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UNITED
STATES
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SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
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SCHEDULE 14A
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Proxy Statement Pursuant to
Section 14(a) of
the Securities Exchange Act of 1934
(Amendment No. 1)
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Filed by the Registrant
x
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Filed by a Party other than the
Registrant
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Check the appropriate box:
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x
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Preliminary Proxy Statement
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o
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Confidential, for
Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
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Definitive Proxy Statement
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Definitive Additional Materials
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Soliciting Material Pursuant to
§240.14a-12
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HIRSCH INTERNATIONAL CORP.
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(Name
of Registrant as Specified In Its Charter)
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N/A
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(Name
of Person(s) Filing Proxy Statement, if other than the Registrant)
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Payment of Filing Fee (Check the
appropriate box):
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o
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No fee required.
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o
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Fee computed on table below per
Exchange Act Rules 14a-6(i)(1) and 0-11.
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(1)
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Title of each class of securities to
which transaction applies:
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Class A Common Stock, par value $0.01 per share, and Class B Common
Stock, par value $0.01 per share (together Common Stock).
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(2)
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Aggregate number of securities to
which transaction applies:
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8,785,184 shares of Common Stock outstanding.
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(3)
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Per unit price or other underlying
value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth
the amount on which the filing fee is calculated and state how it was
determined):
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Calculated solely for the purpose of determining
the filing fee.
The maximum aggregate value was determined
based upon the product of (A) 8,785,184 shares of Common Stock that may
be exchanged for cash in the transaction and (B) the merger consideration of
$0.31 per share. In accordance with Exchange Act Rule 0-11(c), the filing fee
was determined by multiplying 0.00005580 by the product of the preceding
sentence.
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(4)
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Proposed maximum aggregate value of
transaction:
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$2,723,407
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(5)
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Total fee paid:
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$151.97
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x
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Fee paid previously with preliminary
materials.
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o
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Check box if any part of the fee is
offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing
for which the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule and the date
of its filing.
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(1)
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Amount Previously Paid:
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(2)
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Form, Schedule or Registration
Statement No.:
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(3)
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Filing Party:
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(4)
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Date Filed:
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Table of Contents
Preliminary Copy
Hirsch International Corp.
50 Engineers Road
Suite 100
Hauppauge, New York 11788
,
2009
Dear
Stockholders:
You are cordially invited to attend a special
meeting of stockholders of Hirsch International, Corp. (the Company), a
Delaware corporation, to be held on ,
2009 at A.M., New
York time at the offices of Bryan Cave LLP, 1290 Avenue of the Americas, New York,
New York. The accompanying proxy
statement provides information regarding the matters to be acted on at the
special meeting, including at any adjournment or postponement thereof.
At the special meeting, you will be asked to
consider and vote upon a proposal to approve an Agreement and Plan of Merger,
dated as of July 2, 2009, that we entered into with 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
the terms of the merger agreement, if the merger is approved and all of the
other conditions of the merger are satisfied, you will receive $0.31 for each
share of our Class A Common Stock and Class B Common Stock (together,
our common stock) that you own, and Merger Sub will be merged with and into
us and, as a result, we will continue as the surviving corporation. Following
the consummation of the merger, Parent will own all of our common stock. Paul Gallagher, our President, Chief
Executive Officer and Chief Operating Officer, presently owns all of Parents
common stock.
If the merger agreement and the merger are approved
and the merger is consummated, each share of our common stock (other than
shares of our common stock owned by Parent, Merger Sub, Mr. Gallagher or
shares owned by stockholders who properly exercise dissenters rights of
appraisal under Delaware law or shares of our common stock held in treasury by
us), will be cancelled and converted into the right to receive $0.31 in cash,
without interest. Following the consummation of the merger, we will be
privately owned by Parent and its stockholders. A copy of the merger agreement
is included as Annex A to the accompanying proxy statement.
After careful consideration, the Companys board of
directors by a unanimous vote of the directors (other than Mr. Gallagher,
who abstained from the vote) has determined that the merger agreement and the
merger are advisable, fair to and in the best interests of us and our
stockholders, other than Mr. Gallagher, Parent and Merger Sub, and
approved the merger agreement and the merger. This determination was based upon
the unanimous recommendation of a special committee of the Companys board of
directors consisting of three independent and disinterested directors.
Our board of directors unanimously recommends (with Mr.
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Gallagher taking no part in such
recommendation) that you vote FOR the approval of the merger agreement and the
merger.
When you consider the recommendation of our board of
directors to approve the merger agreement and the merger, you should be aware
that some of our directors and an executive officer have interests in the merger
that may be different from, or in addition to, the interests of our
stockholders generally.
The accompanying proxy statement provides you with
detailed information about the special meeting, the merger agreement and the
merger. You are urged to read the entire document carefully. You may also
obtain more information about us from documents we have filed with the
Securities and Exchange Commission.
Regardless of the number of shares
you own, your vote is very important.
The
affirmative vote of the holders of at least a majority of all of the
outstanding shares of our common stock entitled to vote at the special meeting
is required to approve the merger agreement and the merger.
If you fail to vote on the
merger agreement and the merger, the effect will be the same as a vote against
the approval of the merger agreement and the merger. Once you have read the
accompanying proxy statement, please vote on the proposals submitted to
stockholders at the special meeting, whether or not you plan to attend the meeting,
by signing, dating and mailing the enclosed proxy card. If you receive more
than one proxy card because you own shares that are registered differently,
please vote all of your shares shown on all of your proxy cards. If your shares
are held in street name by your broker, your broker will be unable to vote
your shares without instructions from you. You should instruct your broker to
vote your shares, following the procedures provided by your broker. Failure to
instruct your broker to vote your shares will have exactly the same effect as
voting against the approval of the merger agreement and the merger.
Voting by proxy will not
prevent you from voting your shares in person in the manner described in the
accompanying proxy statement if you subsequently choose to attend the special
meeting.
Our board of directors,
appreciates your continuing support of the Company and urge you to support the
merger.
Sincerely,
Christopher J. Davino
Director and Chairman of the Special Committee
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES REGULATORY AGENCY HAS APPROVED OR DISAPPROVED THE MERGER, PASSED
UPON THE MERITS OR FAIRNESS OF THE MERGER OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THE DISCLOSURE IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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The
proxy statement is dated , 2009,
and is first being mailed to stockholders on or about , 2009.
IMPORTANT
YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF
THE NUMBER OF SHARES YOU OWN. PLEASE SIGN, DATE AND PROMPTLY MAIL YOUR PROXY
CARD AT YOUR EARLIEST CONVENIENCE.
If you have any questions or need
assistance voting your shares, please call Georgeson Inc., which is assisting
us in the solicitation of proxies, toll-free at 1-888-264-6999.
Banks and brokers should contact Georgeson Inc. at 212-440-9800.
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HIRSCH INTERNATIONAL CORP.
