by rapid technological
advances in software and hardware, the strong demand for embroidered products,
the creation of new embroidery applications and the strength of the "embroidery
entrepreneur" as a growing segment of the marketplace. The Company believes that
the purchasers of smaller embroidery machines are a significant source of repeat
business for the sale of additional embroidery machines as the entrepreneurs'
operations expand.
The market is affected by weakening value in foreign exchange of the US
dollar versus the Yen resulting in dollar price pressure for machine sales. Most
Japanese equipment based competitors in the industry (including the Company)
faced difficulty in meeting these new market demands. In fiscal 2002 the Company
initiated a restructuring program to address the market shifts in the industry,
including closing and consolidating certain divisions, reducing total
employment, and consolidating facilities that were no longer required to support
its new business model (See Note 9 of Notes to Consolidated Financial
Statements). In fiscal 2004, the Company completed its plan of restructuring and
reversed, as a reduction of operating expenses, $716,000 of restructuring costs
that had been provided for facilities and severance costs due to the
re-negotiation of the office facility in Solon, Ohio.
Results of Operations
The following table presents certain income statement items expressed as a
percentage of total revenue for the fiscal years ended January 29, 2005 and
January 31, 2004 and 2003.
2005 2004 2003
------------ ------------ -------------
Net sales................................................... 100% 100% 100.0%
Cost of sales............................................... 67.8% 67% 69%
Operating expenses.......................................... 36.4% 37.6% 39.3%
Interest expense, net....................................... 0.4% 0.5% 0.6%
Other expense (income), net................................. 0.3% -0.8% -0.9%
------------ ------------ -------------
(Loss) from continuing operations before income taxes -4.9% -4.45% -8.1%
Income tax (benefit) provision.............................. 0.02% 0.5% -0.12%
Income (loss) from discontinued operations, net of tax.... 0.9% 5.4% -6.1%
------------ ------------ -------------
Net Income (loss)......................................... -4.1% 1.0% -13.0%
============ ============ =============
Note: The results of operations have been restated to reflect the discontinued
operations of TUI, and Hometown Threads.
Use of Estimates and Critical Accounting Policies
The preparation of Hirsch's financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and revenues and
expenses during the period. Future events and their effects cannot be determined
with absolute certainty; therefore, the determination of estimates requires the
exercise of judgment. Actual results inevitably will differ from those
estimates, and such differences may be material to our financial statements.
Management continually evaluates its estimates and assumptions, which are based
on historical experience and other factors that are believed to be reasonable
under the circumstances.
Critical Accounting Policies
Management believes the following critical accounting policies affect its
more significant estimates and assumptions used in the preparation of its
consolidated financial statements:
Revenue Recognition - The Company distributes embroidery equipment that it
offers for sale. Where installation and customer acceptance are a substantive
part of the sale, by its terms, the Company has deferred recognition of the
revenue until such customer acceptance of installation has occurred. In fiscal
years 2005, 2004 and 2003, most sales of new equipment did not require
installation within the terms of the sales contract and accordingly sales are
booked when shipped. Service revenues and costs are recognized when services are
provided. Sales of computer hardware and software are recognized when shipped
provided that no significant vendor and post-contract and support obligations
remain and collection is probable. Sales of parts and supplies are recognized
when shipped.
Long lived Assets - The Company reviews its long-lived assets, including
property, plant and equipment, identifiable intangibles and purchased
technologies, for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable. To
determine recoverability of its long-lived assets, the Company evaluates the
probability that future undiscounted net cash flows will be less than the
carrying amount of the assets
Income Taxes - Current income tax expense is the amount of income taxes
expected to be payable for the current year. A deferred income tax asset or
liability is established for the expected future consequences resulting from
temporary differences in the financial reporting and tax bases of assets and
liabilities. The Company provides a valuation allowance for its deferred tax
assets when, in the opinion of management, it is more likely than not that such
assets will not be realized.
Allowance for Doubtful Accounts - The Company maintains an allowance for
estimated losses resulting from the inability of its customers to make required
payments. An estimate of uncollectable amounts is made by management based upon
historical bad debts, current customer receivable balances, age of customer
receivable balances, the customer's financial condition and current economic
trends. If the actual uncollected amounts significantly exceed the estimated
allowance, then the Company's operating results could be significantly adversely
affected.
Inventories - Inventories are valued at the lower of cost or market. Cost
is determined using the "FIFO" weighted average cost for supplies and parts and
specific cost for embroidery machines and peripherals. The inventory balance is
recorded net of an estimated allowance for obsolete or unmarketable inventory.
The estimated allowance for obsolete or unmarketable inventory is based upon
management's understanding of market conditions and forecasts of future product
demand. If the actual amount of obsolete or unmarketable inventory significantly
exceeds the estimated allowance, the Company's cost of sales, gross profit and
net income (loss) could be significantly adversely affected.
Warranty - The Company instituted a five-year limited warranty policy for
its embroidery machines. The Company's policy is to accrue the estimated cost of
satisfying future warranty claims on a quarterly basis. In estimating its future
warranty obligations, the Company considers various relevant factors, including
the Company's stated warranty policies and practices, the historical frequency
of claims, and the cost to replace or repair its products under warranty. If the
number of actual warranty claims or the cost of satisfying warranty claims
significantly exceeds the estimated warranty reserve, the Company's operating
expenses and net income (loss) could be significantly adversely affected.
Fiscal Year 2005 as Compared to Fiscal Year 2004
Net sales. Net sales for fiscal year 2005 were $43.6 million, a decrease of
$2.8 million, or 6.0% compared to $46.4 million for fiscal year 2004. The
Company believes that the reduction in the sales level for fiscal 2005 is mainly
attributable to an on-going decrease in demand for large multi-head embroidery
machines and greater competition in the small machine market which resulted in
lower prices for embroidery machines. There are no major customers who exceed
10% of revenues.
Cost of sales. For fiscal year 2005, cost of sales decreased $1.5 million
or 4.8%, to $29.6 million from $31.1 million for fiscal year 2004. The decrease
was partially a result of the related decrease in net sales for fiscal year 2005
as compared to fiscal year 2004. The Company's gross margin decreased slightly
for fiscal year 2005 to 32.2%, as compared to 33.0% for fiscal year 2004. The
recent fluctuation of the dollar against the yen, which is the currency the
Company's embroidery machines are priced in, has adversely affected and is
likely to continue to adversely 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. As reported for fiscal year 2005, operating expenses
decreased $1.6 million or 9.1%, to $15.9 million from $17.5 million for fiscal
year 2004. The decrease in operating expenses for the fiscal year ended January
29, 2005 is directly related to the Company's continuing efforts to control
operating costs in relation to the overall decline in sales revenues. During the
year ended January 31, 2004, the Company reversed, as a reduction of operating
expenses, $716,000 of restructuring costs associated with the completion of the
restructuring plan.
Interest Expense. Interest expense for fiscal year 2005 and fiscal year
2004 remained constant at $0.2 million. Interest expense is primarily associated
with the sale/leaseback transaction of the corporate headquarters.
Other (Income) Expense. Other expense for fiscal 2005 was $147,000 versus
income of $349,000 for fiscal 2004. In fiscal 2005, other expense included a
$119,000 gain on sale of assets offset by $333,000 in currency losses. In fiscal
2004 other income included a $230,000 gain on sale of fixed assets, $216,000 in
currency loss and $322,000 in interest income on the refund of NOL carryback
claims.
Income tax (benefit) provision. The income tax provision reflected an
effective tax rate of 0% for the twelve months ended January 29, 2005 as
compared to an income tax benefit rate of 1.2% for fiscal year 2004. The benefit
rate for the fiscal 2004 year is a direct result of the Job Creation and Worker
Assistance Act temporarily extending the carryback of Net Operating Losses from
two years to five years. This change has enabled the Company to carryback recent
years losses and obtain a refund of approximately $6 million. During fiscal
2004, the Company received the carryback claim refund from the IRS along with
applicable interest through the refund date. The difference of the above rate to
the federal statutory rate for 2005 is the valuation allowance established on
deferred tax assets since the Company cannot determine the future utilization of
those assets.
Income (Loss) from Discontinued Operations. The Company executed an
Agreement with 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"). The
sale was effective as of January 31, 2004. Upon the consummation of the sale,
Tajima owned 100% of the issued and outstanding common stock of TUI.
The purchase price (the "Purchase Price") for the Shares was equal to the
Book Value (as defined in the Agreement), calculated in accordance with
generally accepted accounting principles. At the closing, Tajima paid the
Company the sum of $500,000 (the "Initial Payment") in partial payment of the
Purchase Price. The remaining balance due on the Purchase Price of $4,482,000
was paid promptly thereafter in accordance with the terms of the Agreement.
In addition, the Company paid TUI the sum of $7,182,002, representing
amounts owed by the Company to TUI as of January 31, 2004 (the "Net Intercompany
Payable"). The Net Intercompany Payable was paid as follows:
(a) the Initial Payment ($500,000) was paid by Tajima to TUI on behalf of the
Company,
(b) the assignment by the Company to TUI of its right to receive the sum of
$2,200,000 from Tajima upon payment of the balance due on the Purchase
Price, and
(c) the payment by the Company of the sum of $4,482,000 in five (5) equal
monthly installments of $735,167 each and a sixth payment of $806,165,
commencing February 29,2004 and continuing through and including July 31,
2004.
The Consolidated Financial Statements have been restated to reflect the
discontinued operations of TUI for all periods presented.
During the quarter ended April 30, 2004, the Company determined that its
Hometown Threads, LLC ("Hometown Threads") subsidiary was not strategic to the
Company's long-term objectives. On October 22, 2004, the Company sold
substantially all of the assets of Hometown Threads to Embroidery Acquisition
LLC ("Buyer"), a wholly owned subsidiary of PCA, LLC ("PCA") pursuant to the
terms of a certain Asset Purchase Agreement ("Agreement") entered into between
the Company, Hometown Threads, Buyer and PCA. Prior to the transaction, Hometown
Threads had been engaged in the business of operating and franchising retail
embroidery service centers in Wal-Mart stores and other retail locations (the
"Business"). The purchase price for the assets acquired by Buyer was $1,500,000.
In addition, Buyer agreed to assume certain enumerated liabilities of Hometown
Threads. Pursuant to the Agreement, PCA guaranteed the obligations of the Buyer.
The Company and Hometown Threads entered a Non-Competition, Non-Disclosure and
Non-Solicitation Agreement, the Company and Hometown Threads are precluded from
directly and indirectly competing with Buyer for seven (7) years in the United
States. The Company and Hometown Threads are also required to keep confidential
certain Confidential Information (as defined therein) for a period of ten (10)
years. Pursuant to the Agreement, The Company, Hometown Threads and Buyer have
entered into a certain Supply Agreement having a term of five (5) years. Under
the terms of the Supply Agreement, the Company agreed to supply to Buyer and
Buyer is required to purchase from the Company all products previously purchased
by Hometown Threads from the Company and utilized in the Business upon the
prices, terms and conditions contained therein.
As a result of the sale of Hometown Threads, the Company recognized a gain
of approximately $943,000.
The Buyer has withheld $200,000 from the selling price primarily associated
with a note receivable on the books of Hometown Threads and $142,000 in deferred
income from deposits received for stores not yet opened. The Company deferred
the recognition of income on these items until the contingencies are resolved
during the six month hold-back period. The Company expects to resolve the
contingencies in the early part of fiscal 2006, however, the Company is unable
to predict the outcome at this time.
Hometown Threads was accounted for as discontinued operations in the
consolidated financial statements for all periods presented.
Net Income (Loss). The net loss for fiscal year 2005 was $1,772,000, an
increase of $2.2 million, compared to net income of $444,000 for fiscal year
2004.
Fiscal Year 2004 as Compared to Fiscal Year 2003
Net sales. Net sales for fiscal year 2004 were $46.5 million, an increase
of $3.8 million, or 8.8% compared to $ 42.7 million for fiscal year 2003. The
Company believes that the increase in the sales level for the fiscal year ended
January 31, 2004 is primarily attributable to an increased penetration of single
head and small machines in the market as well as the aggressive marketing
campaign targeting new and existing customers with the new value added packages
and renewed focus on growing parts and supply sales.
Cost of sales. For fiscal year 2004, cost of sales increased $1.6 million
or 5.4%, to $31.1 million from $29.5 million for fiscal year 2003. The increase
was a result of the related increase in net sales for fiscal year 2004 as
compared to fiscal year 2003. The Company's gross margin improved for fiscal
year 2004 to 33.0%, as compared to 31.0% for fiscal year 2003. While the
fluctuation of the dollar against the yen has historically had a minimal effect
on Tajima equipment gross margins, since currency fluctuations are generally
reflected in pricing adjustments in order to maintain consistent gross margins
on machine revenues, increased cost of sales reflects the continuing product mix
shift from larger equipment with higher gross margins to smaller equipment with
lower gross margins. The 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. As reported for fiscal year 2004, operating expenses
increased $0.7 million or 4.1%, to $17.5 million from $16.8 million for fiscal
year 2003. Excluding the reversal of the non-recurring charges for restructuring
costs of $0.7 million, operating expenses were $18.2 million, an increase of
$1.4 million or 8.3% from $16.8 million. This increase was due to expenses
associated with increased sales, increased advertising and marketing programs,
and increased professional fees.
Interest Expense. Interest expense for fiscal year 2004 was $215,000 versus
interest expense of $259,000 for fiscal year 2003. Interest expense is primarily
associated with the sale/leaseback transaction of the corporate headquarters.
Other (Income) Expense. Other income for fiscal 2004 was $349,000 versus
$368,000 for fiscal 2003. In fiscal 2004, other income included a $234,000 gain
on sale of assets interest income of $334,000, primarily from the tax refund was
recognized during fiscal 2004 offset by $219,000 in currency losses. In fiscal
2003 other income included a $214,000 gain on sale of fixed assets, $55,000
currency gain and $94,000 in interest income.
Income tax (benefit) provision. The income tax provision reflected an
effective tax benefit rate of approximately 1.2% for the twelve months ended
January 31, 2004 as compared to an income tax benefit rate of 14.6% for fiscal
year 2003. The benefit rate for the fiscal 2004 year is a direct result of the
Job Creation and Worker Assistance Act temporarily extending the carryback of
Net Operating Losses from two years to five years. This change has enabled the
Company to carryback its two most recent years losses and obtain a refund of
approximately $6 million. During fiscal 2004, the Company received the carryback
claim refund from the IRS along with applicable interest through the refund
date. The difference of the above rate to the federal statutory rate for 2004 is
the valuation allowance established on deferred tax assets since the Company
cannot determine the future utilization of those assets.
