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| HRSH > SEC Filings for HRSH > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
Quarterly Report
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 include, without limitation, the risks and uncertainties discussed under the caption "Risk Factors" in the Company's Form 10K for the year ending December 31, 2008 and in the Company's other filings made with the Securities and Exchange Commission from time to time. The discussion and analysis should be read in conjunction with, and is qualified in its entirety by, the Company's Consolidated Financial Statements, including the Notes thereto. Historical results are not necessarily indicative of trends in operating results for any future period.
Three and six months ended June 30, 2009 as compared to June 30, 2008.
Net sales. Net sales for the three months ended June 30, 2009 were $6.2 million, a decrease of $4.0 million, or 39.2%, compared to $10.2 million for the three months ended June 30, 2008, and for the six months ended June 30, 2009 were $12.0 million, a decrease of $9.9 million, or 45.2%, compared to $21.9 million for the six months ended June 30, 2008. The decrease in sales for the three months ended June 30, 2009 is primarily attributable to the decrease in new embroidery machines of $2.7 million, the decrease in screenprinting machines of $0.7 million and the decrease in sales of parts and supplies of $0.5 million with all other product categories amounting to a decrease of $0.1 million. For the six months ended June 30, 2009, net sales of embroidery machines decreased $7.4 million, screenprinting sales decreased $1.2 million, parts and supply sales decreased $1.0 million with all other product categories combining for a net decrease of $0.3 million. The overall declines are the result of the general slowdown in demand for capital goods.
Cost of sales. For the three months ended June 30, 2009, cost of sales decreased $2.6 million to $4.2 million from $6.8 million for the three months ended June 30, 2008, and for the six months ended June 30, 2009 decreased $6.2 million to $8.3 million from $14.5 million for the six months ended June 30, 2008. The decrease for the three and six month periods ended June 30, 2009 is the result of lower sales volume combined with higher costs in the new machine categories. The Company's gross margin decreased to 32.3% for the three months ended June 30, 2009 as compared to 33.3% for the three months ended June 30, 2008, and decreased to 30.9% for the six months ended June 30, 2009 from 33.6% for the six months ended June 30, 2008. For the three month period ended June 30, 2009 compared to the three month period ended June 30, 2008, the Company experienced a decrease in sales for the new machine categories which lowered gross margin by $830,000 and a decrease in the used machine, parts, service and other categories which decreased gross margin by $448,000. For the six month period ended June 30, 2009 compared to the six month period ended June 30, 2008, the Company experienced a decrease in the new machine categories which decreased gross margin by $3,019,000 as well as a decrease in the used machine, parts, service and other categories which decreased gross margin by $800,000. The fluctuation of the dollar against the yen, which is the currency the Company's embroidery machines are purchased in, has affected and is likely to continue to affect the Company's machine sales pricing competitiveness and gross margins. Yen fluctuations amounted to an increase in gross profit of $20,000 for the three months ended June 30, 2009, versus a increase in gross profit of $116,000 for the three months ended June 30, 2008, and an increase in gross profit of $193,000 for the six months ended June 30, 2009 versus an increase in gross profit of $1,000 for the six months ended June 30, 2008.
Operating Expenses. For the three months ended June 30, 2009, selling, general and administrative expenses decreased $1.2 million from $4.4 million for the three months ended June 30, 2008 to $3.2 million for the three months ended June 30, 2009. For the six months ended June 30, 2009, selling, general and administrative expenses decreased $2.7 million from $9.1 million for the six months ended June 30, 2008 to $6.4 million for the six months ended June 30, 2009. For the three months ended June 30, 2009, operating expenses were $3.5 million, a decrease of $0.9 million, or 20.5% as compared to $ 4.4 million for the three months ended June 30, 2008, and for the six months ended June 30, 2009,
Other expense (income). Other expense for the three months ended June 30, 2009 decreased by $52,000 to other expense of $14,000 from other income of $38,000 for the three months ended June 30, 2008 primarily attributable to a decrease in interest income for the quarter due to lower cash balances. For the six months ended June 30, 2009, other income decreased $136,000 to $8,000 from $144,000 for the six months ended June 30, 2008, primarily due to increases in interest income during the first quarter of the current year.
Income tax (benefit) expense. Income tax benefit for the three months ended June 30, 2009 was $30,000 versus income tax expense of $9,000 for the three months ended June 30, 2008 and for the six months ended June 30, 2008 income tax benefit was $17,000 versus income tax expense of $9,000 for the six months ended June 30, 2008. For the three and six months ended June 30, 2009 the amounts represent refunds on state income taxes received during the quarter. For the three and six months ended June 30, 2008, these amounts represent taxes due on year end income for various state and local income taxes, for which the net operating loss carry-forwards from prior years do not apply.