NOTICE OF SPECIAL MEETING
TO BE HELD ON , 2009
On ,
2009, Hirsch International Corp. will hold a special meeting of stockholders at
the offices of Bryan Cave LLP, 1290 Avenue of the Americas, New York, NY. The
special meeting will begin at A.M.
New York time.
Only holders of shares of our Class A Common
Stock, par value $0.01 per share and our Class B Common Stock, par value
$0.01 per share (together, our common stock), of record at the close of
business on ,
2009, may vote at this special meeting or at any adjournments or postponements
thereof that may take place. At the special meeting, stockholders will be asked
to:
(1)
consider and
vote upon a proposal to approve the Agreement and Plan of Merger, dated as of July 2,
2009, that we entered into with Hirsch Holdings, Inc., a Delaware
corporation (Parent), HIC Acquisition Company, a Delaware corporation and a
wholly-owned subsidiary of Parent (Merger Sub), which we refer to as the
merger agreement, and approve the merger of Merger Sub with and into us, as a
result of which (a) we will be the surviving corporation in the merger and
will be owned by Parent and (b) each share of our common stock (other than
shares of our common stock owned by Parent, Merger Sub, Mr. Gallagher,
shares owned by stockholders who properly exercise dissenters rights of
appraisal under Delaware law or shares of our common stock held in treasury by
us) will be cancelled and converted into the right to receive $0.31 in cash,
without interest; and
(2)
approve any
motion to adjourn the special meeting to a later date, if necessary or
appropriate, to solicit additional proxies if there are insufficient votes at
the time of the special meeting to approve the foregoing proposal.
Our board of directors (with Mr. Gallagher taking no part in the
vote or recommendation) has unanimously approved and recommends that you vote
FOR the approval of the merger agreement and the merger and FOR the adjournment
proposal, which are discussed in more detail in the accompanying proxy
statement.
When you consider the recommendation of our board of
directors to approve the merger agreement and the merger, you should be aware
that some of our directors and executive officers have interests in the merger
that may be different from, or in addition to, the interests of our
stockholders generally.
Regardless of the number of shares you own, your
vote is very important. The affirmative vote of the holders of at least a
majority of all of the outstanding shares of our common stock entitled to vote
at the special meeting is required to approve the merger agreement and the
merger.
If you fail to vote on the merger agreement and the
merger, the effect will be the same as a vote against the approval of the
merger agreement and the merger.
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We hope you will be able to attend the meeting, but
whether or not you plan to attend, please vote your shares by signing and
returning the enclosed proxy card as soon as possible.
Voting by proxy will not prevent you from voting
your shares in person in the manner described in the accompanying proxy
statement if you subsequently choose to attend the special meeting. If you hold
your shares in street name through a bank, broker or custodian, you must
obtain a legal proxy from such custodian in order to vote in person at the
special meeting. You should not send in your certificates representing shares
of our common stock until you receive written instructions to do so.
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By
Order of the Board of Directors,
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Dan
L. Vasquez
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Secretary
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ANNEXES
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Annex A Agreement and Plan of Merger
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Annex B Opinion of Burnham Securities Inc.
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Annex C Section 262 of the Delaware General Corporation Law
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Annex D Annual Report on Form 10-K for the year ended
December 31, 2008
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Annex E Quarterly Report on Form 10-Q for the Quarter ended
June 30,
2009
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SUMMARY TERM SHEET
This Summary Term Sheet, together with the Questions and
Answers About the Merger and the Special Meeting, summarizes the material
information in this proxy statement. We encourage you to read carefully this
entire proxy statement, its annexes and the documents referred to or
incorporated by reference in this proxy statement before voting. In this proxy statement, the terms Hirsch, Company,
we, our and us refer to Hirsch International Corp. and its
subsidiaries. Where appropriate, we have
set forth a section and page reference directing you to a more complete
description of the topics described in this summary.
The Parties to the Merger (page 68)
Hirsch International Corp., a Delaware corporation,
is a leading provider of equipment and education and support services to the
graphic and decorated apparel industry.
The Company represents the decorated apparel industrys leading brands
including Tajima embroidery equipment, MHM screen printing equipment, SEIT
textile bridge laser, Pulse Microsystems digitizing and design software and
Kornit and Mimaki digital garment printers.
Hirsch Holdings, Inc., which we sometimes refer
to in this proxy statement as Parent, is a Delaware Corporation, that
following the consummation of the merger, will own all of the shares of common
stock of the surviving corporation.
Currently, Parent is wholly-owned by Paul Gallagher, our President,
Chief Executive Officer and Chief Operating Officer. Mr. Gallagher intends to contribute all
of his outstanding shares of our Class A Common Stock that he beneficially
owns to Parent immediately prior to the effective time of the merger.
HIC Acquisition Company, which we sometimes refer to
in this proxy statement as Merger Sub, is a Delaware corporation and, prior
to the effective time of the merger, is a wholly-owned subsidiary of Parent.
In this proxy statement we sometimes refer to Mr. Gallagher,
Parent and Merger Sub as the Parent Group.
The Proposal
(page 64)
You are being asked to consider and vote to approve the
Agreement and Plan of Merger, dated as of July 2, 2009 (as it may be
amended from time to time), by and among Hirsch, Parent and Merger Sub, which
agreement we sometimes refer to in this proxy statement as the merger
agreement. Pursuant to the merger agreement, Merger Sub will merge with and
into Hirsch International Corp. (which we refer to as the merger) and Hirsch
will continue as the surviving corporation and a wholly-owned subsidiary of
Parent. Upon completion of the merger,
Hirsch will cease to be a publicly traded company, and you will cease to have
any rights in Hirsch as a stockholder.
Merger Consideration
(page 71)
If the merger is consummated, holders of shares of
our outstanding Class A Common Stock and Class B Common Stock
(together, our common stock) (other than shares owned by the Parent Group
(stockholders other than Parent Group are referred to as unaffiliated
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stockholders), shares owned
by stockholders who properly exercise dissenters rights of appraisal under
Delaware law, and shares of our common stock held in treasury by us) will be
entitled to receive $0.31 in cash, without interest (which we refer to as the merger
consideration), for each share of our common stock owned at the effective time
of the merger. Mr. Gallagher intends to contribute, immediately prior to
the effective time of the merger, all of the outstanding shares of our common
stock that he owns to Parent. As of the date of this proxy statement, Mr. Gallagher
owned 697,899 shares of our common stock.
We will be entitled to deduct and withhold from the merger consideration
any amounts required to be deducted and withheld under any applicable tax law,
and any amounts so withheld shall be treated as having been paid to the holder
from whose merger consideration the amounts were so deducted and withheld.