Income (Loss) from Discontinued Operations. In the fourth quarter of Fiscal
2002, the Company determined that its HAPL Leasing subsidiary was not strategic
to the Company's ongoing objectives and discontinued operations. The Company has
made provisions for the cost of winding down the operations as well as the
potential losses that could be incurred in disposing of its minimum lease
payments and residual receivables. The operating loss in fiscal 2002 includes
$4.6 million provision for the Ultimate Net Loss ("UNL") liability and the sale
of the residual receivable associated with it. The operating loss in fiscal 2003
includes an additional $4.0 million to account for expected additional losses in
liquidating the leasing subsidiary's remaining lease portfolio. The Company's
Statements of Operations have been restated to reflect the results of the HAPL
Leasing subsidiary as a loss on discontinued operations (See Note 7 to the
Consolidated Financial Statements). In July 2003, the Company entered into a
transaction whereby the Company assigned its interest in the remaining UNL lease
portfolio from the CIT Group/Equipment Financing, Inc. ("CIT") to Beacon Funding
and the residual receivables associated with the lease portfolio for
approximately $375,000. The Company reversed, as part of discontinued
operations, $2.0 million of reserves associated with the UNL Lease portfolio.
The Company executed an Agreement with 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"). The sale was effective as of January 31, 2004. Upon
the consummation of the sale, Tajima owned 100% of the issued and outstanding
common stock of TUI.
The purchase price (the "Purchase Price") for the Shares was equal to the
Book Value (as defined in the Agreement), calculated in accordance with
generally accepted accounting principles. At the closing, Tajima paid the
Company the sum of $500,000 (the "Initial Payment") in partial payment of the
Purchase Price. The remaining balance due on the Purchase Price of $4,482,000
was paid promptly thereafter in accordance with the terms of the Agreement.
In addition, the Company paid TUI the sum of $7,182,002, representing
amounts owed by the Company to TUI as of January 31, 2004 (the "Net Intercompany
Payable"). The Net Intercompany Payable was paid as follows:
(d) the Initial Payment ($500,000) was paid by Tajima to TUI on behalf of the
Company,
(e) the assignment by the Company to TUI of its right to receive the sum of
$2,200,000 from Tajima upon payment of the balance due on the Purchase
Price, and
(f) the payment by the Company of the sum of $4,482,000 in five (5) equal
monthly installments of $735,167 each and a sixth payment of $806,165,
commencing February 29,2004 and continuing through and including July 31,
2004.
The Consolidated Financial Statements have been restated to reflect the
discontinued operations of TUI for all periods presented.
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. On October 22, 2004, the Company sold substantially all of the
assets of its Hometown subsidiary to Embroidery Acquisition LLC ("Buyer"), a
wholly owned subsidiary of PCA, LLC ("PCA") pursuant to the terms of a certain
Asset Purchase Agreement ("Agreement") entered into between the Company,
Hometown, Buyer and PCA. Prior to the transaction, Hometown had been engaged in
the business of operating and franchising retail embroidery service centers in
Wal-Mart stores and other retail locations (the "Business"). The purchase price
for the assets acquired by Buyer was $1,500,000. In addition, Buyer agreed to
assume certain enumerated liabilities of Hometown. Pursuant to the Agreement,
PCA guaranteed the obligations of the Buyer. The Company and Hometown entered a
Non-Competition, Non-Disclosure and Non-Solicitation Agreement, the Company and
Hometown are precluded from directly and indirectly competing with Buyer for
seven (7) years in the United States. The Company and Hometown are also required
to keep confidential certain Confidential Information (as defined therein) for a
period of ten (10) years. Pursuant to the Agreement, The Company, Hometown and
Buyer have entered into a certain Supply Agreement having a term of five (5)
years. Under the terms of the Supply Agreement, the Company agreed to supply to
Buyer and Buyer is required to purchase from the Company all products previously
purchased by Hometown from the Company and utilized in the Business upon the
prices, terms and conditions contained therein.
As a result of the sale of the Hometown Threads subsidiary, the Company
recognized a gain of approximately $943,000.
The Buyer has withheld $200,000 from the selling price primarily associated
with a note receivable on the books of Hometown Threads and $142,000 in deferred
income from deposits received for stores not yet opened. The Company deferred
the recognition of income on these items until the contingencies are resolved
during the six month hold-back period. The Company expects to resolve the
contingencies in the early part of 2006, however, the Company is unable to
predict the outcome at this time.
Hometown Threads, LLC was accounted for as discontinued operations in the
consolidated financial statements for all periods presented.
Net Income (Loss). The net income for fiscal year 2004 was $444,000, an
increase of $5.1 million, compared to a net loss of $5.5 million for fiscal year
2003. This increase is attributable to the increase in net sales, an increase in
the cost of sales, an increase in operating expenses, reversals of restructuring
accruals, and the change in income (loss) on discontinued operations of $5.1
million.
Liquidity and Capital Resources
The Company's working capital decreased $1.3 million or 8.9% to $13.3
million at January 29, 2005 from $14.7 million at January 31, 2004.
During fiscal 2005, The Company's cash (exclusive of restricted cash)
decreased $2.6 million or 29% to $6.4 million from $9.0 million at January 31,
2004. The majority of the decrease was cash used in financing activities of $2.8
million, the majority of which was $2.7 million used to collateralize open
standby letters of credit, cash used in operating activities of $0.7 million and
net cash provided by investing activities of $0.9 million
Investing activities provided $0.9 million in cash during fiscal 2005.
Investing activities during fiscal 2005 included $0.2 million in capital
expenditures for the purchase of additional fixed assets, $1.1 million in
proceeds from the sale of Hometown Threads.
Financing activities used $2.8 million during fiscal 2005, which included
$2.65 million in additional collateral to cover Standby Letters of Credit at
Congress Financial, $0.08 million in dividend payments during the first quarter
of fiscal 2005, $0.15 million in long term debt repayments and cash of $0.06
million provided by stock options exercised.
Future Commitments
The following table shows the Company's contractual obligations and
commitments (See Notes 10 and 15 to the Consolidated Financial Statements).
Payments due by period (in thousands)
Total Less than 1-3 4-5 More than
1 year years years 5 years
Contractual Obligations/Commitments
- ------------------------------------------ ----------- ------------- ------------- ------------ ------------
Capital lease obligations................. $2,012 $306 $976 $701 $29
Operating lease obligations............... 1,935 598 883 436 18
Purchase commitments...................... 800 800 0 0 0
Total $4,747 $1,704 $1,859 $1,137 $47
=========== ============= ============= ============ ============
Revolving Credit Facility and Borrowings
The Company has a Loan and Security Agreement ("the Congress Agreement")
with Congress Financial Corporation ("Congress") for a three year term expiring
on November 26, 2005. The Congress Agreement as amended, August 31, 2004,
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 all financial covenants at January 29, 2005. The Company has placed $5.7
million in restricted cash to support standby letters of credit of approximately
$4.5 million at January 29, 2005.
Future Capital Requirements
Subsequent to the close of fiscal 2002, the Federal Government passed the
Job Creation and Worker Assistance Act temporarily extending the carry back of
Net Operating Losses from two years to five years. This provided approximately
$6.0 million in cash available for operations. Approximately $3.0 million was
received during the fiscal year ended January 31, 2003 and the balance was
received during fiscal 2004, along with applicable interest. The Company
believes these proceeds, with its existing cash and funds generated from
operations, together with its credit facility, will be sufficient to meet its
working capital requirements. Capital expenditures are expected to be
immaterial.
Backlog and Inventory
The ability of the Company to fill orders quickly is an important part of
its customer service strategy. The embroidery machines held in inventory by the
Company are generally shipped within a week from the date the customer's orders
are received, and as a result, backlog is not meaningful as an indicator of
future sales.
Inflation
The Company does not believe that inflation has had, or will have in the
foreseeable future, a material impact upon the Company's operating results.
Recent Accounting Pronouncements -
See note 2(q) to the consolidated financial statements
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including changes in
foreign currency exchange rates and interest rates. Market risk is the potential
loss arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The Company has a formal policy that
prohibits the use of currency derivatives or other financial instruments for
trading or speculative purposes. The policy permits the use of financial
instruments to manage and reduce the impact of changes in foreign currency
exchange rates that may arise in the normal course of the Company's business.
Currently, the Company does not use interest rate derivatives.
The Company may from time to time enter into forward foreign exchange
contracts principally to hedge the currency fluctuations in transactions
denominated in foreign currencies, thereby limiting the Company's risk that
would otherwise result from changes in exchange rates.
Any Company debt, if utilized, is U.S. dollar denominated and floating
rate-based. At year-end, there was no usage of the revolving credit facility the
Company maintains with Congress Financial. If the Company had utilized its
credit facility, it would have exposure to rising and falling rates, and an
increase in such rates would have an adverse impact on net pre-tax expenses. The
Company does not use interest rate derivatives to protect its exposure to
interest rate market movements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information contained in pages F-1 through F-24 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. 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' 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 fourth quarter that have materially
affected, or are reasonably likely to affect, the Company's internal controls
over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information Regarding Executive Officers and Directors
The following table sets forth the names and ages of the Company's
directors and executive officers and the positions they hold with the Company:
Name Age Position
- ---- --- --------
Henry Arnberg......... 62 Chairman of the Board of Directors
Paul Gallagher........ 55 Chief Executive Officer, Director and President
Marvin Broitman....... 66 Director
Mary Ann Domuracki ... 47 Director
Christopher Davino ... 39 Director
Beverly Eichel........ 47 Vice President - Finance and Administration,
Chief Financial Officer and Secretary
Kristof Janowski...... 52 Executive Vice President - Sales and Marketing
Nicholas Paccione.... 50 Vice President - Operations
Henry Arnberg, has held the position of Chairman of the Board of the Board
of Directors since 1980 and served as President of the Company until December
1998 and its Chief Executive Officer until November 2004. Mr. Arnberg received a
Bachelor of Science in Accounting from the University of Bridgeport in 1965 and
an MBA in Finance and Management from the Adelphi University in 1971.
Paul Gallagher, joined the Company as its Chief Operating Officer in
September 2001. In early 2003, Mr. Gallagher was also appointed the Company's
President as well as a director. On December 1, 2004, Mr. Gallagher was
appointed Chief Executive Officer. Prior thereto, Mr. Gallagher was employed by
Cornerstone Group Inc., a consulting firm focused on corporate turnarounds and
restructurings, as well as mergers and acquisitions. Mr. Gallagher received a
Bachelor of Science from the University of Cincinnati in 1976 and an MBA from
Xavier University in 1978.
Marvin Broitman has served as a director of the Company since April 1994,
and is currently Vice President of Uniwave, Inc., a company engaged in the
engineering and manufacturing of automation accessory equipment for textile
machinery since 1968. Mr. Broitman received a Bachelor of Electrical Engineering
degree from City College in 1961 and an MBA from the Harvard Business School in
1968. Mr. Broitman serves on the Audit, Stock Option and Compensation Committees
of the Board of Directors.
Mary Ann Domuracki has served as a director of the Company since September
2001, and is a managing Director of Restructuring at Financo, Inc. since
September 2001. Ms. Domuracki has more than 25 years experience of accounting,
advisory and operating management services. Her industry experience includes,
senior management positions as President of Danskin, Inc., Executive Vice
President of Administration and Finance of Kasper A.S.L., and most recently,
Executive Vice President and Chief Financial Officer of Pegasus Apparel Group,
Inc. Ms. Domuracki is a CPA and a member of the AICPA, and has a Bachelor of
Business Administration from the Pennsylvania State University with a
concentration in Accounting. Ms. Domuracki serves on the Audit, Stock Option and
Compensation Committees of the Board of Directors.
Christopher Davino has served as a director of the Company since October
2004, he is currently Chief Operating Officer of E-Rail Logistics Inc., a waste
management transportation company. Prior to his current position, Mr. Davino
worked as a restructuring professional at Financo Inc. Mr. Davino is a seasoned
restructuring professional having provided strategic and financial advice to
Fortune 500 companies, financial sponsors and strategic buyers, commercial banks
and bondholders with respect to corporate restructurings and mergers and
acquisitions over the last 14 years. Prior to joining Financo, Mr. Davino was
Managing Director at Miller Buckfire Lewis Ying, LLC, the former restructuring
group of Wasserstein Perella and subsequently Dresdner Kleinwort Wasserstein. In
that capacity, Mr. Davino advised companies as well as their various creditor
constituencies in a wide range of industries including construction, consumer
products, electronics, energy, financial services, gaming, healthcare,
insurance, manufacturing, metals, minerals, steel, real estate and technology
telecommunications. Prior to Wasserstein Perella, Mr. Davino was a consultant
with Zolfo Cooper & Co., an internationally recognized turnaround consulting and
crisis management firm. Mr. Davino received his Bachelor of Science in Finance
from Lehigh University.
Beverly Eichel, has been Vice President of Finance and Administration and
Chief Financial Officer of the Company since February 1, 2002. Ms. Eichel has
also served as the Company's Secretary since October 2002. Prior thereto, she
was Executive Vice President and Chief Financial Officer of Donnkenny, Inc. from
October 1998 to June 2001. From June 1992 to September 1998, Ms. Eichel served
as Executive Vice President and Chief Financial Officer of Danskin, Inc. and had
been its Corporate Controller from October 1987 to June 1992. Ms. Eichel is a
Certified Public Accountant in the State of New York and a member of the AICPA.
Ms. Eichel received a Bachelor of Science in Accounting from the University of
Maryland in 1980.
Kristof Janowski has worked for the Company since 1987. From 1987 through
1994 he was sales manager for the Midwest Region. In October 1994, he was
promoted to Vice President of Midwest sales. In 1999, he was promoted to Vice
President of National Sales and most recently Mr. Janowski was promoted to
Executive Vice President - Sales and Marketing effective March 1, 2005.
Nicholas Paccione joined the Company in June of 2003 as Director of
Information Technology and was promoted to Vice President of Operations in
February of 2005. Prior to joining the Company, Mr. Paccione owned his own
independent consultancy specializing in computer network design. Prior to
starting his consulting firm, Mr. Paccione was Chief Operating Officer at
Heathology, an online health education company, Senior Vice President of
Operations for Primedia Workplace learning, and Vice President of Systems and
Technology for the Primedia Information Group.
Committees of the Board of Directors
The Board of Directors has an Audit Committee, a Compensation Committee and
a Stock Option Committee. Each member of the Audit Committee is an "independent
director" as defined in Rule 4200(a)(15) of the National Association of
Securities Dealers listing standards, as applicable and as may be modified or
supplemented. MaryAnn Domuracki, Chairman of the Audit Committee, is a financial
expert within the meaning of Item 401(h)(2) of Regulation S-K privileged under
the Act. The audit committee has adopted a written audit committee charter. The
Board of Directors does not have a nominating committee or a committee
performing the functions of a nominating committee.
Messrs. Broitman and Davino and Ms. Domuracki serve on the Compensation
Committee, the Audit Committee, and on the Stock Option Committee. The function
of the Compensation Committee is to determine the compensation of the Company's
executives. The Stock Option Committee administers the Company's stock option
plans and awards stock options.