Loss from continuing operations. The loss from continuing operations for the three months ended June 30, 2009 was $1.5 million an increase of $0.5 million as compared to $1.0 million for the three months ended June 30, 2008 and for the six months ended June 30, 2009 was $3.0 million, an increase of $1.4 million as compared to $1.6 million for the six months ended June 30, 2008. The decrease in both periods is primarily from an increase in operating loss due to the decrease in sales.
Loss from discontinued operations. The loss from discontinued operations for the three months ended June 30, 2009 was $0.8 million and for the six months ended June 30, 2009 was $2.0 million.
Net Loss. The net loss for the three months ended June 30, 2009 was $2.2 million a increase of $1.2 million as compared to $1.0 million for the three months ended June 30, 2008 and for the six months ended June 30, 2009 was $4.9 million, an increase of $3.3 million as compared to $1.6 million for the six months ended June 30, 2008. The increase in both periods is primarily from an increase in operating loss due to the decrease in sales as well as the loss from discontinued operations.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $6.6 million at June 30, 2009, decreasing $4.0 million, or 37.7%, from $10.6 million at December 31, 2008.
During the six months ended June 30, 2009, the Company's cash and cash equivalents decreased by $1.1 million from $4.7 million at December 31, 2008 to $3.6 million at June 30, 2009. Net cash of $0.9 million was used by the Company's operating activities. $4.0 million was provided by reductions in Accounts Receivable and Inventory which was offset by pay downs of accounts payable of $2.0 million and losses of $2.9 million from continuing operations. Cash of $0.2 million was used in investing activities for capital expenditures primarily for a new computer system.
The Company purchases inventory in Yen and Euro and maintains bank accounts denominated in Yen and Euro in order to facilitate payments. The Company purchases yen and euro in anticipation of current invoice maturities in order to mitigate the impact of currency fluctuations. As of June 30, 2009 the Company did not own any foreign currency futures contracts.
At this time, the Company is seeking a new credit facility to augment its current cash position and to enhance liquidity. There is no assurance that the Company will be successful in such efforts.
Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting policies and estimates from those disclosed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2008.
Future Capital Requirements
The Company has incurred significant losses since last year and has not generated positive cash flow from operations. As of June 30, 2009 the Company had cash and cash equivalents of $3.6 million. Management believes that current cash levels may not be sufficient to fund the Company's operations through the foreseeable future and it is currently seeking a new credit facility to augment its current cash position and enhance liquidity. There is no assurance that the Company will be successful in such efforts.
The Company is impacted by its continuing losses from continuing operations which was $3.0 million for the six months ended June 30, 2009, as well as its continued liquidity issues. During the last several years, the Company has taken steps to reduce overhead including a reduction in personnel, salary reductions, closing offices and converting fixed labor costs to variable labor costs. The Company will continue to look to reduce costs while it seeks additional business from new and existing customers. The Company believes that the current economic climate is having an adverse effect upon its ability to develop new business as potential customers have been reluctant to purchase capital equipment. The Company is also exploring strategic alternatives with respect to the Company and its majority owned subsidiary, U.S. Graphics. There is no assurance that the Company will be successful in such efforts.
In light of the foregoing, substantial doubt exists as to the Company's ability to continue as a going concern. These financial statements have been prepared assuming that the Company will continue as a going concern and, accordingly, did not include any adjustment that might result from the uncertainty discussed above.
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.
Subsequent Events
On July 2, 2009, the Company entered into an Agreement and Plan of Merger, dated as of July 2, 2009, between the Company, Hirsch Holdings, Inc., a Delaware corporation ("Parent"), and HIC Acquisition Company, a Delaware corporation and a wholly-owned subsidiary of Parent ("Merger Sub"), pursuant to which, subject to the terms and conditions contained in such agreement, the Merger Sub will be merged with and into the Company (the "Merger"), with the Company as the surviving corporation and a wholly-owned subsidiary of Parent. Parent is wholly owned by Paul Gallagher, the Company's Chief Executive Officer, President and Chief Operating Officer.
Under the terms of the merger agreement, the Company's stockholders, other than Mr. Gallagher and certain related parties, will receive $0.31 per share in cash for each of the Company's
Effective July 2, 2009, the Company entered into a Second Amended and Restated Employment Agreement (the "Employment Agreement") with Paul Gallagher in connection with the entry into the merger agreement. The Employment Agreement modifies Mr. Gallagher's former employment agreement to, among other things, extend the term of Mr. Gallagher's employment by the Company for an additional year, to September 11, 2010, and state that Mr. Gallagher shall not be entitled to receive severance payments and benefits from the Company under his Employment Agreement, or the acceleration of any of his stock options, in connection with any termination of employment, resignation or non-renewal of the agreement which occurs after the completion of the Merger, or any other transaction pursuant to which (a) the shares of the Company's Class A common stock become eligible for deregistration under the Securities Exchange Act of 1934, as amended, and (b) Mr. Gallagher becomes the beneficial owner, directly or indirectly, of 25% or more of the Company's voting stock.
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