Treatment of Outstanding Options
(page 72)
Our
board of directors has taken action to terminate all of our existing stock
option plans effective immediately prior to the effective time of the
merger. If the merger is consummated,
all outstanding options to purchase shares of Hirsch common stock granted under
a Hirsch stock option plan and not exercised prior to the merger will vest and
be cancelled and converted into the right to receive a cash payment equal to
the number of shares of our common stock subject to such options, multiplied by
the amount by which $0.31 exceeds the option exercise price, without
interest. Upon cancellation, none of our
outstanding options will receive the consideration set forth in the prior
sentence, as all of the outstanding options have an exercise price above $0.31.
Expected Completion Date
of the Merger
We currently anticipate that the merger will be
completed during the third quarter of 2009. However, there can be no assurances
that the merger will be completed at all, or if completed, that it will be
completed during the third quarter of 2009.
Votes Required for Adoption of the Merger Agreement
(page 65)
The presence, in person or by proxy, of stockholders
holding at least a majority of our shares of common stock outstanding on the
record date will constitute a quorum for the special meeting. The affirmative
vote of the holders of a majority of all of the outstanding shares of our
common stock entitled to vote is required to approve and adopt the merger
agreement and the merger.
Approval of a motion to adjourn the meeting to a
later date requires the affirmative vote of the holders of a majority of the
shares of our common stock present, in person or by proxy, and entitled to vote
at the special meeting on that matter, even if less than a quorum. If you fail
to vote on the merger agreement and the merger or abstain from voting, the
effect will be the same as a vote against the approval of the merger agreement
and the merger.
Recommendation of Our Board of Directors (page 27)
Our board of directors formed a special committee of
independent directors on February 12, 2009 to have full authority to
consider and pursue all of our strategic alternatives, including any proposal
that Mr. Gallagher or any other party might make to acquire all of our
outstanding
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shares of common stock, and
to explore and negotiate any specific proposals that Hirsch might have
received. The special committee has
unanimously (i) determined that the merger is advisable and in our best
interest and the best interest of our unaffiliated stockholders, and (ii) recommended
to our board of directors that the board approve and adopt the merger agreement
in order to effect the merger. The
members of the special committee comprise a majority of our board of directors,
with the only other members being Mr. Gallagher and Henry Arnberg. After carefully considering various factors,
including the unanimous recommendation of the special committee, our board of
directors (with Mr. Gallagher taking no part in the vote) unanimously
·
determined that the merger
and the terms and conditions set forth for the merger in the merger agreement
are approved and are advisable, fair to, and in the best interest of, Hirsh and
its unaffiliated stockholders;
·
determined that the merger
agreement is approved and adopted; and
·
directed that the Merger
Agreement be submitted to our stockholders for their approval and adoption and
recommends that the stockholders approve the merger agreement and the merger.
Accordingly,
our board of directors (with Mr. Gallagher taking no part in the voting)
unanimously recommends that you vote to approve the merger agreement.
Opinion of Burnham Securities Inc. (page 32)
Burnham Securities Inc., which we refer to as Burnham,
delivered its oral opinion, which was subsequently confirmed in writing, to the
special committee that, as of July 1, 2009 and based upon and subject to
the procedures followed, assumptions made, qualifications and limitations on
its review undertaken and other matters considered by Burnham, the merger
consideration of $0.31 per share in cash to be received by the unaffiliated
stockholders was fair from a financial point of view to such stockholders. The full text of the written opinion of
Burnham, dated July 1, 2009, is attached as
Annex B
to this proxy statement. We encourage you to read
this opinion in its entirety. The
opinion of Burnham was provided to the special committee in connection with the
special committees evaluation of the merger, does not address any other aspect
of the merger and is not a recommendation as to how any stockholder should vote
with respect to the merger or any other matter.
Interests of Certain Persons in the Merger (page 56)
In considering the recommendation of our board of
directors, you should be aware that our directors and an executive officer have
interests in the merger that are different from, or in addition to, your
interests as a stockholder and that may present actual or potential conflicts
of interest. These interests include, among others:
·
Mr. Gallaghers
ownership of shares of our common stock prior to the merger and his ownership
of Parent (and through Parent, Merger Sub), and, after the completion of the
merger, his indirect ownership interest in Hirsch; and
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·
continued indemnification
and directors and officers liability insurance to be provided by the
surviving corporation to our directors and officers for the period following
completion of the merger.
The special committee and our board of
directors were aware of these interests and considered them, among other
matters, prior to providing their respective recommendations with respect to
the merger agreement and the merger.
Financing of the Merger (page 52)
Parent estimates that the aggregate amount of
financing necessary to complete the merger, and the payment of related fees and
expenses will be approximately $3.4 million. This amount is expected to be
funded by Parent and Merger Sub with debt financing contemplated by a
commitment letter from Keltic Financial Services LLC (which we refer to as Keltic
Financial) further described below, together with available cash of the
Company.
Mr. Gallagher
has received a debt financing commitment letter that provides for up to $4
million of debt financing to Parent or Merger Sub from Keltic Financial. The obligation to provide the debt financing
to Parent or Merger Sub is subject to the satisfaction of conditions set forth
in the commitment letter. Parent has
agreed to use its commercially reasonable efforts to arrange the debt financing
on the terms and conditions described in the debt commitment letter. The closing of the merger is conditioned on
the receipt of the debt financing from Keltic Financial.
Material United States Federal Income Tax Consequences
(page 54)
For U.S. federal income tax purposes, your receipt
of cash in exchange for your shares of our common stock in the merger generally
will result in your recognizing gain or loss measured by the difference, if
any, between the cash you receive in the merger and your tax basis in your
shares of Company common stock.
You should
consult your tax advisor for a complete analysis of the effect of the merger on
your U.S. federal, state, local and/or foreign taxes.
Restrictions on Solicitations of Other Offers and Change in
Recommendation
(page 78)
The
merger agreement provides that during the period beginning on the date of the
merger agreement and continuing until the close of business on July 22,
2009, which we refer to as the go-shop period, we, under the direction of the
special committee, are permitted to:
·
initiate, solicit and
encourage takeover proposals (as defined below);
·
participate in any
discussions or negotiations regarding a takeover proposal or otherwise
cooperate with or take any other action to facilitate any proposal that
constitutes, or could reasonably be expected to lead to, a takeover proposal.
After the end of the go-shop period and until the
earlier of (i) the termination of the merger agreement in accordance with
its terms, or (ii) the effective time of the merger, we have agreed that
we, our subsidiaries and representatives will not, subject to certain
exceptions discussed below, directly or indirectly:
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·
initiate, solicit or
knowingly encourage (including by way of providing information) the submission
of any inquiries, proposals or offers or any other efforts or attempts that
constitute or may reasonably be expected to lead to a takeover proposal or
engage in any discussions or negotiations with respect thereto; or
·
approve, endorse or
recommend, or publicly propose to approve, endorse or recommend, any takeover
proposal or enter into any letter of intent, agreement in principal, merger
agreement, acquisition agreement or other similar agreement providing for or
relating to any takeover proposal, or enter into any agreement or agreement in
principle requiring that we abandon, terminate or fail to consummate the
transactions contemplated by the merger agreement or breach our obligations
thereunder, or publicly propose or agree to do any of the foregoing.