Code of Ethics
The Company has adopted a code of ethics applicable to the Company's
Executive Officer and financial officer, which is a "Code of Ethics" defined by
the applicable rules of the Securities and Exchange Commission. The Company
undertakes to provide to any person with out charge, upon request, a copy of the
Company's Standards of Business Conduct. Requests for such copy should be made
in writing to the Company at its principal office, which is set forth on the
first page of this Form 10-K, attention Chief Financial Officer. If the Company
makes any amendment to its code of ethics, other than technical, administrative
or non-substantive amendments, or grants any waivers, including implicit waivers
from a provision of the code of ethics to the Company's principal executive
officer, principal financial officer or persons performing similar functions,
the Company will disclose the motive for the amendment or waiver, its effective
date and to what it applied on a report on Form 8-K filed with the Securities
and Exchange Commission.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors and persons who own more than ten percent of a class of
the Company's securities to file reports of ownership and changes in ownership
on Forms 3, 4 and 5 with the Securities and Exchange Commission. In addition,
officers, directors and greater than ten percent stockholders are required by
the Securities and Exchange Commission regulates to furnish the Company with
copies of all Section 16 forms they file.
To the Company's knowledge, based solely on its review of the copies of
such forms received by it and representations from certain reporting persons,
the Company believes that during the fiscal year ended January 29, 2005, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were satisfied.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation earned during the three
fiscal years ended January 29, 2005 and January 31, 2004 and 2003 by the
Company's Chairman of the Board and by the four most highly paid Company's
Executive Officers whose total compensation for such periods exceeded $100,000
(the "Named Executives"):
Summary Compensation Table
Long-term compensation
Annual compensation Awards Payouts
------------------- ------ -------
Name and Principal Position Fiscal Salary Bonus Other Restricted Securities All
Annual Underly- Other
Compen- Stock Ing LTIP Compen-
Sation Awards(s) Options/ Payouts Sation
Year ($) ($) ($) ($) SARs (#) ($) ($)
- --------------------------- -------- ---------- --------- ---------- ---------- ---------- ---------- --------
Henry Arnberg
Chairman of the Board
of Directors 2005 $218,000 - - - - $2,919
2004 $250,000 - - - - - $2,060
2003 $279,166 - - - - - $2,060
Paul Gallagher 2005 $310,000 - - - 150,000 - $4,187
Chief Executive Officer
2004 $300,000 $150,000 2 - - - - $3,675
2003 $300,000 $75,000 1 - - 300,000 - $3,675
-
Beverly Eichel -
Vice President-Finance
and Chief Financial
Officer and Secretary 2005 $265,000 - - - 40,000 -
2004 $250,000 $87,500 2 - - - - -
2003 $235,000 $35,250 1 - - 218,000 - -
Kristof Janowski -
Executive Vice President
- - Sales and Marketing 2005 $250,000 - - - - -
2004 $289,000 $50,000 2 - - - - -
2003 $200,000 $54,000 1 - - 80,600 - -
Nicholas Paccione -
Vice President -
Operations 2005 $155,000 - - - -
2004 $82,500 $21,500 - - 20,000 - -
2003 - - - - - - -
1 Bonuses were earned in fiscal 2003 but paid in fiscal 2004
2 Bonuses were earned in fiscal 2004 but paid in fiscal 2005
The following table sets forth the individual grants of stock options made
during the fiscal year ended January 29, 2005 by the Company's Chairman of the
Board and the named executive officers:
Options/SAR Grants Table
Percent of
Number of total
Securities Options/SARs Excise
Underlying Granted to of base
Options/SARs Employees in Price Expiration 5% 10%
Name Granted (#) fiscal year ($/Sh) date ($) ($)
---- ----------- ----------- ------ ---- --- ---
Henry Arnberg - - - - - -
Paul Gallagher 150,000 79% $168,000 12/1/2009 $214,000 $225,000
Beverly Eichel 40,000 21% $44,800 12/1/2009 $57,000 $60,000
Kristof Janowski - - - - - -
Nicholas Paccione - - - - - -
Option Exercises and Holdings
The following table sets forth information concerning the exercise of stock
options by the Named Executives during the Company's fiscal year ended January
29, 2005 the number of options owned by the Named Executives and the value of
any in-the-money unexercised stock options as of January 29, 2005.
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year End Option Values
-------------------------------------------------------
Number of Unexercised Value of Unexercised
Options at In-the-Money Options at
Fiscal Year End (#) Fiscal Year End ($)
Name Shares Acquired Value Exercisable/Unexercisable Exercisable/Unexercisable
on Exercise (#) Realized ____$
- -------------- ------------------- --------------- ------------------------------ ------------------------------
Henry Arnberg 0 $0 0/0 $ 0/0
Paul Gallagher 0 $0 358,000/192,000 $ 0/115,500
Beverly Eichel 0 $0 173,000/85,000 $ 0/40,040
Kris Janowski 0 $0 54,000/27,000 $ 0/7,290
Nicholas Paccione 0 $0 7,000/13,000 $ 0/11,180
In connection with the execution of their respective employment
agreements, Mr. Gallagher received options to purchase 150,0000 shares and Ms.
Eichel received options to purchase 40,000 shares of the Company's Class A
Common Stock.
Employment Agreements
Paul Gallagher
On of September 11, 2004, Mr. Gallagher entered into a two-year employment
agreement to serve as the Company's President, Chief Operating Officer and a
director. Effective December 1, 2004, Mr. Gallagher agreed to serve as Chief
Exectuive Officer of the Company.
Mr. Gallagher's employment agreement provides for the payment of an annual
base salary of $325,000 during the first year of the agreement, and $350,000
during the second year of the agreement. The agreement also entitles Mr.
Gallagher to participate in and receive a bonus under the Company's annual
incentive plan for key employees with a possible maximum bonus of up to 100% of
Mr. Gallagher's annual base salary. In addition, the employment agreement
provides for the reimbursement of certain business expenses, the provision of
health insurance and an automobile allowance.
The employment agreement requires Mr. Gallagher to devote his entire
business time and attention to the Company and provides for termination upon his
death or disability (defined as the inability to perform duties for three (3)
consecutive months or six (6) months in any nine (9) month period), or for cause
(as defined in the Gallagher Agreement).
In the event the Company terminates the employment agreement other than for
cause, or materially breaches its obligations thereunder, Mr. Gallagher is
entitled to receive payment of his salary for up to six months plus a pro-rata
portion, based upon his period of service to the Company, of the amount, if any,
he would have been entitled to receive under the Incentive Plan if his
employment had continued until the end of the fiscal year. The employment
agreement also provides that Mr. Gallagher shall not compete with the Company
during the term of the agreement and for a period of one (1) year thereafter. A
change of control provision under which Mr. Gallagher would be entitled to
receive an amount equal to his base salary for a period of one year following
the termination of employment is included, in addition to any and all health and
dental, disability, survivor income and life insurance plan or other benefit
plan maintained by the Company.
Mr. Gallagher also received, pursuant to the agreement, options to purchase
150,0000 shares of the Company's Class A Common Stock.
Beverly Eichel
As of February 1, 2004, Ms. Eichel entered into a two-year employment
agreement to serve as the Company's Vice-President-Finance and Administration,
Chief Financial Officer and Secretary
Ms. Eichel's employment agreement provides for the payment of an annual
salary of $265,000 per year. The agreement also entitles Ms. Eichel to
participate in and receive a bonus under the Company's annual incentive plan for
key employees with a possible maximum bonus of 70% of Ms. Eichel's annual base
salary. In addition, Ms. Eichel's employment agreement provides for the
reimbursement of business expenses including an automobile and cellular phone
allowance, the provision of health insurance and related benefits.
The employment agreement requires Ms. Eichel to devote her entire business
time and attention to the Company and provides for termination upon her death or
disability (defined as the inability to perform duties for three (3) consecutive
months or six (6) months in any nine (9) month period), or for cause (as defined
in the employment agreement). The employment agreement also provides that Ms.
Eichel not compete with the Company during the term of the agreement and for a
period of one (1) years thereafter. A change of control provision under which
Ms. Eichel would be entitled to receive an amount equal to her base salary for a
period of one year following the termination of employment, in addition to any
and all health and dental, disability, survivor income and life insurance plan
or other benefit plan maintained by the Company, is included.
In addition, in connection with the execution of the employment agreement,
Ms. Eichel also received options to purchase 40,000 shares of Class A Common
Stock.
Director's Compensation
Directors who are employees of the Company or its subsidiaries receive no
compensation, as such, for service as members of the Board other than
reimbursement of expenses incurred in attending meetings. Directors who are not
employees of the Company or its subsidiaries receive an annual directors' fee of
$6,000 plus $1,250 for each board or stockholder's meeting attended and $1,000
for each meeting of an executive committee of the Board attended, and are
reimbursed for expenses incurred in attending such meetings. In addition, all
non-employee directors participate in the Company's 2004 Non-Employee Director
Stock Option Plan. In fiscal 2002, the Board approved the issuance of 50,000
warrants to one of the independent directors for services rendered to the
Company. The director was also granted certain registration rights associated
with the warrants. The warrants had an exercise price of $.50 per share, which
was the fair market value on the date of grant. In fiscal 2004, each independent
director was issued 10,000 options under the Company's 2004 Non-Employee Stock
Option Plan. The options have an exercise price of $1.01-$1.02 per share, which
was the fair market value as of the date of the grant.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The Company's Compensation Committee of the Board of Directors consists of
Marvin Broitman, Mary Ann Domuracki and Christopher Davino, all of who are
independent outside directors of the Company. The Compensation Committee's
primary responsibility is for reviewing the Company's compensation practices for
executive officers and key employees.
The Compensation Committee has furnished the following report on executive
compensation.
Compensation Committee Report
The Compensation Committee of the Board of Directors (the "Committee") is
composed of three independent outside directors of the Company.
The Committee focuses on compensating Company executives on a competitive
basis with other comparably sized and managed companies in a manner consistent
and supportive of overall Company objectives and through a compensation plan
which balances the long-term and short-term strategic initiatives of the
Company. The Committee intends that the Company's executive compensation program
will:
(1) reward executives for strategic management, the achievement of key
business objectives and enhancement of stockholder value;
(2) reflect each executive's success at resolving key operational issues;
(3) facilitate both the short-term and long-term planning process; and
(4) attract and retain key executives believed to be critical to the
long-term success of the Company.
The Company's compensation program for executive officers generally
consists of (i) a fixed base salary, (ii) performance-related annual bonus
awards and (iii) long-term incentive compensation in the form of stock options.
In addition, Company executives are able to participate in various benefit plans
generally available to other full-time employees of the Company. Each executive
officer's compensation package is designed to provide an appropriately weighted
mix of these elements, which in the aggregate provide a level of compensation
the committee believes is approximately equal to those provided by comparatively
sized and managed companies.
In reviewing the Company and executives' performance, the Committee takes
into consideration, among other things, the following performance factors in
making its compensation recommendations: revenues, net income and cash flow. The
Committee has received and considered outside guidance from compensation
consultants in its efforts to have comparability and fairness in their
determinations.
Base Salary
Base salary for the Company's executives is intended to provide competitive
remuneration for services provided to the Company over a one-year period. Base
salaries are set at levels designed to attract and retain the most appropriately
qualified individuals for each of the key management level positions within the
Company.
Short-Term Incentives
Short-term incentives are paid primarily to recognize specific operating
performance achieved within the last fiscal year. Since such incentive payments
are related to a specific year's performance, the Committee understands and
accepts that such payments may vary considerably from one year to the next. The
Company's bonus program generally ties executive compensation directly back to
the annual performance of both the individual executive and the Company overall.
Those executives not signatory to an employment agreement are able to earn a
percentage of their base salary as a performance-related bonus. Where there is
an employment agreement, an executive may earn a percentage of their base
salary, pursuant to the Company's annual incentive program, as a
performance-related bonus. The bonuses paid during fiscal 2004 relate to such
employment agreements, as amended, with Paul Gallagher the Company's Chief
Executive Officer and Beverly Eichel, its Vice President - Finance and
Administration, Chief Financial Officer and Secretary.
Long-Term Incentives
In order to align long-term executive compensation with long-term
stockholder value improvements, the Committee has from time to time awarded
stock option grants to executives of the Company in recognition of the value of
these grants in motivating long-term strategic decision making. The Company's
long-term performance ultimately determines compensation from stock options
because stock option value is entirely dependent on the long-term growth of the
Company's Common Stock price. During the fiscal year ended January 29, 2005,
190,000 stock options were granted to the Company's senior executive officers.
During the fiscal year ended January 31, 2004, no stock options were granted to
the Company's senior executive officers.
Chief Executive Officer
Mr. Gallagher's base salary and long-term incentive compensation as
described in his employment agreement were determined by the Compensation
Committee with input and guidance from an outside compensation consultant and
are based upon the same factors as those used by the Compensation Committee for
executives in general.
In addition to his base salary, Mr. Gallagher is eligible to participate in
the short-term and long-term incentive programs outlined above for the other
Named Executives (including the Company's annual incentive program). The targets
in the annual incentive program for Mr. Gallagher were developed by the
Compensation Committee with the input and guidance of an outside compensation
consultant.
COMPENSATION COMMITTEE:
Marvin Broitman (Chairperson)
Mary Ann Domuracki
Chris Davino
Stock Option Plans
The Company maintains two stock option plans pursuant to which options to
purchase an aggregate of 1,984,375 shares of Class A Common Stock may be
granted.
1993 Stock Option Plan. The 1993 Stock Option Plan was adopted by the Board
of Directors in December 1993 and was approved by the stockholders of the
Company in July 1994 (the "1993 Plan"). The 1993 Plan, as amended, currently has
1,750,000 shares of Class A Common Stock reserved for issuance upon exercise of
options designated as either (i) incentive stock options ("ISOs") under the
Internal Revenue Code of 1986, as amended (the "Code"), or (ii) non-qualified
options. ISOs may be granted under the 1993 Plan to employees and officers of
the Company. Non-qualified options may be granted to consultants, directors
(whether or not they are employees), employees or officers of the Company.
The purpose of the 1993 Plan is to encourage stock ownership by certain
directors, officers and employees of the Company and certain other persons
instrumental to the success of the Company and to give them a greater personal
interest in the success of the Company. The 1993 Plan is administered by the
Stock Option Committee. The Committee, within the limitations of the 1993 Plan,
determines the persons to whom options will be granted, the number of shares to
be covered by each option, whether the options granted are intended to be ISOs,
the duration and rate of exercise of each option, the option purchase price per
share and the manner of exercise, the time, manner and form of payment upon
exercise of an option, and whether restrictions such as repurchase rights in the
Company are to be imposed on shares subject to options. Options granted under
the 1993 Plan may not be granted at a price less than the fair market value of
the Class A Common Stock on the date of grant (or 110% of fair market value in
the case of persons holding 10% or more of the voting stock of the Company). The
aggregate fair market value of shares for which ISOs granted to any person are
exercisable for the first time by such person during any calendar year (under
all stock option plans of the Company and any related corporation) may not
exceed $100,000. The 1993 Plan will terminate in December 2003; however, options
granted under the 1993 Plan will expire not more than five years from the date
of grant. Options granted under the 1993 Plan are not transferable during an
optionee's lifetime but are transferable at death by will or by the laws of
descent and distribution. The plan expired in December 2003.