Prior to terminating the merger agreement or
entering into an agreement with respect to any such takeover proposal, we are
required to comply with certain terms of the merger agreement described under
The Merger AgreementRestrictions on Solicitations of Other Offers.
Notwithstanding the foregoing, under certain
circumstances, we, acting under the direction of our special committee, from
and after the end of the go-shop period, (i) may continue discussions or
negotiations with any third party with respect to any takeover proposal if such
discussions or negotiations commenced and were ongoing prior to the end of the
go-shop period and (ii) may respond to a bona fide unsolicited takeover
proposal or terminate the merger agreement and enter into an acquisition
agreement with respect to a superior proposal (as defined below), in each
case so long as we comply with certain terms of the merger agreement described
under
The Merger AgreementRestrictions on Solicitations
of Other Offers
.
A takeover proposal as defined in the merger
agreement, means any inquiry, proposal or offer other than from Parent or its
affiliates relating to, or that is reasonably likely to lead to, any direct or
indirect acquisition or purchase, in one transaction or a series of related
transactions, of assets (including equity securities of any subsidiary of the
Company) or businesses that constitute 25% or more of the revenues, net income
or assets of the Company and its subsidiaries (taken as a whole), or 25% or
more of any class of equity securities of the Company or any our subsidiaries,
any tender offer or exchange offer that if consummated would result in any
person or group beneficially owning 25% or more of any class of equity
securities of the Company or any of our subsidiaries, or any merger,
consolidation, business combination, recapitalization, liquidation,
dissolution, joint venture, binding share exchange or similar transaction
involving the Company or any our subsidiaries pursuant to which any person or
group would own 25% or more of any class of equity securities of the Company or
any of our subsidiaries, in each case other than the transactions contemplated
by this Agreement.
A superior proposal as defined in the merger
agreement, means any written takeover proposal that, if consummated, would
result in such person or group (or their equityholders) owning, directly or
indirectly, more than 50% of the shares of the Companys common stock then
outstanding (or of the shares of the surviving entity in a merger or the direct
or indirect parent company of the surviving entity in a merger) or a majority
of the assets of the Company and its subsidiaries (taken as a whole), which the
special committee determines in good faith
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(after consultation with its
outside counsel and financial advisor) would, if consummated, be more favorable
to our stockholders from a financial point of view than the transactions
contemplated by the merger agreement (taking into account all the terms and
conditions of such takeover proposal and the merger agreement, including (x) the
likelihood and timing of consummation of such transaction on the terms set
forth therein (as compared to the terms in the merger agreement), (y) all
appropriate legal, financial (including the financing terms of such takeover
proposal), regulatory and other aspects of such takeover proposal, and (z) any
changes to the financial and other terms of the merger agreement proposed by
Parent in response to such takeover proposal or otherwise).
Conditions to the Completion of the Merger
(page 86)
The completion of the merger is subject to, among
other things, the following conditions:
·
the adoption of the merger
agreement by the majority of the outstanding shares of our Class A Common
Stock and Class B Common Stock, voting together as class;
·
the absence of any
governmental orders or statutes or rules that have the effect of making
the merger illegal or otherwise prevents the consummation of the merger;
·
each partys respective
representations and warranties in the merger agreement being true and correct
as of the closing date in the manner described in
The Merger AgreementConditions to the Completion of the Merger
;
·
each partys performance in
all material respects of its obligations required to be performed under the
merger agreement prior to the closing date of the merger;
·
the aggregate number of
shares of our common stock at the effective time of the merger for which
appraisal rights shall have been perfected under Section 262 of the
Delaware General Corporate Law (the DGCL) not having exceeded 10% or more of
the number of our outstanding shares of common stock as of the record date for
the special meeting;
·
Parent shall have obtained
the debt financing on the terms and conditions set forth in the debt financing
commitment letter;
·
the Company shall have
obtained the consent to the merger from Tajima Industries, Ltd.; and
·
Burnham shall not have
withdrawn, amended or modified its opinion dated July 1, 2009 to the
effect that, as of such date, the per share merger consideration is fair, from
a financial point of view, to our unaffiliated stockholders.
Termination of the Merger Agreement
(page 87)
The merger agreement may be terminated and the
merger abandoned at any time before the effective time of the merger, whether
before or after our stockholders approve and adopt the merger agreement:
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·
by mutual written consent of
Parent and the Company;
·
by either Parent or the
Company:
·
if the merger has not been
consummated on or before the outside date (which is October 30, 2009)
unless the failure to consummate the merger on or before the outside date is
due (in whole or material part) to the terminating partys breach of a
representation warranty, covenant or agreement contained in the merger
agreement;
·
if our stockholders fail to
approve the merger and to approve and adopt the merger agreement and the
transactions contemplated thereby at the special meeting or any adjournment or
postponement of that meeting;
·
if a final, non-appealable
legal restraint or order permanently restraining or prohibiting the
consummation of the merger is issued, provided that the party seeking to
terminate the merger agreement shall have used its reasonable best efforts to
remove the restraint or order;
·
if the non-terminating party
has breached or failed to perform any of its representations, warranties,
covenants or agreements contained in the merger agreement such that the closing
conditions to the merger agreement would not be satisfied, and which breach
cannot be cured by the outside date or, if capable of being cured, has not been
cured within thirty days after receipt by the breaching party of written notice
from the terminating party stating its intention to terminate, so long as the
terminating party is not then in breach of any of its representations, warranties,
covenants or agreements such that the closing conditions to the merger
agreement would not be satisfied;
·
by the Company if:
·
prior to obtaining the
affirmative vote of a majority of our outstanding shares of common stock, (i) the
special committee or our board of directors approves, endorses or recommends
another
takeover proposal
or the entering into another agreement with
respect to another
takeover proposal
, or (ii) our board of
directors, acting under the direction of the special committee, modifies its
recommendation to our stockholders to adopt the merger agreement and approve
the merger, in a manner adverse to Parent, or withdraws such recommendation, in
order to enter into a definitive agreement providing for the implementation of
a transaction that is a superior proposal (each such event in (i) or (ii) a
change in recommendation), provided that we complied with the notice and
other requirements described below in
The Merger
AgreementRestrictions on Solicitations of Other Offers
and we pay
to Merger Sub the termination fee described in
Termination
Fee
;
·
any portion of the Parent or
Merger Subs debt financing becomes unavailable in the manner or from the
source contemplated by the commitment letter delivered to the Company (or in
certain instances, an alternative source), provided that this right may not be
exercised by the
7
Table
of Contents
Company
if it has not provided Parent with at least five business days notice and
Parent has not obtained a new debt financing arrangement within such period;
·
by Parent if (i) we
shall have made a change in recommendation, (ii) we fail to comply in any
material respect with the merger agreements requirements regarding
solicitation of other offers or termination in connection with a superior
proposal described above in -
Restrictions on
Solicitations of Other Offers and Change in Recommendation
and
below in
The Merger Agreement
Restrictions
on Solicitations of Other Offers
,
or (iii) we
fail to include in our proxy statement relating to the approval and adoption of
the merger agreement by our stockholders our board of directors recommendation
to our stockholders to adopt the merger agreement and approve the merger.