1994 Non-Employee Director Stock Option Plan. The 1994 Non-Employee
Director Stock Option Plan, as amended, (the "Directors Plan") was adopted by
the Board of Directors in September 1994 and was approved by the stockholders of
the Company in June 1995. The Directors Plan has 234,375 shares of Class A
Common Stock reserved for issuance. Pursuant to the current terms of the
Directors Plan, each independent unaffiliated Director shall automatically be
granted, subject to availability, without any further action by the Board of
Directors or the Stock Option Committee: (i) a non-qualified option to purchase
10,000 shares of Class A Common Stock upon their election to the Board of
Directors; and (ii) a non-qualified option to purchase 10,000 shares of Class A
Common Stock on the date of each annual meeting of stockholders following their
election to the Board of Directors. The exercise price of each option is the
fair market value of the Company's Class A Common Stock on the date of grant.
Each option expires five years from the date of grant and vests in three annual
installments of 33 1/3% each on the first, second and third anniversary of the
date of grant. Options granted under the Directors Plan are generally not
transferable during an optionee's lifetime but are transferable at death by will
or by the laws of descent and distribution. In the event an optionee ceases to
be a member of the Board of Directors (other than by reason of death or
disability), then the non-vested portion of the option immediately terminates
and becomes void and any vested but unexercised portion of the option may be
exercised for a period of 180 days from the date the optionee ceased to be a
member of the Board of Directors. In the event of death or permanent disability
of an optionee, all options accelerate and become immediately exercisable until
the scheduled expiration date of the option. The plan expired in September 2004.
Voluntary Stock Option Cancellation Program. The price of the Company's
Class A Common Stock has been depressed for some time. As compared to the
exercise price on most incentive stock options, the market price of the
Company's Common Stock is and has been for some time significantly lower than
the exercise price of most incentive stock options issued to employees of the
Company. To restore the incentive value for which the Company's stock option
plans were established, the Board of Directors during fiscal 2002 approved a
limited stock option voluntary cancellation program (the "Program"). The Program
afforded the opportunity for employees, officers and directors holding options
to turn them into the Company for cancellation. At the time the program was
implemented, no new options were issued to employees who turned their options in
for cancellation. The Company intends to evaluate the option holdings by its
employees as a whole on an on-going basis and decide whether new options to its
employees who have turned in their current options at the then fair market value
of the Company's Class A common stock are warranted (or 110% of fair market
value in the case of persons holding 10% or more of the voting stock of the
Company).
2003 Stock Option Plan. The 2003 Plan was adopted by the Board of Directors
in May 2003 and was approved by the stockholders of the Company in July 2003
(the "2003 Plan"). The 2003 Plan currently has 750,000 shares of Common Stock
reserved for issuance upon the exercise of options designated as either (i)
incentive stock options ("ISOs") under the Code or (ii) non-qualified stock
options. ISOs may be granted under the 2003 Plan to employees and officers of
the Company. Non-qualified options may be granted to consultants, directors
(whether or not they are employees), employees or officers of the Company. In
certain circumstances, the exercise of stock options may have an adverse effect
on the market price of the Company's Common Stock.
The purpose of the 2003 Plan is to encourage stock ownership by certain
directors, officers and employees of the Company and certain other persons
instrumental to the success of the Company and give them a greater personal
interest in the success of the Company. If approved, the 2003 Plan would be
administered by the Stock Option Committee. The Committee, within the
limitations of the 2003 Plan, determines the persons to whom options will be
granted, the number of shares to be covered by each option, whether the options
granted are intended to be ISOs, the duration and rate of exercise of each
option, the option purchase price per share and the manner of exercise, the
time, manner and form of payment upon exercise of an option, and whether
restrictions such as repurchase rights in the Company are to be imposed on the
shares subject to options. Options granted under the 2003 Plan may not be
granted at a price less than the fair market value of the Common Stock on the
date of the grant (or 110% of fair market value in the case of persons holding
10% or more of the voting stock of the Company). The aggregate fair market value
of shares for which ISOs granted to any person are exercisable for the first
time by such person during any calendar year (under all stock option plans of
the Company and any related corporation) may not exceed $100,000. The 2003 Plan
will terminate in December, 2013 which means no options may be granted after
such date. Options granted under the 2003 Plan will expire not more than five
years from the date of grant; however, any options outstanding on the
termination date of the 2003 Plan will continue until they expire by their
terms. Options granted under the 2003 Plan are not transferable during an
optionee's lifetime but are transferable at death by will or by the laws of
descent and distribution.
2004 Non-Employee Director Stock Option Plan. The 2004 Plan was adopted by
the Board of Directors in August 2004. The 2004 Plan reserves 148,042 shares of
Class A Common Stock for issuance to the Company's independent and unaffiliated
directors. Pursuant to the terms of the 2004 Plan, as proposed each independent
and unaffiliated director shall automatically be granted, subject to
availability, without any further action by the Board of Directors or the Stock
Option Committee: (i) a non-qualified option to purchase 10,000 shares of Class
A Common Stock upon their initial election or appointment to the Board of
Directors; and (ii) a non-qualified option to purchase 10,000 shares of Class A
Common Stock on the date of each annual meeting of stockholders following their
election or appointment to the Board of Directors. The exercise price of each
option is the fair market value of the Company's Class A Common Stock on the
date of grant. Each option expires five years from the date of grant and vests
in three annual installments of 33 1/3% each on the first, second and third
anniversary of the date of grant. Options granted under the 2004 Plan would
generally not be transferable during an optionee's lifetime but would be
transferable at death by will or by the laws of descent and distribution. In the
event an optionee ceases to be a member of the Board of Directors (other than by
reason of death or disability), then the non-vested portion of the option would
immediately terminate and become void and any vested but unexercised portion of
the option may be exercised for a period of 180 days from the date the optionee
ceased to be a member of the Board of Directors. In the event of death or
permanent disability of an optionee, all options accelerate and become
immediately exercisable until the scheduled expiration date of the option.
Stock Performance Graph/Table
The Company believes that it is the only publicly-held firm in the
embroidery equipment industry, and therefore does not believe that it can
reasonably identify an embroidery industry-based peer group. The Company has
elected to define a peer group based on a group of five industrial distributors,
trading in similar SIC Codes, with relatively low market capitalization for a
benchmark. The following graph and table compares the change in the cumulative
total stockholder return for the five-year period beginning on January 31, 2001,
and ending on January 31, 2005, based upon the market price of the Company's
Class A Common Stock, with the cumulative total return of the NASDAQ Composite
Index and the defined Peer Group. The Peer Group includes the following
companies: Lancer Corp.; Quipp Inc.; Paul Mueller Company; Oilgear Company; and
Key Technology Inc. The graph assumes a $100 investment on January 31, 2001 in
each of the indices and the reinvestment of any and all dividends. [GRAPHIC
OMITTED][GRAPHIC OMITTED]
Comparison of Five-Year Cumulative Total Return Among
Hirsch International Corp., NASDAQ Composite Index and an
Industry-based Market Capitalization-Based Peer Group
- -------------------------------------------------------
1/31/01 1/31/02 1/31/03 1/31/04 1/31/05
------- ------- ------- ------- -------
Hirsch International Corp. $100 $49 $42 $225 $99
NASDAQ Composite Index 100 70 48 75 74
Peer Group 100 75 79 106 90
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth the beneficial ownership of shares of Class A
Common Stock and Class B Common Stock as of April 22, 2005, by (i) each person
who owns more than 5% of the outstanding shares of Class A and Class B Common
Stock; (ii) each executive officer and director of the Company; and (iii) all
officers and directors of the Company as a group:
Name and Address of Beneficial Owner (1) Title of Class (2) Amount and Nature of Percent of Class
Beneficial Ownership
- ----------------------------------------- -------------------------- ------------------------------ ----------------------
Henry Arnberg................. Class A 981,658 12.4%
Class B 500,018 (3) 91%
Paul Levine...................... Class A 1,074,621(4) 13.6%
Class B - -
Paul Gallagher................. Class A 653,332(8) 8.3%
Class B - -
Marvin Broitman.............. Class A 81,498 (5) 1.0%
Class B - -
Mary Ann Domuracki........ Class A 23,333 (6) *
Class B - -
Christopher Davino..... Class A 3,333 (7) *
Class B - -
Beverly Eichel....... Class A 202,166 (9) 2.6%
Class B - -
All Officers and Directors as a group Class A 3,019,941 38.2%
(six persons) Class B 500,018 91%
* Less than one percent
(1) All addresses are c/o Hirsch International Corp., 200 Wireless Boulevard,
Hauppauge, New York 11788.
(2) The Company's outstanding Common Stock consists of two classes. Class A
Common Stock and Class B Common Stock. The Class A Common Stock and the
Class B Common Stock are substantially identical except that two-thirds of
the directors of the Company will be elected by the holders of the Class B
Common Stock, as long as the number of outstanding Shares of Class B Common
Stock equals or exceeds 400,000 shares.
(3) Includes 400,018 shares of Class B Common Stock held by an estate planning
entity for the benefit of Mr. Arnberg's children. Mr. Arnberg exercises
voting control over these shares
(4) Includes 100,000 shares of Class A Common Stock owned by trusts created for
the benefit of his minor children as to which he disclaims beneficial
ownership.
(5) Includes options to purchase 10,000 shares of Class A Common Stock at an
exercise price of $0.96, 11,499 shares of Class A Common Stock at an
exercise price of $0.27, 6,666 shares of Class A Common Stock at an
exercise price of $0.92 per share and options to purchase 3,333 shares of
Class A Common Stock at an exercise price of $1.02 per share. Also includes
warrants to purchase 50,000 shares of Class A Common Stock at $0.50 per
share. Does not include options to purchase 834 shares of Class A Common
Stock at an exercise price of $0.27, options to purchase 3,334 shares of
Class A Common Stock at an exercise price of $0.92 per share and option to
purchase 6,667 shares of Class A Common Stock at an exercise price of $1.02
per share.
(6) Includes options to purchase 10,000 shares of Class A Common Stock at an
exercise price of $0.89, 10,000 shares of Class A Common Stock at an
exercise price of $0.27, 6,666 shares of Class A Common Stock at an
exercise price of $0.92 per share and 3,333 shares of Class A Common Stock
at an exercise price of $1.02 per share. Does not include options to
purchase 6,667 shares of Class A Common Stock at an exercise price of $1.02
per share, and 3,334 shares of Class A Common Stock at an exercise price of
$0.92 per share.
(7) Includes options to purchase 3,333 shares of Class A Common Stock at an
exercise price of $1.01 per share. Does not include options to purchase
6,667 shares of Class A Common Stock at an exercise price of $1.01 per
share.
(8) Includes options to purchase 100,000, 183,332 and 75,000 shares of Class A
Common Stock at an exercise price of $0.95, $0.27 and $1.12 per share
respectively. Does not include options to purchase 116,668 and 75,000
shares of Class A Common Stock at an exercise price of $0.27 and $1.12 per
share, respectively.
(9) Includes options to purchase 50,000, 102,166 and 20,000 shares of Class A
Common Stock at an exercise price of $0.52, $0.27 and $1.12 per share
respectively. Does not include options to purchase 65,334 and 20,000 shares
of Class A Common Stock at an exercise price of $0.27 and $1.12 per share,
respectively.
The Company is unaware of any arrangements between stockholders that
may result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective October 31, 2002, the Company completed the sale of all of the
outstanding equity interests in its wholly-owned subsidiary, Pulse Microsystems
Ltd. ("Pulse"), pursuant to the terms of the purchase agreement by and between
Hirsch and 2017146 Ontario Limited. All periods presented have been restated to
reflect the discontinue operations of Pulse (See Note 7 to the Consolidated
Financial Statements).
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 Tajima USA Inc.
("TUI") subsidiary owned by it to Tajima. The Company's Consolidated Financial
Statements have been restated to reflect the discontinued operations of TUI (See
Note 7 to the Consolidated Financial Statements).
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. On October 22, 2004, the Company sold substantially all of the
assets of its Hometown subsidiary to Embroidery Acquisition LLC, a wholly owned
subsidiary of PCA, LLC pursuant to the terms of a certain Asset Purchase
Agreement entered into between the Company, Hometown Threads, Buyer and PCA.
Hometown Threads, LLC was accounted for as discontinued operations in the
consolidated financial statements for all periods presented (See Note 7 to the
Consolidated Financial Statements).
Prior to January 2003, the Company had advanced approximately $496,000 for
premiums on split dollar life insurance for Henry Arnberg, the Company's
Chairman and Paul Levine, the former Vice-Chairman of the Board. The spouse of
each Messrs. Arnberg and Levine are the beneficiaries of these respective
policies. These advances are collateralized by the cash surrender value of the
policies, which totaled in the aggregate approximately $555,000 at January 29,
2005 for both policies. The premiums for these policies are currently being paid
out of the accumulated dividends for the policies.
On April 2, 2004, the Company entered into a 36 month consulting agreement
with Paul Levine, former Vice-Chairman of the Board of Directors. Under the
agreement, Mr. Levine resigned from the Board of Directors and was relieved of
all fiduciary positions or committees. Mr. Levine is longer an employee of the
Company and for the term of the agreement is considered an independent
contractor. A monthly fee of $9,166.67 will be paid to Mr. Levine, in addition
to the cost of medical benefits as provided to executive level employees of the
Company, premiums for his disability policy and payments under an automobile
lease which expired January 18, 2005. Mr. Levine will provide consulting
services for up to 4 days per month during the term of the agreement including
attendance at trade shows, business development activities, contact with key
customer accounts, product assessment and undertaking special projects.
During the fourth quarter of fiscal 2005, Howard Arnberg, former President
of Hometown Threads, received a lump sum payment in the amount of $92,500. This
payment was made pursuant to a change of control provision in an employment
agreement between Mr. Howard Arnberg and the Company in connection with the sale
of Hometown Threads in October, 2004. Howard Arnberg in no longer affiliated
with the Company.
On December 1, 2004, the Company entered into a 36 month consultant
agreement with Henry Arnberg, Chairman of the Board of Directors. Under the
agreement, Mr. Arnberg is no longer an employee of the company, but will remain
Chairman of the Board of Directors. A monthly fee of $12,500 will be paid to Mr.
Arnberg in lieu of any other compensation for his service on the Board of
Directors. Mr. Arnberg would continue to receive medical benefits as provided to
the executive level of employees of the Company, premiums for his disability
policy and payments under the current automobile lease until the lease expires.