Termination Fees and Expense Reimbursement
(page 89)
If the merger agreement is terminated under certain
circumstances we will be obligated to reimburse Parent for reasonable actual
out of pocket expenses incurred by Parent and Merger Sub in connection with the
proposed merger and the other transactions contemplated by the merger agreement
in an amount not to exceed either $250,000 or $300,000, depending upon the
circumstances of the termination.
Appraisal Rights
(page 92)
Under Delaware law, holders of our common stock who
do not vote in favor of adopting the merger agreement will have the right to
seek appraisal of the fair value of their shares of our common stock as
determined by the Court of Chancery of the State of Delaware if the merger is
completed, but only if they comply with all requirements of Delaware law for
exercising appraisal rights set forth in Section 262 of the General
Corporation Law of the State of Delaware (which we refer to as the DGCL in
this proxy statement), the text of which can be found in
Annex C
to this proxy statement, which are
summarized in this proxy statement. This appraisal amount could be more than,
the same as or less than the merger consideration. Any holder of shares of our
common stock intending to exercise appraisal rights must, among other things,
submit a written demand for an appraisal to us prior to the vote on the
adoption of the merger agreement at the special meeting and must not vote or
otherwise submit a proxy in favor of adoption of the merger agreement. Your
failure to follow exactly the procedures specified under Section 262 of
the DGCL will result in the loss of your appraisal rights, and your shares of
Hirsch common stock will instead entitle you to receive merger consideration
with respect to such shares.
Market Price of the Companys Common Stock and Dividend Information
(page 103
)
The closing trading price of our Class A Common
Stock on the Nasdaq Capital Market on June 12, 2009, the last completed
trading day prior to the public announcement of Mr. Gallaghers offer, was
$0.21 per share. The merger consideration represents a premium of approximately
47.6% to the closing trading price on June 12, 2009. On July 1, 2009, the last completed
trading day prior to public announcement of our entry into the merger agreement,
the
8
Table
of Contents
closing trading price of our
Class A Common Stock was $0.25 per share.
The merger consideration represents a premium of approximately 24% to
the closing trading price on July 1, 2009.
On , 2009, which is the
most recent practicable trading date prior to the date of this proxy statement,
the closing trading price of our common stock was $ per share.
You are urged to obtain a current market price quotation for our shares
of Class A Common Stock.
We have not paid or declared cash dividends on our
common stock within the past five years and we do not intend to pay or declare
cash dividends on our common stock in the future. In addition, the merger agreement prohibits
us from declaring or paying dividends on our common stock until the earlier of
the termination of the merger agreement in accordance with its terms or the
consummation of the merger.
9
Table of Contents
QUESTIONS AND ANSWERS ABOUT
THE MERGER AND THE SPECIAL MEETING
The following questions and
answers address briefly some questions you may have regarding the proposed
merger and the special meeting. These questions and answers may not address all
questions that may be important to you as a stockholder of Hirsch. Please refer
to the more detailed information contained elsewhere in this proxy statement,
the annexes to this proxy statement and the documents referred to or
incorporated by reference in this proxy statement.
Q:
What is the proposed transaction?
A:
The proposed transaction is
a merger of Merger Sub with and into us pursuant to the merger agreement. Once the merger agreement has been adopted by
the Companys stockholders and the other closing conditions under the merger
agreement have been satisfied or waived, Merger Sub will be merged with and
into the Company, with the Company continuing as the surviving corporation.
Upon consummation of the merger, the Company will become a wholly-owned
subsidiary of Parent. All of the common
stock of Parent is presently owned by Mr. Gallagher. After the merger, shares of Hirsch will no
longer be publicly traded.
Q:
What will I receive for my shares of Hirschs common
stock in the merger?
A:
Upon completion of the
merger, you will receive $0.31 in cash, without interest, and less any
applicable withholding taxes, for each share of our common stock that you own.
This does not apply to shares held by the Parent Group, or any of our
stockholders who are entitled to and who properly exercise appraisal rights
under Delaware law or shares held by us in our treasury. Upon consummation of
the merger, you will not own shares of Hirsch or Parent.
Q:
What
are the material United States federal income tax consequences of the
transaction to stockholders?
A:
In general, your receipt of
cash in exchange for shares of Hirsch common stock pursuant to the merger will
be a taxable transaction for United States federal income tax purposes. Since
the tax consequences of the merger to you will depend on your particular
circumstances, you should consult your own tax advisor for a full understanding
of the U.S. federal, state, local, non-U.S. and other tax consequences of the
merger to you. See
Special FactorsMaterial United States
Federal Income Tax Consequences
beginning on page 54.
Q:
Where and when is the special meeting?
A:
The special meeting will take place at the offices
of Bryan Cave LLP, 1290 Avenue of the Americas, New York, New York on ,
2009 at A.M. New York
time.
Q:
What matters will be voted on at the special meeting?
A:
You will be asked to consider and vote on the
following proposals:
·
to approve the merger agreement and the
merger;
·
to approve any motion to adjourn the special
meeting, if necessary or appropriate, to a later date to solicit additional
proxies if there are insufficient votes at the time of the
10
Table of Contents
special meeting to
approve the proposal on the merger agreement.
Q:
Does our board of directors recommend that our
stockholders vote FOR the adoption of the merger agreement?
A:
Yes. After careful consideration, our board of
directors, by a unanimous vote of the directors (other than Paul Gallagher, who
abstained from the vote) recommends that you vote:
·
FOR the adoption of the merger agreement and
approval of the merger; and
·
FOR the adjournment proposal.
You should read
Special
FactorsRecommendation of the Special Committee and of our Board of Directors;
Reasons for Recommending Approval of the Merger Agreement
beginning
on page 27, for a discussion of the factors that our special committee and
board of directors considered in deciding to recommend the adoption of the
merger agreement. In addition, in considering the recommendation of our special
committee and board of directors with respect to the merger agreement, you
should be aware that some of the Companys directors and executive officers
have interests in the merger that are different from, or in addition to, the
interests of our stockholders generally. See
Special
FactorsInterests of Certain Persons in the Merger
beginning on page 56.
Q:
Who is entitled to vote at the special meeting?
A:
The record date for the special meeting is , 2009. Only holders of Hirschs common stock at the
close of business on the record date are entitled to notice of, and to vote at,
the special meeting or any adjournment or postponement thereof.
Q:
What constitutes a quorum for the special meeting?
A:
The presence, in person or by proxy, of
stockholders representing a majority of the shares of Hirschs common stock
outstanding on the record date will constitute a quorum for the special
meeting.
Q:
What vote of the Companys stockholders is required to
adopt the merger agreement and to approve the adjournment proposal?
A:
The adoption of the merger
agreement requires the affirmative vote of the holders of a majority of the
outstanding shares of our common stock voting as a single class and entitled to
vote on the adoption of the merger agreement at the special meeting. A failure to vote your shares of common
stock, abstention from the vote to adopt the merger agreement or a broker
non-vote will have the same effect as voting AGAINST the adoption of the
merger agreement. A broker non-vote occurs when a broker does not have
discretion to vote on the matter and has not received instructions from the
beneficial holder as to how such holders shares are to be voted on the matter.
Approval of an adjournment of the special meeting requires the
affirmative vote of the holders of a majority of the shares of Hirsch common
stock present, in person or by proxy, and entitled to vote at the special
meeting on that matter. A failure to vote your shares of
11
Table of Contents
common stock or a broker non-vote will not affect the vote or any
proposal to adjourn the special meeting, if necessary.
Q:
How do the directors and executive officers of the
Company intend to vote?
A:
As of August 24, 2009, the
record date, the directors and executive officers of Hirsch held and were
entitled to vote, in the aggregate, 2,036,075 shares of our common stock
representing approximately 21.5% of the outstanding shares. We believe our
directors and executive officers intend to vote all of their shares of our
common stock FOR the adoption of the merger agreement and approval of the
merger, and FOR the adjournment proposal.
Q:
When do you expect the merger to be completed?
A:
We are working toward
completing the merger as quickly as possible, and we anticipate that it will be
completed in the third quarter of 2009. In order to complete the merger, we
must obtain the stockholder approval described above and the other closing
conditions under the merger agreement must be satisfied or waived. Neither we,
nor Parent and Merger Sub, are obligated to complete the merger unless and
until the closing conditions in the merger agreement have been satisfied or
waived, which conditions are described in
The
Merger AgreementConditions to the Completion of the Merger
beginning on page 86.
Q:
What effects will the proposed merger have on the
Company?
A:
Upon completion of the
proposed merger, Hirsch will cease to be a publicly traded company and will be
wholly-owned by Parent. As a result, you will no longer have any interest in
our future earnings or growth, if any. Following completion of the merger, the
registration of our common stock and our reporting obligations with respect to
our common stock under the Securities Exchange Act of 1934, as amended, which
we refer to as the Exchange Act, are expected to be terminated. In addition,
upon completion of the proposed merger, shares of Hirsch common stock will no
longer be listed on the Nasdaq Capital Market or any other stock exchange or
quotation system.
Q:
What happens if the merger is not completed?
A:
If the merger agreement is
not adopted by our stockholders, or if the merger is not completed for any other
reason, our stockholders will not receive any payment for their shares of our
common stock pursuant to the merger agreement. Instead, Hirsch will remain as a
public company and our common stock will continue to be registered under the
Exchange Act and listed and traded on the Nasdaq Capital Market. Under
specified circumstances, Hirsch may be required to pay Parent a termination fee
or reimburse Parent for its actual out-of-pocket expenses not to exceed
$300,000, as described in
The Merger
AgreementTermination Fee
beginning on page 89.
Q:
What
do I need to do now?
A:
Please vote as soon as
possible. We urge you to read this proxy
statement carefully, including its annexes, and to consider how the transaction
affects you as a stockholder. You may also
want to review the documents referenced under
Where You
Can Find More
12
Table of Contents
Information
on page 107.
Q:
How
do I vote?
A:
You should simply indicate
on your proxy card how you want to vote, and sign and mail your proxy card in
the enclosed return envelope as soon as possible so that your shares will be
represented at the special meeting. If you sign and send in your proxy and do
not indicate how you want to vote, your proxy will be counted as a vote for
approval of the merger, and the approval and adoption of the merger agreement
and the other transactions contemplated thereby, and for the adjournment
proposal, if such adjournment is necessary. If you fail to vote your shares or
do not instruct your broker how to vote any shares held for you in a brokerage
account, the effect will be the same as a vote against the approval of the
merger, and the approval and adoption of the merger agreement, but it will not
affect the vote on any proposal to adjourn the special meeting, if necessary.
If your shares are held by your broker, bank or other nominee, see below.
Q:
If my shares are held in street name by my broker, will
my broker vote my shares for me?
A:
Your broker will not vote
your shares on your behalf unless you provide instructions to your broker on
how to vote. You should follow the directions provided by your broker regarding
how to instruct it to vote your shares. Without those instructions, your shares
will not be voted, which will have the same effect as voting AGAINST the
adoption of the merger agreement.
Q:
What does it mean if I get more than one proxy card or
vote instruction form?
A:
If your shares are
registered differently and are in more than one account, you may receive more
than one proxy card or voting instruction form. Please complete, sign, date and
return all of the proxy cards and voting instruction forms you receive
regarding this special meeting to ensure that all of your shares are voted.
Q:
May I
change my vote?
A:
Yes. You may change your
vote at any time before your proxy is voted at the special meeting, subject to
the limitations described below. You may do this in a number of ways. First,
you may send us a written notice stating that you would like to revoke your
proxy. Second, you may complete and submit a new proxy card. If you choose
either of these two methods, you must submit your notice of revocation or your
new proxy card to the secretary of Hirsch at or before the taking of the vote
at the special meeting, at the address under
The Parties
to the MergerHirsch International Corp.
on page 68. You may also change your vote by attending
the special meeting and voting in person. Simply attending the special meeting,
without voting in person, will not revoke your proxy. Notwithstanding the
foregoing, if your shares are held in street name and you have instructed a
broker to vote your shares, you must follow directions received from your
broker to change your vote or to vote at the special meeting.
13
Table of Contents
Q:
What
happens if I sell my shares of Hirsch common stock before the special meeting?
A:
The record date for the
special meeting is earlier than the date of the special meeting and the date
that the merger is expected to be completed. If you transfer your shares of
Hirsch common stock after the record date but before the special meeting, you
will retain your right to vote at the special meeting, but will transfer the
right to receive the per share merger consideration of $0.31 in cash, without
interest and less any applicable withholding taxes, to the person to whom you
transfer your shares, so long as such person owns the shares of Hirsch common
stock when the merger is completed. In such case, your vote is still very
important and you are encouraged to vote.
Q:
Are appraisal rights available?
A:
Yes. As a holder of shares
of common stock of the Company, you are entitled to appraisal rights under
Delaware law if (a) you do not vote in favor of adopting the merger
agreement, (b) you continue to hold your shares of Hirsch common stock
until the consummation of the merger, (c) you deliver to us a written
demand for appraisal prior to the vote at the special meeting and (d) you
satisfy certain other conditions. See
Appraisal
Rights
beginning on page 92.