Mr. Arnberg will provide consulting services for up to 10 days per month during
the term of the agreement including attendance at trade shows, contact with key
customer accounts, product assessment and undertaking special projects.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth the fees paid to BDO Seidman, LLP for
professional services for each of the two fiscal years ended January 29, 2005
and January 31, 2004:
2005 2004
---- ----
------------------ ------------------
Audit Fees........................... $172,500 $175,000
Audit-Related Fees................... 26,000 29,000
Tax Fees............................. 33,000 55,000
------------------ ------------------
$231,500 $259,000
================== ==================
Audit fees include fees billed for (a) the audit of Hirsch
International Corp. and its consolidated subsidiaries, (b) the review of
quarterly financial information, (c) attendance at the annual stockholders'
meeting and (d) the statutory audit for one subsidiary.
Audit-Related Fees include fees billed for (a) consultation on
accounting matters and (b) the audit of an employee benefit plan.
Tax Fees include fees billed for the preparation of tax returns and
consulting on tax examinations and planning matters.
The Audit Committee negotiates the annual audit fee directly with the
Company's independent registered Public Accounting firm. The Audit Committee
has also established pre-approved services for which the Company's management
can engage the Company's independent registered Public Accounting firm. Any work
in addition to these pre-approved services in a quarter requires the advance
approval of the Audit Committee. The Audit Committee considers whether the
provision of permitted non-audit services is compatible with maintaining BDO
Seidman, LLP's independence. PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
(a)(1) All financial statements Page(s)
------------------------------- -------
Index to Consolidated Financial
Statements..................................................F-1
Report of Independent Registered Public Accounting
Firm....................................................... F-2
Consolidated Balance
Sheets......................................................F-3 to F-4
Consolidated Statements of
Income......................................................F-5
Consolidated Statements of Stockholders'
Equity......................................................F-6
Consolidated Statements of Cash
Flows.......................................................F-7
Notes to Consolidated Financial
Statements..................................................F-8 to F-26
Exhibits....................................................F-27 to F-32
(a)(3) Exhibits which are listed on the Exhibit Index below
EXHIBIT INDEX
-------------
Exhibit No. Description of Exhibit
- ----------- ----------------------------------------------
%3.1 Restated Certificate of Incorporation of the Registrant
^3.2 Amended and Restated By-Laws of the Registrant
*4.1 Specimen of Class A Common Stock Certificate
*4.2 Specimen of Class B Common Stock Certificate
10.1 Distributorship Agreement dated as of April, 2004 among the Company,
Tajima Industries Ltd ("Tajima"), Tajima USA, Inc ("TUI") and Tajima
America Corp.("TAC")
10.2 Distributorship Agreement dated as of April, 2004 among the Company,
Tajima Industries Ltd ("Tajima"), Tajima USA, Inc ("TUI") and Tajima
America Corp.("TAC")
+++10.3 1993 Stock Option Plan, as amended
***10.4 2003 Stock Option Plan
+++10.5 1994 Non-Employee Director Stock Option Plan, as amended
*****10.6 2004 Non-Employee Director Stock Option Plan
**10.7 Lease Agreement dated March 8, 2001 between the Company and
Brandywine Operating Partnership, L.P.
++10.8 First Amendment to Lease dated December 2001 between the
Company and Brandywine Operating Partnership, L.P.
****10.9 Loan and Security Agreement dated as of November 26, 2002,
by and between Congress Financial Corporation, as Lender and Hirsch
International Corp., as Borrower.
++++10.10 Amendment No.1 to Loan and Security Agreement dated as of April 28,
2003
#10.11 Amendment No.2 to Loan Security Agreement dated as of July 16, 2003
#10.12 Amendment No.3 to Loan and Security Agreement dated April 30, 2004
@10.13 Amendment No. 4 to Loan and Security Agreement dated August 31, 2004.
21.1 List of Subsidiaries of the Registrant
23.1 Independent Registered Public Accounting Firm Consent
31.1 Certification of Chief Executive Officer pursuant to
Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer pursuant to Rules
13a-14 and 15d-14 of the Securities Exchange Act of 1934.
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
- --------------------------------------------------------------------------------
% Incorporated by reference from the Registrant's Form 10-Q filed for
the quarter ended July 31, 1997.
^ Incorporated by reference from the Registrant's Form 10-Q filed for
the quarter ended October, 31, 1997.
@ Incorporated by reference from the Registrant's Form 10-Q filed for
the quarter ended July 31, 2004.
+ Incorporated by reference from Registrant's Form 10-K filed for the
year ended January 31, 2004.
* Incorporated by reference from the Registrant's Registration
Statement on Forms S-1, Registration Number 33-72618.
** Incorporated by reference from Registrant's Report on Form 8-K filed
with the Commission March 15, 2001.
++ Incorporated by reference from Registrant's Form 10-K for the fiscal
year ended January 31, 2002.
+++ Incorporated by reference from Registrant's definitive proxy
statement filed with the Commission on May 30, 2002.
*** Incorporated by reference from Registrant's definitive proxy
statement filed with the Commission on June 2, 2003.
**** Incorporated by reference from Registrant's Report on Form 8-K with
the Commission on December 6, 2002.
***** Incorporated by reference from Registrant's definitive proxy
statement filed with the Commissions on August 6, 2004.
++++ Incorporated by reference from Registrant's Report on Form 10-K filed
with the Commission on April 30, 2003.
# Incorporated by reference from Registrant's Report on Form 10-Q filed
with the Commission on September 15, 2003.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HIRSCH INTERNATIONAL CORP.
Registrant
By: /s/Paul Gallagher
----------------------
Paul Gallagher, President
Chief Executive Officer and Chief
Operating Officer
Dated: April 29, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title
- --------- -----
/s/ Henry Arnberg Chairman of the Board of Directors
Henry Arnberg
/s/ Paul Gallagher President, Chief Executive Officer (Principal
Paul Gallagher Executive Officer), Chief Operating Officer and
Director
/s/ Beverly Eichel Vice President-Finance and Administration, and Chief
Beverly Eichel Financial Officer (Principal Accounting and Financial
Officer), Secretary
/s/ Daniel Vasquez Corporate Controller
Daniel Vasquez
/s/ Marvin Broitman Director
Marvin Broitman
/s/ Mary Ann Domuracki Director
Mary Ann Domuracki
/s/ Christopher Davino Director
Christopher Davino
INDEX TO FINANCIAL STATEMENTS
HIRSCH INTERNATIONAL CORP.
Report of Independent Registered Public Accounting Firm F-2
Consolidated Financial Statements
Balance Sheets as of January 29, 2005 and January 31, 2004 F-3-F-4
Statements of Operations for the years ended
January 29, 2005, January 31, 2004 and 2003 F-5
Statements of Stockholders' Equity for the years ended
January 29, 2005, January 31, 2004 and 2003 F-6
Statements of Cash Flows for the years ended
January 29, 2005, January 31, 2004 and 2003 F-7
Notes to the Consolidated Financial Statements F-8-F-26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Hirsch International Corp.
Hauppauge, New York
We have audited the accompanying consolidated balance sheets of Hirsch
International Corp. and subsidiaries as of January 29, 2005 and January 31,
2004, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended January
29, 2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
controls over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hirsch
International Corp. and subsidiaries as of January 29, 2005 and January 31,
2004, and the results of their operations and their cash flows for each of the
three years in the period ended January 29, 2005, in conformity with accounting
principles generally accepted in the United States of America.
/s/ BDO Seidman, LLP
- --------------------
BDO Seidman, LLP
Melville, New York
April 15, 2005, except for Note 16 which is as of April 20, 2005
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 29, JANUARY 31,
ASSETS 2005 2004
---------------------------- -------------------------
CURRENT ASSETS:
Cash and cash equivalents $6,398,000 $8,963,000
Restricted cash (Note 2c) 5,650,000 3,000,000
Accounts receivable, net of an allowance for possible losses of
$630,000 and $680,000, respectively (Notes 4 and 15c) 4,914,000 6,562,000
Inventories, net (Notes 3, 4 and 15c) 5,776,000 6,922,000
Other current assets 393,000 264,000
Assets of discontinued operations (Note 7) 831,000 1,339,000
---------------------------- -------------------------
Total current assets 23,962,000 27,050,000
---------------------------- -------------------------
PROPERTY, PLANT AND EQUIPMENT, Net (Note 6) 1,949,000 2,397,000
ASSETS OF DISCONTINUED OPERATIONS (Note 7) - 22,000
OTHER ASSETS (Note 8) 715,000 877,000
---------------------------- -------------------------
TOTAL ASSETS $26,626,000 $30,346,000
============================ =========================
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 29, JANUARY 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2004
--------------------- ---------------------
CURRENT LIABILITIES:
Trade acceptances payable (Note 15(d)) $0 $ 1,324,000
Accounts payable and accrued expenses (Note 9) 8,346,000 8,150,000
Capitalized Lease Obligation - short term (Note 10) 148,000 123,000
Deferred Gain - short term (Note 10) 119,000 119,000
Customer deposits and other 585,000 383,000
Liabilities of discontinued operations (Note 7) 1,495,000 2,253,000
--------------------- ---------------------
Total current liabilities 10,693,000 12,352,000
CAPITALIZED LEASE OBLIGATIONS - Less current maturities (Note 10) 1,270,000 1,418,000
DEFERRED GAIN - (Note 10) 608,000 728,000
--------------------- ---------------------
12,571,000 14,498,000
Total liabilities
--------------------- ---------------------
COMMITMENTS AND CONTINGENCIES (Note 15)
STOCKHOLDERS' EQUITY (Note 12): Preferred stock, $.01 par value; authorized:
1,000,000 shares; issued: none - -
Class A common stock, $.01 par value; authorized: 20,000,000 shares;
issued and outstanding; 9,002,149 and 6,827,000 shares respectively 90,000 68,000
Class B common stock, $.01 par value; authorized: 3,000,000 shares,
outstanding: 600,018 and 2,668,000 shares, respectively 6,000 27,000
Additional paid-in capital 41,465,000 41,408,000
Accumulated deficit (25,489,000) (23,638,000)
--------------------- ---------------------
16,072,000 17,865,000
Less: Treasury Class A Common stock at cost 1,164,000 shares (Note 13) 2,017,000 2,017,000
--------------------- ---------------------
Total stockholders' equity 14,055,000 15,848,000
--------------------- ---------------------
$26,626,000 $30,346,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
===================== =====================
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
January 29, January 31, January 31,
2005 2004 2003
---- ---- ----
NET SALES $43,641,000 $46,449,000 $42,723,000
COST OF SALES (Note 15d) 29,574,000 31,120,000 29,490,000
---------------- -------------- --------------
14,067,000 15,329,000 13,233,000
GROSS PROFIT
---------------- -------------- --------------
OPERATING EXPENSES
Selling, general and administrative expenses 15,874,000 18,204,000 16,793,000
Restructuring costs (income) (Note 9) - (716,000) -
---------------- -------------- --------------
Total operating expenses 15,874,000 17,488,000 16,793,000
---------------- -------------- --------------
OPERATING LOSS (1,807,000) (2,159,000) (3,560,000)
---------------- -------------- --------------
OTHER INCOME (EXPENSE)
Interest expense (185,000) (215,000) (259,000)
Other income (expense) - net (147,000) 349,000 368,000
---------------- -------------- --------------
Total other income (expense) (332,000) 134,000 109,000
---------------- -------------- --------------
(2,139,000) (2,025,000) (3,451,000)
LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES, AND DISCONTINUED OPERATIONS
INCOME TAX PROVISION (BENEFIT) (Note 11) 9,000 25,000 (504,000)
---------------- -------------- --------------
LOSS FROM CONTINUING OPERATIONS (2,148,000) (2,050,000) (2,947,000)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS - NET (Note 7)
(Includes $943,000 gain on
sale of Hometown Threads for fiscal 2005) 376,000 2,494,000 (2,603,000)
---------------- -------------- --------------
$(1,772,000) $444,000 ($5,550,000)
NET INCOME (LOSS)
================ ============== ==============
LOSS PER SHARE:
Basic and diluted:
Loss from continuing operations ($0.26) ($0.24) ($0.34)
Income (loss) from discontinued operations 0.05 0.29 (0.30)
---------------- -------------- --------------
($0.21) $0.05 ($0.64)
Net income (loss)
================ ============== ==============
WEIGHTED AVERAGE NUMBER OF SHARES IN THE CALCULATION OF
INCOME (LOSS) PER SHARE
Basic and diluted 8,351,000 8,571,000 8,789,000
================ ============== ==============
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 29, 2005, JANUARY 31, 2004 AND 2003
Class A Class B
Common Stock Common Stock
(Note 12) (Note 12)
----------------------------------- ---------------------------------
Shares Amount Shares Amount Additional
Paid-In Capital
--------------- ---------------- --------------- -------------- ----------------
BALANCE, JANUARY 31, 2002 6,815,000 $68,000 2,668,000 $27,000 $41,397,000
Comprehensive income: -- -- -- -- --
Gain on foreign currency translation -- -- -- -- --
Net loss -- -- -- -- --
Total comprehensive income -- -- -- -- --
--------------- ---------------- --------------- -------------- ----------------
BALANCE, JANUARY 31, 2003 6,815,000 68,000 2,668,000 27,000 41,397,000
Exercise of stock options & warrants 12,000 -- -- -- 11,000
Dividends -- -- -- -- --
Purchase of treasury shares (Note 13) -- -- -- -- --
Net income -- -- -- -- --
--------------- ---------------- --------------- -------------- ----------------
BALANCE, JANUARY 31, 2004 6,827,000 68,000 2,668,000 27,000 41,408,000
Exercise of stock options & warrants 107,000 1,000 -- -- 57,000
Dividends -- -- -- -- --
Transfers 2,068,000 21,000 (2,068,000) (21,000) --
Net loss -- -- -- -- --
--------------- ---------------- --------------- -------------- ----------------
BALANCE, JANUARY 29, 2005 9,002,000 90,000 600,000 6,000 41,465,000
=============== ================ =============== ============== ================
Accumulated Accumulated Deficit Treasury Total
other
Comprehensive Stock
Income (Loss) (Note 13)
(Note 2n)
-------- -------- -------- --------
BALANCE, JANUARY 31, 2002 $(156,000) $(18,275,000) $(1,602,000) $21,459,000
Gain on foreign currency translation 156,000 -- -- 156,000
Net loss -- (5,550,000) -- (5,550,000)
Total comprehensive income -- -- -- (5,394,000)
---------------
BALANCE, JANUARY 31, 2003 -- (23,825,000) (1,602,000) $16,065,000
----------------- -------------------- --------------- ---------------
Exercise of stock options & warrants -- -- -- 11,000
Purchase of treasury shares (Note 13) -- -- (415,000) (415,000)
Dividends -- (257,000) -- (257,000)
---------------
Net income -- 444,000 -- $444,000
----------------- -------------------- --------------- ---------------
BALANCE, JANUARY 31, 2004 -- (23,638,000) (2,017,000) $15,848,000
Exercise of stock options & warrants -- -- -- 58,000
Dividends -- (79,000) -- (79,000)
Net loss -- (1,772,000) -- (1,772,000)
----------------- -------------------- --------------- ---------------
BALANCE, JANUARY 29, 2005 -- $(25,489,000) $(2,017,000) $14,055,000
================= ==================== =============== ===============
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY
January 29, January 31, January 31,
2005 2004 2003
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,772,000) $444,000 $(5,550,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used
in) operating activities:
Depreciation and amortization 786,000 887,000 809,000
Gain on sale of assets (50,000)
Recognized gain on sale of building (119,000) (119,000) (119,000)
Provision for reserves (200,000) (140,000) 410,000
Deferred income taxes - - (130,000)
Minority interest - 235,000 196,000
Reversal of restructuring accrual reserves - (716,000) -
Reversal of lease reserves - (2,000,000) -
Gain on sale of subsidiary (943,000) - -
CHANGES IN ASSETS AND LIABILITIES:
Accounts receivable 1,838,000 (2,493,000) 4,675,000
Net investments of sales type leases (85,000) 553,000 5,365,000
Inventories 1,142,000 1,431,000 2,910,000
Other current assets and other assets (315,000) 453,000 (1,431,000)
Trade acceptances payable (1,324,000) 355,000 (1,216,000)
Accounts payable and accrued expenses 280,000 1,994,000 (3,718,000)
Prepaid income taxes and income taxes payable (8,000) 3,176,000 3,742,000
--------------- ----------------- -----------------
Net cash provided by (used in) operating activities (720,000) 4,010,000 5,943,000
--------------- ----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (166,000) (552,000) (547,000)
Proceeds from sale of fixed assets - 100,000 -
Proceeds from sale of subsidiary 1,139,000 500,000 530,000
--------------- ----------------- -----------------
Net cash provided by (used in) investing activities 973,000 48,000 (17,000)
--------------- ----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Restricted cash (2,650,000) (2,100,000) (900,000)
Repayments of long-term debt (147,000) (123,000) (83,000)
Payment of deferred financing costs - - (518,000)
Exercise of stock options 58,000 11,000 -
Payment of dividends (79,000) (170,000) -
Purchase of treasury shares - (415,000) -
--------------- ----------------- -----------------
Net cash used in financing activities (2,818,000) (2,797,000) (1,501,000)
--------------- ----------------- -----------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - - 156,000
--------------- ----------------- -----------------
(2,565,000) 1,261,000 4,581,000
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 8,963,000 7,702,000 3,121,000
--------------- ----------------- -----------------
$6,398,000 $8,963,000 $7,702,000
CASH AND CASH EQUIVALENTS, END OF YEAR
=============== ================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest and bank fees paid $566,000 $584,000 $515,000
=============== ================= =================
Income taxes paid $50,000 $350,000 $9,000
=============== ================= =================
Supplemental Disclosure of non-cash investing activity: In connection with the
sale of its TUI subsidiary effective January 31, 2004, the Company incurred
accounts payable to TUI in the amount of $4.5 million.
See notes to consolidated financial statements.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 29, 2005, JANUARY 31, 2004 AND 2003
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Hirsch International Corp. ("Hirsch"), HAPL Leasing Co., Inc. ("HAPL" or "HAPL
Leasing"), Pulse Microsystems, Ltd. through October 31, 2002 (Pulse), Hirsch
Business Concepts LLC ("HBC"), Hometown Threads LLC ("Hometown") through October
22, 2004, and Tajima USA, Inc. ("TUI") through January 31, 2004 (collectively,
the "Company").
The Company is a single source provider of sophisticated equipment and
value added products and services to the embroidery industry. The embroidery
equipment and value added products sold by the Company are widely used by
contract embroiderers, large and small manufacturers of apparel and fashion
accessories, retail stores and embroidery entrepreneurs servicing specialized
niche markets.
On January 6, 1998, Tokai Industrial Sewing Machine Company ("Tokai"),
an affiliate of Tajima, the Company's major supplier, purchased a 45 percent
interest in TUI for $900,000. For financial reporting purposes, the assets,
liabilities and earnings of TUI are consolidated in the Company's financial
statements. Tokai's 45 percent interest in TUI has been reported as minority
interest in the Company's Consolidated Balance Sheet as of January 31, 2003 and
Tokai's share of the earnings had been reported as minority interest in the
Company's Consolidated Statements of Operations for the years ended January 31,
2004 and 2003. As of January 31, 2004 the Company sold its majority position in
TUI to Tajima Industries and its earnings have been reported as discontinued
operations.
See Note 7 to the Consolidated Financial Statements for discontinued
operations of the leasing subsidiary, Pulse, Hometown and TUI.
Due to the discontinuation of entities noted above, the Company
currently only operates in a single reportable segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation - The consolidated financial
statements include the accounts of the Company and its
wholly-owned subsidiaries. All material inter-company balances
and transactions have been eliminated in consolidation.
b. Revenue Recognition - The Company distributes embroidery
equipment. Where installation and customer acceptance are a
substantive part of the sale, by its terms, the Company has
deferred recognition of the revenue until such customer
acceptance of installation has occurred. In fiscal years 2005,
2004 and 2003, most sales of new equipment did not require
installation within the terms of the sales contract; these
sales were recorded at the time of shipment, at which time
title is transferred to the customer.
Service revenues and costs are recognized when services are
provided. Sales of computer hardware and software are
recognized when shipped provided that no significant vendor
and post-contract and support obligations remain and
collection is probable.
c. Cash Equivalents - Cash equivalents consist of money market
accounts with initial maturities of three months or less. As
of January 29, 2005, the Company had $5.7 million in
restricted cash which was used to collateralize outstanding
standby letters of credit. As of January 31, 2004 the Company
had $3.0 million in restricted cash which is being used to
collateralize outstanding letters of credit due in 90 days.
d. Allowance for Doubtful Accounts - The Company maintains an
allowance for estimated losses resulting from the inability of
its customers to make required payments. An estimate of
uncollectible amounts is made by management based upon
historical bad debts, current customer receivable balances,
age of customer receivable balances, the customer's financial
condition and current economic trends. If the actual
uncollected amounts significantly exceed the estimated
allowance, then the Company's operating results would be
significantly and adversely affected.
e. Inventories - Inventories consisting of machines and parts are
stated at the lower of cost or market. Cost for machinery is
determined by specific identification and for all other items
on a first-in, first-out weighted average basis. Reserves are
established to record provisions for slow moving inventories
in the period in which it becomes reasonably evident that the
product is not salable or the market value is less than cost.
Used equipment is valued based on an assessment of age,
condition, model type, accessories, capabilities and demand in
the used machine market.
f. Foreign Currency Transactions - Trade acceptances payable are
denominated in Japanese yen and are related to the purchase of
equipment from the Company's major supplier. Gains and losses
from foreign currency transactions are included in other
income, net .
g. Property, Plant and Equipment - Property, plant and equipment
are stated at cost less accumulated depreciation and
amortization. Capitalized values of property under leases are
amortized over the life of the lease or the estimated life of
the asset, whichever is less. Depreciation and amortization
are provided on the straight-line or declining balance methods
over the following estimated useful lives:
Furniture and fixtures 3-7
Machinery and equipment 3-7
Software 3
Automobiles 3-5
Leasehold improvements 3-20
Property under capital lease 10
h. Impairment of Long-Lived Assets - The Company reviews
long-lived assets whenever events or changes in circumstances
indicate that the carrying value of any of these assets may
not be recoverable. In that regard the Company will assess the
recoverability of such assets based upon estimated
undiscounted cash flow forecasts.
i. Warranty - The Company has a five-year limited warranty policy
for its embroidery machines. The Company's policy is to accrue
the estimated cost of satisfying future warranty claims on a
quarterly basis. In estimating its future warranty
obligations, the Company considers various relevant factors,
including the Company's stated warranty policies and
practices, the historical frequency of claims, and the cost to
replace or repair its products under warranty. If the number
of actual warranty claims or the cost of satisfying warranty
claims significantly exceeds the estimated warranty reserve,
the Company's operating expenses and net income (loss) could
be significantly adversely affected.
j. Leases - Leases (in which the Company is lessee) which
transfer substantially all of the risks and benefits of
ownership are classified as capital leases, and assets and
liabilities are recorded at amounts equal to the lesser of the
present value of the minimum lease payments or the fair value
of the leased properties at the beginning of the respective
lease terms. Interest expense relating to the lease
liabilities is recorded to effect constant rates of interest
over the terms of the leases. Leases which do not meet such
criteria are classified as operating leases and the related
rentals are charged to expense as incurred.
k. Income Taxes - The Company records deferred tax assets and
liabilities for the expected future tax consequences of events
that have been included in the Company's consolidated
financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on
the differences between the financial accounting and tax bases
of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse.
Valuation allowances are established when the Company cannot
determine the future utilization of some portion or all of the
deferred tax asset.
l. Income (Loss) Per Share - Basic earnings per share are based
on the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share are
based on the weighted average number of shares of common stock
and dilutive common stock equivalents (options and warrants)
outstanding during the period, computed in accordance with the
treasury stock method. Outstanding options and warrants of
1,253,000, 1,258,000 and 1,218,000 were anti-dilutive for the
fiscal years ended January 29, 2005 and January 31, 2004 and
2003, respectively.
m. Stock-Based Compensation - The Company accounts for
stock-based awards to employees using the intrinsic value
method.
The Company follows Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based compensation,"
("SFAS 123") which requires the disclosure of pro forma net
income (loss) and earnings (loss) per share. Under SFAS 123,
the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even
though such models were developed to estimate the fair value
of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's
stock option awards. These models also require subjective
assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made at the date of
the grant using the Black-Scholes option pricing model with
the following weighted average assumptions: Fiscal 2005:
dividend yield of 0.00%, volatility of 67% and risk free
interest rate of 3.72% for grants on 12/1/2004, 77% volatility
and 3.40% risk free interest rate for grants on 9/8/2004 and
77% volatility and 3.35% risk free rate for grants on
9/17/2004. 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; 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 and expected life of 5 years. The Company's
calculations are based on a multiple option valuation approach
and forfeitures are recognized as they occur. The weighted
average fair value of the options granted during 2005, 2004
and 2003 was $1.11, $0.84 and $0.16, respectively.
If compensation cost for the Company's stock options had been
determined consistent with SFAS No. 123, the Company's net
(loss) income and (loss) earnings per share would have been
the pro forma amounts indicated below:
Year Ended
----------
January 29 January 31
---------- ----------
2005 2004 2003
---- ---- ----
Net income (loss):
Net income (loss) as reported $(1,772,000) $444,000 $(5,550,000)
Deduct Total stock-based employee
compensation expense determined
under fair value method 103,000 70,000 82,000
-------------------- -------------------- --------------------
Pro forma net income (loss) $(1,875,000) $374,000 $(5,632,000)
==================== ==================== ====================
Basic and diluted net income (loss) per share:
As reported $(0.21) $0.05 $(0.63)
Pro forma $(0.22) $0.04 $(0.64)
n. Comprehensive Income - Statement of Financial Accounting
Standards No. 130. "Reporting Comprehensive Income" ("SFAS
130"). This statement established rules for reporting
comprehensive income and its components. Comprehensive income
consists of net income (loss) and, in fiscal 2003 only,
foreign exchange translation adjustments related to Pulse
Canada and is presented in the consolidated statements of
stockholders' equity.
o. Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
p. Fair Value of Financial Instruments - Financial instruments
consist primarily of investments in cash, cash equivalents,
trade account receivables, accounts payable and debt
obligations. Where quoted market prices are not available,
fair values are estimated based on assumptions concerning the
amount and timing of estimated future cash flow and assumed
discount rates reflecting varying degrees of credit risk, at
January 29, 2005 and January 31, 2004, the fair value of the
Company's financial instruments approximated the carrying
value.
q. Recent Accounting Pronouncements - The Financial Accounting
Standards Board ("FASB") has issued the following:
In December 2004, the FASB issued SFAS 123R, "Share-Based
Payment." This statement is a revision of SFAS 123,
"Accounting for Stock-Based Compensation" and supercedes APB
25, "Accounting for Stock Issued to Employees," and is
effective beginning the first annual or interim period after
December 15, 2005. SFAS 123R establishes standards on
accounting for transactions in which an entity obtains
employee services in share-based payment transactions. This
statement measurement of the cost of employee services
received in exchange for an award of equity instruments based
on the grant-date fair value of the award. The cost will be
recognized over the period during which an employee is
required to provide service in exchange for the award, which
is usually the vesting period. SFAS 123R also addresses
transactions in which an entity incurs liabilities in exchange
for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the
issuance of those equity instruments. The adoption of this
statement is not expected to have a material effect on our
financial position or results of operations. We intend to
implement this statement in the first quarter of fiscal 2006.
In December 2004, the FASB issued SFAS 153,
"Exchanges of Nonmonetary Assets," which is effective for
fiscal years beginning after June 15, 2005. SFAS 153 amends
APB 29, "Accounting for Nonmonetary Transactions", which is
based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets
exchanged. The quidance in APB29 included certain exceptions
to that principle. SFAS 153 amends APB 29 to eliminate the
exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly
as a result of the exchange. The adoption of this statement is
not expected to have a material effect on our financial
position
r. Reclassifications - As a result of discontinued operations,
certain reclassifications have been applied to prior year
amounts to conform to current year presentation.
s. Shipping and handling expenses - The Company records shipping
and handling expenses in operating expenses on the statement
of operations. These expenses were approximately; $934,000,
$974,000 and $1,012,000 during the years ended January 29,
2005, January 31, 2004, and 2003, respectively. Amounts billed
to customers were immaterial for all periods presented.
t. Advertising expenses - The Company expenses advertising as
incurred. These expenses were approximately; $673,000,
$608,000 and $455,000 during the years ended January 29, 2005,
January 31, 2004, and 2003, respectively
3. INVENTORIES
January 29, January 31,
2005 2004
--------------- -------------------
New machines $3,824,000 $5,194,000
Used machines 566,000 344,000
Parts and accessories 2,979,000 2,966,000
Less reserve for slow-moving inventory (1,593,000) (1,582,000)
--------------- -------------------
Total $5,776,000 $6,922,000
--------------- -------------------
4. CHANGES IN RESERVES
Allowance for Doubtful Accounts:
Opening Ending
Balance Additions Write Offs Adjustments Balance
------- --------- ---------- ----------- -------
Year ended January 29, 2005 $ 680,000 $ 0 $ 0 $ (50,000) $ 630,000
Year ended January 31, 2004 $1,451,000 $230,000 $(1,001,000) 0 $ 680,000
Year ended January 31, 2003 $2,893,000 $151,000 $(1,593,000) 0 $1,451,000
Inventory Reserve
Year ended January 29, 2005 $1,582,000 $ 59,000 $ (148,000) $ 100,000 $1,593,000
Year ended January 31, 2004 $1,946,000 $ 80,000 $ 0 $ (444,000) $1,582,000
Year ended January 31, 2003 $2,185,000 $259,000 $ (498,000) $ 0 $1,946,000
Warranty Reserve
Year ended January 29, 2005 $ 543,000 $233,602 $ 0 $ (233,602) $ 543,000
Year ended January 31, 2004 $ 543,000 $257,896 $ 0 $ (257,896) $ 543,000
Year ended January 31, 2003 $ 543,000 $245,749 $ 0 $ (245,749) $ 543,000
During fiscal 2005, the Company reversed $200,000 in Accounts Receivable
reserves that were no longer necessary. During fiscal 2004, the Company reversed
$444,000 in inventory reserves that were no longer necessary.