Q:
Should I send in my stock certificates now?
A:
No. PLEASE DO NOT SEND
IN YOUR STOCK CERTIFICATES WITH YOUR PROXY.
If you hold your shares in your name as a stockholder of record, then
shortly after the merger is completed you will receive a letter of transmittal
with instructions informing you how to send in your stock certificates to the
paying agent in order to receive the merger consideration in respect of your
shares of our common stock. You should use the letter of transmittal to
exchange your stock certificates for the merger consideration which you are
entitled to receive as a result of the merger. If you hold your shares in
street name through a broker, bank or other nominee, then you will receive
instructions from your broker, bank or other nominee as to how to effect the
surrender of your street name shares in exchange for the merger
consideration.
Q:
Will any proxy solicitors be used in connection with
the special meeting?
A:
Yes. To assist in the solicitation of proxies, we
have engaged Georgeson Inc., who may be contacted toll-free at
1-888-264-6999. Banks and brokers may
contact Georgeson Inc. at 212-440-9800.
Q:
Who can help answer my other questions?
A:
If you have any questions about the merger, need
assistance in submitting your proxy or voting your shares, or need additional
copies of the proxy statement or the enclosed proxy card, you should contact
Georgeson Inc., which is acting as the proxy solicitation agent in connection
with the merger. They may be contacted
toll-free at 1-888-264-6999. Banks and
brokers may contact Georgeson Inc. at 212-440-9800.
14
Table of Contents
SPECIAL FACTORS
Background of the Merger
Our board of directors and management regularly
evaluate our business and operations and periodically review and assess
strategic alternatives available to enhance value to our stockholders. As part
of this process, our board of directors and management have regularly
considered opportunities that could complement, enhance or expand our current
business or products or that might otherwise offer growth opportunities for the
Company. In this regard, over the course of the past two years, we have
explored several strategic alternatives. To assist us in identifying
opportunities, the Company engaged an investment bank in May 2007 to serve
as its financial advisor and to help identify and evaluate potential strategic
alternatives. In May and June of 2007,
the investment bank assisted us in our evaluation of an acquisition candidate,
which was a screen printing equipment manufacturer, but ultimately the
transaction was not consummated and our engagement with the investment bank was
terminated in September 2007.
During the remainder of 2007 and the first two
quarters of 2008, our board of directors and management continued to evaluate
potential strategic alternatives for the Company. On August 4, 2008, we
acquired 80% of the equity interests of US Graphic Arts, Inc., a company
primarily engaged in developing and manufacturing printers for the decorative
apparel industry, and viewed as complementary to the Companys business of
providing equipment and education and support services to the decorated apparel
industry.
Beginning in the fall of 2008, the rapidly
deteriorating general economic conditions in the United States and the
tightening of the credit markets had a significant impact upon the business of
the Company. The reduced demand for capital goods that began during this period
hurt the Companys business. Additionally, the movement of the currency
exchange rates between the dollar and the Japanese yen also adversely affected
the Company, as the Company purchases its largest amount of embroidery machine
equipment from a Japanese vendor.
Between January and March 2009, the Company
approached approximately 20 financial institutions to obtain a new credit
facility to address its working capital needs.
Unfortunately, due to the Companys continuing losses, which were
projected to continue for the foreseeable future, the Company was unsuccessful
in its efforts.
At a board of directors meeting on February 2,
2009, the board of directors acknowledged the difficult business environment
facing the Company. At this meeting, the topic of the Companys strategic
alternatives was raised. Mr. Gallagher presented certain information to
the board of directors that detailed the Companys financial situation if it
were (i) to continue operating in its present form, or (ii) to
identify a potential acquirer for the Company in an effort to eliminate its
public stockholders. Mr. Gallagher
also indicated that the Company had approximately $3 to $4 million in cash at
such time, but that the costs of remaining a public company were approximately
$1 million per year. The board of directors then discussed the possibilities of
the Company engaging in a transaction whereby it would cease to be a publicly
owned Company or the Company liquidating and distributing the proceeds upon
liquidation to its stockholders. There was also initial discussion of forming a
special committee comprised of independent members of the board of directors,
whose responsibility it would be to further investigate the Companys strategic
alternatives. The board of directors authorized the executive
15
Table of Contents
officers of the Company to
retain a firm to conduct an analysis of the Companys liquidation value.
After consultation
from the independent members of the board of directors, and after contacting
several valuation consultants, the Company retained Clear Thinking Group LLC
(Clear Thinking) on February 5, 2009 to perform a liquidation analysis of the
Company. Clear Thinking was selected by
the Company after consideration of, among other things, the fact that it is a
national advisory firm that specializes in corporate restructuring, operations
improvements, litigation analytics, liquidation and asset sales, case
management services, with expertise in providing financial advisory services to
financially distressed entities. Clear
Thinking provided a liquidation analysis for the Company on February 12, 2009,
and then issued an updated liquidation analysis for the Company on May 29,
2009. No material relationship existed
between the Company and Clear Thinking during the two years prior to the
engagement of Clear Thinking to perform the liquidation analyses, and no such
material relationships are contemplated.
No limitations were placed on Clear Thinking regarding the preparation
of its two liquidation analyses. Clear
Thinking was paid an aggregate of $25,412 for the preparation of its two
analyses. A summary of each of Clear
Thinkings liquidation analyses are included below. However, as the descriptions below are only a
summary and do not contain all of the information set forth in the liquidation
analyses prepared by Clear Thinking, we urge you to read the full text of each
of the liquidation analyses in their entirety, which are attached as Exhibits
(c)(3) and (c)(4) to the Schedule 13E-3 filed with the SEC in connection with
the merger and which analyses are incorporated to this Proxy Statement by
reference.
Another meeting of the board of directors was held
on February 12, 2009. The first topic discussed was the liquidation
analysis that had been prepared for the Company by Clear Thinking. The analysis
indicated that the Companys liquidation value was estimated to be in the range
of $1.2 million to $3.5 million in the aggregate, resulting in an estimated per
share value of $0.13 to $0.36.
A summary of Clear Thinkings liquidation
analysis follows.
Clear
Thinkings report dated February 12, 2009 (the February Analysis) was based
upon meetings with Mr. Gallagher, the Companys President, Chief Executive
Officer and Chief Operating Officer, and the Companys then Chief Financial
Officer, as well as the following financial data: the Companys balance sheet
as of December 31, 2008 and other historical income statements and balance
sheets, estimated wind down expenses, consolidated 2009 forecast of net sales,
gross profit, gross margin by manufacturer, and salary and other operating
expenses last updated by management as of February 9, 2009, and additional information
on the following items: (i) available cash on hand, (ii) aging accounts
receivable, (iii) aging inventory, (iv) equipment purchase order, (v)
furniture, fixture and equipment, (vi) real estate lease liabilities, (vii)
miscellaneous leases and contracts, (viii) estimated wind down expenses, (ix)
accounts payable and accrued expenses payable, and (x) employee severance. In connection with Clear Thinkings review,
Clear Thinking assumed and relied upon, without independent verification, the
accuracy and completeness of the information that was publicly available or
supplied or otherwise made available to Clear Thinking by the Company, and
formed a substantial basis for its opinion.