5. NET INVESTMENT IN SALES-TYPE LEASES
January 29, January 31,
-------------------- -------------------
2005 2004
-------------------- -------------------
Total minimum lease payments receivable $228,000 $ 423,000
Estimated residual value of leased property (unguaranteed) (A) 461,000 853,000
Reserve for estimated uncollectible lease payments (50,000) (94,000)
Less: Unearned income (56,000) (79,000)
-------------------- -------------------
Net investment - Included in Assets of discontinued operations $583,000 $1,103,000
(See Note 7)
==================== ===================
(A) The estimated residual value of leased property will fluctuate
based on volume of transactions, financial structure of the
transactions, sales of residuals to third party financing
organizations and periodic recognition of the increased net
present value of the residuals over time.
6. PROPERTY, PLANT AND EQUIPMENT
January 29, January 31,
2005 2004
---------------- -- -----------------
Property Under Capital Lease Obligation $1,786,000 $1,786,000
Software 614,000 576,000
Machinery and equipment 5,239,000 5,182,000
Furniture and fixtures 2,042,000 1,986,000
Automobiles 35,000 294,000
Leasehold improvements 594,000 583,000
---------------- -----------------
Total 10,310,000 10,407,000
Less: Accumulated depreciation
and amortization (8,361,000) (8,010,000)
---------------- -----------------
Property, plant and equipment, net $1,949,000 $2,397,000
================ =================
7. DISCONTINUED OPERATIONS
In the fourth quarter of Fiscal 2002, the Company determined that its
HAPL Leasing subsidiary was not strategic to the Company's ongoing objectives
and discontinued its operations. Accordingly, the Company reported its
discontinued operations in accordance with SFAS 144. The consolidated financial
statements have segregated the assets, liabilities and operating results of
these discontinued operations for all periods presented. Management intends to
sell the net assets by January 2006.
The operating loss in fiscal 2003 includes a reserve of $4 million as
an additional provision for the liquidation of the lease portfolio. In July
2003, the Company entered into a transaction whereby the Company assigned its
interest in the remaining Ultimate net loss lease portfolios from the CIT Group
to Beacon Funding. 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 reversed as part of discontinued
operations, $2.0 million of reserves recorded in fiscal 2002 associated with the
UNL lease portfolio. The transaction closed in September 2003.
Assets and liabilities of discontinued operations of HAPL Leasing are as follows
(in thousands):
For the year ended,
January 29, January 31,
2005 2004
------------------- ----------------
Assets:
Accounts receivable $ 92 $ 0
Minimum lease payments receivable and
residuals (Note 5) 583 1,103
Inventory 0 23
Prepaid taxes and other assets 8 11
------------------- ----------------
Total Assets $ 683 $1,137
=================== ================
Liabilities:
Accounts payable and accrued expenses $1,009 $1,548
Income taxes payable 87 87
------------------- ----------------
Total Liabilities $1,096 $1,635
=================== ================
Summary operating results of the discontinued operations of HAPL Leasing are as
follows (in thousands):
For the year ended
January 29, January 31, January 31,
2005 2004 2003
---- ---- ----
Revenue ......................... $107 $ 619 $1,554
Gross profit..................... 85 278 128
Income (loss) from discontinued
operations....... $ 0 $2,000 $(4,000)
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 which was
paid as follows: (a) $0.5 million cash, (b) a $0.5 million note payable in 11
quarterly installments beginning April 30, 2003 and including interest accruing
on the principal balance at the rate of US Prime +1% per annum, which note 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 reflect the discontinued
operations of Pulse.
Summary operating results of the discontinued operations of Pulse Microsystems,
Ltd are as follows (in thousands):
For the year ended January 31,
2003
----
Revenue................................... $3,731
Gross profit.............................. 2,510
Income (loss) from discontinued operations $ 328
In November 2003, the Company was notified by Tajima that it had an
interest to purchase the Company's interest in TUI effective January 31, 2004.
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.
The purchase price (the "Purchase Price") for the Shares was equal to the
Book Value (as defined in the Agreement) calculated in accordance with generally
accepted accounting principles. At the closing, Tajima paid the Company the sum
of $500,000 (the "Initial Payment") in partial payment of the Purchase Price
paid in accordance with the terms of the Agreement.
In addition, the Company agreed to repay TUI the sum of $7,182,002,
representing amounts owed by the Company to TUI as of January 31, 2004 (the "Net
Intercompany Payable"). The Net Intercompany Payable was paid as follows:
(a) the Initial Payment ($500,000) was paid by Tajima to TUI on behalf of the
Company
(b) the assignment by the Company to TUI of its right to receive the sum of
$2,200,000 from Tajima upon payment of the balance due on the Purchase
Price, and
(c) the payment by the Company of the sum of $4,482,000 in five (5) equal
monthly installments of $735,167 each and a sixth payment of $806,165,
commencing February 29,2004 and continuing through and including July 31,
2004.
The Consolidated Financial Statements for all periods presented have been
restated to reflect the discontinued operations of TUI.
Summary operating results of the discontinued operations of TUI (in thousands)
are as follows:
For the year ended
January 31, January 31,
2004 2003
-------------- ---------------
Revenue $13,228 $12,433
Gross profit 1,812 1,506
Income (Loss) from Discontinued Operations $965 $1,068
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. On October 22, 2004, the Company sold substantially all of the
assets of its Hometown subsidiary to Embroidery Acquisition LLC ("Buyer"), a
wholly owned subsidiary of PCA, LLC ("PCA") pursuant to the terms of a certain
Asset Purchase Agreement ("Agreement") entered into between the Company,
Hometown, Buyer and PCA. Prior to the transaction, Hometown had been engaged in
the business of operating and franchising retail embroidery service centers in
Wal-Mart stores and other retail locations (the "Business"). The purchase price
for the assets acquired by Buyer was $1,500,000. In addition, Buyer agreed to
assume certain enumerated liabilities of Hometown. Pursuant to the Agreement,
PCA guaranteed the obligations of the Buyer. The Company and Hometown entered a
Non-Competition, Non-Disclosure and Non-Solicitation Agreement, the Company and
Hometown are precluded from directly and indirectly competing with Buyer for
seven (7) years in the United States. The Company and Hometown are also required
to keep confidential certain Confidential Information (as defined therein) for a
period of ten (10) years. Pursuant to the Agreement, The Company, Hometown and
Buyer have entered into a certain Supply Agreement having a term of five (5)
years. Under the terms of the Supply Agreement, the Company agreed to supply to
Buyer and Buyer is required to purchase from the Company all products previously
purchased by Hometown from the Company and utilized in the Business upon the
prices, terms and conditions contained therein.
As a result of the sale of the Hometown Threads subsidiary, the Company
recognized a gain of approximately $943,000.
The Buyer has withheld $200,000 from the selling price primarily associated
with a note receivable on the books of Hometown Threads and $142,000 in deferred
income from deposits received for stores not yet opened. The Company deferred
the recognition of income on these items until the contingencies are resolved
during the six month hold-back period. The Company expects to resolve the
contingencies in the early part of fiscal 2006, however, the Company is unable
to predict the outcome at this time.
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):
January 29, January 31,
2005 2004
----------------- ----------------
Assets:
Accounts receivable 148 26
Property, Plant & Equipment - 22
other Assets - 176
----------------- ----------------
Total Assets $ 148 $ 224
================= ================
Liabilities:
Accounts payable and accrued expenses $ 399 $ 618
----------------- ----------------
Total Liabilities $ 399 $ 618
================= ================
Summary operating results of the discontinued operations of Hometown Threads,
LLC (in thousands) are as follows:
For the year ended
January 29 January 31, January 31,
2005 2004 2003
------------- ---------------- ------------
$1,425 $1,693 $1,571
Gross profit 646 867 874
Gain on Sale 943 0 0
Income (Loss) from Discontinued $(567) $(471) $ 1
Operations
8. OTHER ASSETS
January 29, January 31,
2005 2004
---------------- ----------------
Deferred financing costs (1) $527,000 $1,162,000
Officers Loans Receivable (2) 496,000 496,000
Other 61,000 47,000
---------------- ----------------
Total other assets $1,084,000 $1,705,000
Accumulated amortization of Long Term
Other Assets $ (369,000) $ (828,000)
---------------- ----------------
Other Assets, net $ 715,000 $877,000
================ ================
(1) Deferred financing costs related to the (3 years) Loan and
Security Agreement in November 2002, and they are being
amortized over the term of the agreement from Congress
Financial Corp.
(2) Related to split dollar life insurance policy on 2 officers
of the Company. The Company no longer pays the premiums on
the policies which are collateralized by the cash surrender
value of the policies of $555,000 at January 29, 2005.
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
January 29, January 31,
2005 2004
--------------- --------------
Other accrued expenses $ 516,000 $1,276,000
Accounts payable 6,887,000 1,002,000
Accounts payable to TUI 0 4,482,000
Accrued payroll costs 400,000 812,000
Accrued warranty 543,000 543,000
Accrued commissions payable 0 35,000
--------------- --------------
Total accounts payable and accrued expenses $8,346,000 $8,150,000
=============== ==============
In the fourth quarter of the year ended January 31, 2002, the
Company initiated a restructuring plan in connection with its
continuing operations. During the year ended January 31, 2004, the
Company reversed, as a reduction of operating expenses, $716,000 of
restructuring costs associated with the completion of the
restructuring plan.
10. LONG TERM OBLIGATIONS
January 29, January 31,
2005 2004
----------------- -------------------
$1,418,000 $1,541,000
Obligation Under Capital Lease (A)
Deferred Gain on Sale of Building (B) 727,000 847,000
----------------- -------------------
Total 2,145,000 2,388,000
Less: Current maturities (267,000) (242,000)
----------------- -------------------
$1,878,000 $2,146,000
Long-term maturities
================= ===================
(A) Obligation Under Capital Lease of the Company at January 29, 2005 matures as
follows:
Fiscal Year Ending January 29,
2006 $ 306,000
2007 316,000
2008 325,000
2009 335,000
2010 345,000
2011 and thereafter 385,000
-------------
Total Minimum Lease Payments $2,012,000
Less: Amount representing interest (594,000)
-------------
1,418,000
Present value of net minimum lease payments
Less current portion 148,000
-------------
$1,270,000
Long term lease obligations
=============
(B) On March 8, 2001, the corporate headquarters facility located at
200 Wireless Boulevard, Hauppauge, New York, was sold and
partially leased back from Brandywine Realty Trust in a concurrent
transaction.
In fiscal 2003, the Company leased the entire facility and the
lease of the remaining portion of the building was accounted for
as an operating lease.
Concurrent sale and leaseback transactions are subject to specific
rules regarding the timing of the recognition of the gain. This
transaction results in a non-recurring gain of $1.2 million
deferred over the life of the lease, a period of ten years. The
related lease obligation meets the rules requiring classification
as a capital lease. The operating expense is therefore reported as
interest and depreciation on a straight-line basis over the life
of the lease, with both current and long-term portions, rather
than rent expense. The capitalized lease obligation and the
related asset were booked at an aggregate value of $1.8 million,
and the term of the lease is ten years. Cash proceeds of
approximately $4.0 million were provided by the sale.
11. INCOME TAXES
The provision (benefit) for income taxes is based on income (loss)
before taxes on income and discontinued operations as follows:
Years ended
-----------
January 29, 2005 January 31, 2004 January 31, 2003
---------------- ---------------- ----------------
Domestic................................. $(2,139,000) $(2,025,000) $(3,451,000)
Foreign - included in discontinued
operations (See Note 7) 0 0 536,000
---------------------- ---------------------- ---------------------
$(2,139,000) $(2,025,000) $(2,915,000)
Total...................................
====================== ====================== =====================
The income tax (benefit) provision from continuing operations for each
of the periods presented herein is as follows:
January 29, January 31, January 31,
2005 2004 2003
----------------- ------------------ -----------------
Current:
Federal $ - $ - $(504,000)
State 9,000 25,000 -
----------------- ------------------ -----------------
9,000 25,000 (504,000)
Total current
----------------- ------------------ -----------------
Deferred:
Federal - - -
State and foreign - - -
----------------- ------------------ -----------------
- - -
Total deferred:
----------------- ------------------ -----------------
$9,000 $25,000 $(504,000)
Total income tax (benefit) provision
================= ================== =================
Tax expense (benefit) of $0, $348,000 and $(381,000), related to discontinued
operations for the years ended January 29, 2005 and January 31, 2004, and 2003,
respectively.
The tax effects of temporary differences that give rise to deferred income tax
assets and liabilities at January 29, 2005 and January 31,2004 are as follows:
January 29, 2005 January 31, 2004
---------------- ----------------
Net Current
Net Current Net Long- Deferred Net Long-
Deferred Tax Term Deferred Tax Term Deferred
Assets Tax Assets Assets Tax Assets
---------------- ----------------- ------------------- ------------------
Accounts receivable $231,000 $0 $271,000 $0
Inventories 681,000 0 683,000 0
Accrued warranty costs 217,000 0 217,000 0
Other accrued expenses 10,000 0 10,000 0
Deferred franchise revenue 0 0 169,000 0
Purchased technologies and goodwill 0 $1,958,000 0 2,259,000
Net operating loss $10,079,000 0 6,905,000
Reserves for discontinued operations $377,000 0 658,000 0
Gain on sale of building 0 $291,000 0 338,000
---------------- ----------------- ----------------- -----------------
1,516,000 12,328,000 2,008,000 9,502,000
Less valuation allowance (1,516,000) (12,328,000) (2,008,000) (9,502,000)
---------------- ----------------- ------------------- ------------------
$0 $0 $0 $0
================ ================= =================== ==================
A full valuation allowance for such deferred tax assets has been established at
January 29, 2005 and January 31, 2004, since the Company cannot determine the
future utilization of those assets.
Net operating loss carry-forwards expire through 2024.
A reconciliation of the differences between the federal statutory tax rate of 34
percent and the Company's effective income tax rate is as follows:
Year Ended
January 29, January 31, January 31,
---------------- ----------------- ----------------
2005 2004 2003
---------------- ----------------- ----------------
Federal statutory income tax rate (34.0)% (34.0)% (34.0)%
State income taxes, net of Federal benefit - 1.0 -
Permanent differences (45.0) 27.3 35.4
Valuation Allowance 79 6.9 (16.0)
---------------- ----------------- ----------------
Effective income tax rate 0% 1.2% (14.6)%
================ ================= ================
12. STOCKHOLDERS' EQUITY
a. Common and Preferred Stock - The Class A Common Stock and Class B Common
Stock has authorizations of 20,000,000 and 3,000,000 shares, respectively.
The Class A Common Stock and Class B Common Stock, are substantially
identical in all respects, except that the holders of Class B Common Stock
(one member of the Company's current management and his affiliates)
elect two-thirds of the Company's Board of Directors (as long as the number
of shares of Class B Common Stock outstanding equals or exceeds 400,000),
while the holders of Class A Common Stock elect one-third of the Company's
Board of Directors. Each share of Class B Common Stock automatically
converts into one share of Class A Common Stock upon transfer to a
non-Class B common stock holder. The 1,000,000 shares of preferred stock
are authorized and may be issued from time to time, in such series and with
such designations, rights and preferences as the Board may determine.
b. Stock Option Plans - The Company maintains two active stock option plans
pursuant to which an aggregate of approximately 898,000 shares of Common
Stock may be granted.
The 1993 Stock Option Plan (the "1993 Plan") has 1,750,000 shares of Common
Stock reserved for issuance upon the exercise of options designated as either
(i) incentive stock options ("ISOs") under the Internal Revenue Code of 1986, as
amended (the "Code"), or (ii) non-qualified options. ISOs may be granted under
the Stock Option Plan to employees and officers of the Company. Non-qualified
options may be granted to consultants, directors (whether or not they are
employees), employees or officers of the Company.
Stock option transactions during the years ended January 29, 2005, January 31,
2004 and 2003 for the 1993 Plan are summarized below:
Shares Exercise Weighted Average
Price Range Exercise Price
----------------- --------------------- ----------------------
Options outstanding - January 31, 2002 278,000 $0.95-$17.00 $1.71
Options canceled (98,000) $1.00-$17.00 $3.99
Options issued 878,000 $0.27-$0.52 $0.29
----------------- --------------------- ----------------------
Options outstanding - January 31, 2003 1,058,000 $0.27-$1.00 $0.50
Options canceled (18,000) $0.27-$21.13 $1.09
Options exercised (12,000) $0.27-$1.00 $1.88
----------------- --------------------- ----------------------
Options issued 40,000 $0.72-$0.86 $0.79
----------------- --------------------- ----------------------
Options outstanding - January 31, 2004 1,068,000 $0.27-$5.25 $0.50
Options canceled 95,000 $0.27-$5.25 $1.36
----------------- --------------------- ----------------------
Options exercised 100,000 $0.27-$1.00 $0.56
----------------- --------------------- ----------------------
Options issued - - -
----------------- --------------------- ----------------------
Options outstanding - January 29, 2005 873,000 $0.27-$2.72 $0.40
Options exercisable at January 29, 2005 594,000 $0.27-$2.72 $0.43
================= ===================== ======================
Options Outstanding Options Exercisable
Weighted Avg. Weighted Weighted
Range of Exercise Price Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life (yrs) Price Exercisable Price
---------------- ----------- ---------- ----- ----------- -----
$0.91-$2.72 5,000 1.0 $1.81 5,000 $1.81
$0.95 100,000 2.0 $0.95 100,000 $0.95
$0.27-$0.52 728,000 3.0 $0.29 476,000 $0.30
$0.72-$0.86 40,000 4.0 $0.79 13,000 $0.79
---------------- ----------------
873,000 594,000
Most options issued vest in three annual installments of 33-1/3 percent each on
the first, second, and third anniversary of the date of grant except for 50,000
issued in 2003 which vested immediately. This plan expired in December 2003.
The 1994 Non-Employee Director Stock Option Plan (the "Directors Plan") has
approximately 234,000 shares of Common Stock reserved for issuance. Pursuant to
the terms of the Directors Plan, each independent unaffiliated Director shall
automatically be granted, subject to availability, without any further action by
the Board of Directors or the Stock Option Committee: (i) a non-qualified option
to purchase 10,000 shares of Common Stock upon their election to the Board of
Directors; and (ii) a non-qualified option to purchase 10,000 shares of Common
Stock on the date of each annual meeting of stockholders following their
election to the Board of Directors. The exercise price under each option is the
fair market value of the Company's Common Stock on the date of grant. Each
option has a five-year term and vests in three annual installments of 33-1/3
percent each on the first, second, and third anniversary of the date of grant.
Options granted under the Directors Plan are generally not transferable during
an optionee's lifetime but are transferable at death by will or by the laws of
descent and distribution. In the event an optionee ceases to be a member of the
Board of Directors (other than by reason of death or disability), then the
non-vested portion of the option immediately terminates and becomes void and any
vested but unexercised portion of the option may be exercised for a period of
180 days from the date the optionee ceased to be a member of the Board of
Directors. In the event of death or permanent disability of an optionee, all
options accelerate and become immediately exercisable until the scheduled
expiration date of the option.
Stock option transactions during the years ended January 29, 2005, January 31,
2004 and 2003 for the Directors' Plan are summarized below:
Exercise Weighted Average
Shares Price Range Exercise Price
--------------- ----------------- ----------------------
Options & Warrants outstanding - 120,000 $0.50-$0.96 $0.58
January 31, 2002
--------------- ----------------- ----------------------
Options cancelled 0 0 0
Options issued 40,000 $0.27-$0.89 $0.43
--------------- ----------------- ----------------------
Options & Warrants outstanding - 160,000 $0.27-$0.96 $0.54
January 31, 2003
--------------- ----------------- ----------------------
Options issued 30,000 $0.92 $0.92
--------------- ----------------- ----------------------
Options & Warrants outstanding -
January 31, 2004 190,000 $0.27-$0.96 $0.68
--------------- ----------------- ----------------------
Options exercised (6,000) $0.91 $0.91
Options cancelled (24,000) $0.27-$0.96 $0.82
--------------- ----------------- ----------------------
Options & Warrants outstanding -
January 29, 2005 160,000 $0.27-$0.96 $0.54
--------------- ----------------- ----------------------
Options outstanding-January 29, 2005 60,000 $0.27-$0.96 $0.60
=============== ================= ======================
Warrants exercisable-January 29, 2005 100,000 $0.50 $0.50
=============== ================= ======================
This plan expired in September 2004.
Options Outstanding Options Exercisable
Weighted Avg. Weighted Weighted
Range of Exercise Price Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life (yrs) Price Exercisable Price
- ---------------------------- ---------------- ----------------- ------------- ---------------- --------
$0.89-$0.96 20,000 2.0 $.093 20,000 $.093
$0.27 20,000 3.0 $0.27 20,000 $0.27
$0.92 20,000 4.0 $0.92 20,000 $0.92
---------------- ----------------
60,000 60,000
The 2003 Stock Option Plan (the "2003 Plan") has 750,000 shares of Common Stock
reserved for issuance upon the exercise of options designated as either (i)
incentive stock options ("ISOs") under the Code, or (ii) non-qualified options.
ISOs may be granted under the 2003 Plan to employees and officers of the
Company. Non-qualified options may be granted to consultants, directors (whether
or not they are employees), employees or officers of the Company. In certain
circumstances, the exercise price of stock options may have an adverse effect on
the market price of the Company's Common Stock.
Stock option transactions during the year ended January 29, 2005 for the 2003
Plan are summarized below:
Exercise Weighted Average
Shares Price Range Exercise Price
----------------- --------------------- ----------------------
Options outstanding - January 31, 2004 0 0 0
Options issued 190,000 $1.12 $1.12
----------------- --------------------- ----------------------
Options outstanding - January 29, 2005 190,000 $1.12 $1.12
Options exercisable at January 29, 2005 95,000 $1.12 $1.12
================= ===================== ======================
Most options issued vest in three annual installments of 33-1/3 percent each on
the first, second, and third anniversary of the date of grant except for 190,000
issued in 2004 50% of which vested December 31, 2004, and 50% of which will vest
December 31, 2005. There are approximately 560,000 shares available for future
grants under the 2003 Plan.
The 2004 Non-Employee Director Stock Option Plan (the "Directors Plan") The 2004
Plan was adopted by the Board of Directors in August 2004. The 2004 Plan
reserves 148,042 shares of Class A Common Stock for issuance to the Company's
independent and unaffiliated directors. Pursuant to the terms of the 2004 Plan,
as proposed each independent and unaffiliated director shall automatically be
granted, subject to availability, without any further action by the Board of
Directors or the Stock Option Committee: (i) a non-qualified option to purchase
10,000 shares of Class A Common Stock upon their initial election or appointment
to the Board of Directors; and (ii) a non-qualified option to purchase 10,000
shares of Class A Common Stock on the date of each annual meeting of
stockholders following their election or appointment to the Board of Directors.
The exercise price of each option is the fair market value of the Company's
Class A Common Stock on the date of grant. Each option expires five years from
the date of grant and vests in three annual installments of 33 1/3% each on the
first, second and third anniversary of the date of grant. Options granted under
the 2004 Plan would generally not be transferable during an optionee's lifetime
but would be transferable at death by will or by the laws of descent and
distribution. In the event an optionee ceases to be a member of the Board of
Directors (other than by reason of death or disability), then the non-vested
portion of the option would immediately terminate and become void and any vested
but unexercised portion of the option may be exercised for a period of 180 days
from the date the optionee ceased to be a member of the Board of Directors. In
the event of death or permanent disability of an optionee, all options
accelerate and become immediately exercisable until the scheduled expiration
date of the option.
Stock option transactions during the years ended January 29, 2005, January 31,
2004 and 2003 for the Directors' Plan are summarized below:
Shares Exercise Weighted Average
Price Range Exercise Price
--------------- ----------------- ----------------------
Options outstanding-January 31, 2004 0 0 0
Options issued 30,000 $1.01-$1.02 $1.02
Warrants issued - - -
Options cancelled - - -
--------------- ----------------- ----------------------
Options outstanding-January 29, 2005 30,000 $1.01-$1.02 $1.02
=============== ================= ======================
Options exercisable-January 29, 2005 - - -
=============== ================= ======================
There are approximately 118,000 shares available for future grants under the
Directors' Plan
13. TREASURY STOCK
Treasury stock at January 29, 2005 and January 31, 2004 consists of
1,164,000 shares of Class A common stock purchased in open market transactions
for a total cost of approximately $2,017,000 pursuant to a stock repurchase
program authorized by the Board of Directors in fiscal year 1999.
14. PROFIT SHARING PLAN
Profit Sharing Plan - The Company has a voluntary contribution profit
sharing plan (the "Plan"), which complies with Section 401(k) of the Internal
Revenue Code. Employees who have attained the age of 21 and have one year of
continuous service are eligible to participate in the Plan. The Plan permits
employees to make a voluntary contribution of pre-tax dollars to a pension
trust, with a discretionary matching contribution by the Company up to a maximum
of two percent of an eligible employee's annual compensation. The Company
elected not to make matching contributions for fiscal years ended January 29,
2005 and January 31, 2004 and 2003.
15. COMMITMENTS AND CONTINGENCIES
a. Minimum Operating Lease Commitments - The Company has non-cancelable
operating leases for various automobiles and sales and service
locations. The annual aggregate rental commitments required under these
leases, except for those providing for month-to-month tenancy, are as
follows:
Fiscal Year Ending
January 31,
2006 $598,000
2007 396,000
2008 267,000
2009 220,000
2010 215,000
2011 and after 239,000
------------------
$1,935,000
==================
Rent expense was approximately $473,000, $584,000 and $574,000 for the
years ended January 29, 2005, January 31, 2004 and 2003, respectively.
The decline from previous years is the result of termination of various
facility leases.
b. Litigation - The Company is a defendant in various litigation matters, all
arising in the normal course of business. Based upon discussion with
Company counsel, management does not expect that these matters will have a
material adverse effect on the Company's consolidated financial position or
results of operations and cash flows.
c. 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, as amended August 31, 2004,
provides for a credit facility of $12 million for Hirsch and all
subsidiaries and is collateralized by eligible accounts receivable and
inventory as defined in the agreement. Advances made pursuant to the
Congress Agreement may be used by the Company and its subsidiaries for
working capital loans, letters of credit and deferred payment letters of
credit. The terms of the Congress Agreement require the Company to maintain
certain financial covenants. The Company was in compliance with all
financial covenants at fiscal 2005 year-end. The Agreement was also used to
support letters of credit and bankers acceptances of approximately $4.5
million as of January 29, 2005.
d. Dependency Upon Major Supplier - During the fiscal years ended January 29,
2005 and January 31, 2004 and 2003; the Company made purchases of
$22,067,000, $21,115,000, and $27,789,000 respectively, from Tajima
Industries Ltd. ("Tajima"), the manufacturer of the embroidery machines the
Company sells. This amounted to approximately 73, 74, and 85 percent of the
Company's total purchases for the years ended January 29, 2005 and January
31, 2004 and 2003, respectively. Purchases from Tajima are purchases under
letters of credit. Outstanding letters of credit as of January 31, 2004 are
reflected in trade acceptances payable on the balance sheet.
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
Company is in the process of negotiating an extension of the West Coast
Agreement. The Consolidated Agreements supercede all of the other
distribution agreements between the Company and Tajima. Each agreement
may be terminated upon the failure of the Company to achieve certain
minimum sales quotas. During fiscal 2005, the Company failed to meet
these minimum sales quotas; however, Tajima waived the Company's
failure for fiscal 2005. The termination of the Tajima agreements would
have a material adverse effect on the Company's business, financial
condition and results of operations.
e. Purchase Commitments - The Company entered into a three year minimum
purchase commitment with Pulse under which the Company is obligated to
purchase $100,000 of software each month. The commitment was effective
November 1, 2002 and runs until October 31, 2005. As of January 29, 2005
there was $800,000 remaining under this commitment.
16. SUBSEQUENT EVENT
On April 20, 2005, the Company filed a report on Form 8-K with the
Securities and Exchange Commission announcing a non-binding agreement in
principle with Sheridan Square Entertainment, Inc. concerning the proposed
merger of the two companies. The agreement in principle contemplates an exchange
of newly issued Hirsch Common Stock (of which there would then be only one
class) for the outstanding capital stock of Sheridan Square Entertainment. The
terms of the non-binding agreement in principle are subject to the negotiation
and execution of definitive written agreements, finalization of economic terms,
and the approval of the Board of Directors and Stockholders of each of the
companies.