Clear Thinking also assumed that the financial projections that were furnished
to it had been reasonably prepared on bases reflecting the best current
estimates and judgments of the management of the Company of the future
financial performance of the Company.
16
Table of Contents
In addition to
reviewing the foregoing materials, Clear Thinking assumed that the Company
would employ a carefully orchestrated and executed wind down process which
would maximize value for the Companys stockholders. Clear Thinking assumed that the Company would
employ a two stage approach, and that phase I would commence March 1, 2009, and
take approximately sixty days to complete, during which period, the Company
would aggressively sell most of its less expensive inventory that required a
greater amount of customer service, training and sales support. At the conclusion of such period, it was
assumed that a significant reduction in sales staff and support could be
implemented, resulting in a reduction of a significant monthly cash
expenditure. Phase II would then focus
on selling the remaining inventory to more established customers that need less
sales support and training. It was
assumed that this phase would take sixty days, and that most sales offices
could be closed with only a limited number of the best sales staff
remaining. Simultaneously with the
occurrence of phase I and phase II, the Company would collect its accounts
receivable.
After the
expiration of the initial 120 days during the two stage approach, it was
assumed that an additional thirty days would then be necessary for the Company
to close down its business. Based upon
the March 1, 2009, start date, it was estimated that the liquidation process
could be completed by July 1, 2009.
In preparing its
liquidation analysis, the recovery rates utilized were based upon Clear
Thinkings experience in connection with other liquidation scenarios.
Based upon the
foregoing, and the additional material assumptions in the notes following the
table below, Clear Thinking estimated the Companys liquidation value in its
February 12, 2009 report, as follows:
17
Table of Contents
|
|
|
|
|
|
Liquidation Analysis Scenarios
|
|
|
|
Recoverable Assets as of 2/9/09
|
|
$ Amount
|
|
Low
|
|
Mid
|
|
High
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a
|
|
Cash in Bank Estimate
|
|
$
|
4,461,065
|
|
$
|
4,461,065
|
|
$
|
4,461,065
|
|
$
|
4,461,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
b
|
|
Accounts Receivable
|
|
$
|
3,906,466
|
|
$
|
3,068,460
|
|
$
|
3,273,920
|
|
$
|
3,495,088
|
|
|
|
|
|
Recovery Rate
|
|
78.5
|
%
|
83.8
|
%
|
89.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
c
|
|
Inventory Equipment & Parts (Recovery on Cost)
|
|
$
|
11,912,256
|
|
$
|
8,739,035
|
|
$
|
9,716,269
|
|
$
|
10,595,347
|
|
|
|
|
|
Recovery Rate
|
|
73.4
|
%
|
81.6
|
%
|
88.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
d,e
|
|
Pre-Paid Expenses (Supplies, etc.)
|
|
$
|
164,000
|
|
$
|
16,400
|
|
$
|
24,600
|
|
$
|
32,800
|
|
|
|
|
|
Recovery Rate
|
|
10.0
|
%
|
15.0
|
%
|
20.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
f
|
|
Furniture, Fixtures & Equipment (FF&E)
|
|
$
|
1,555,698
|
|
$
|
97,605
|
|
$
|
123,312
|
|
$
|
149,018
|
|
|
|
|
|
Recovery Rate
|
|
6.3
|
%
|
7.9
|
%
|
9.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
g
|
|
Intellectual Property (Patents, Trademarks, URLs,
etc.)
|
|
$
|
0
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
h
|
|
FF&E Recovery Fee (-20%)
|
|
|
|
$
|
(19,521
|
)
|
$
|
(24,662
|
)
|
$
|
(29,804
|
)
|
i
|
|
Accounts Receivable Collection Fees (-15%)
|
|
|
|
$
|
(230,135
|
)
|
$
|
(245,544
|
)
|
$
|
(262,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Recovery before Wind Down Expenses, Professional
Fees, and Return to Shareholders
|
|
|
|
$
|
16,132,909
|
|
$
|
17,328,960
|
|
$
|
18,441,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and Administrative Expenses, Professional
Fees and Other Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
j
|
|
Company Operating Costs During Orderly Wind Down
|
|
|
|
$
|
5,146,177
|
|
$
|
5,146,177
|
|
$
|
5,146,177
|
|
k
|
|
Professional Fees & Expenses
|
|
|
|
$
|
750,000
|
|
$
|
750,000
|
|
$
|
750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross $ Available to Creditors
|
|
|
|
$
|
10,236,732
|
|
$
|
11,432,783
|
|
$
|
12,545,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
l
|
|
Property Lease Liabilities
|
|
$
|
730,742
|
|
$
|
730,742
|
|
$
|
730,742
|
|
$
|
730,742
|
|
m
|
|
Other Leases and Contracts Liabilities
|
|
$
|
13,872
|
|
$
|
13,872
|
|
$
|
13,872
|
|
$
|
13,872
|
|
n
|
|
Accounts Payable & Accrued Expenses Payable
|
|
$
|
5,135,329
|
|
$
|
5,135,329
|
|
$
|
5,135,329
|
|
$
|
5,135,329
|
|
o
|
|
Inventory On Order Commitment Payable
|
|
$
|
1,963,143
|
|
$
|
1,963,143
|
|
$
|
1,963,143
|
|
$
|
1,963,143
|
|
p
|
|
Customer Credits on Accounts Receivable
|
|
$
|
584,696
|
|
$
|
584,696
|
|
$
|
584,696
|
|
$
|
584,696
|
|
q
|
|
February Cash Usage
|
|
$
|
450,000
|
|
$
|
450,000
|
|
$
|
450,000
|
|
$
|
450,000
|
|
r
|
|
Check Float
|
|
$
|
200,000
|
|
$
|
200,000
|
|
$
|
200,000
|
|
$
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Available for Shareholders
|
|
|
|
$
|
1,158,952
|
|
$
|
2,355,002.67
|
|
$
|
3,467,426
|
|
a.
Available cash on hand as of February 9,
2009, as per company cash flow summary report, less amounts committed for
outstanding letters of credit.
b.
Accounts receivable (includes customer
payments by credit cards where the Company has not yet actually received the
underlying payment, as well as credits owed to customers, which are reflected
in line p as an expense) as of February 9, 2009, as per the Companys aging
accounts receivable records. This amount
assumes that half of the balance will be collected in the normal fashion, and
the other half will be collected utilizing a collection agency.
c.
Inventory value indicated is at cost as
per the Companys aging inventory summary as of February 9, 2009. The total includes parts inventory and on
order inventory.
d.
Amount indicated is from the Companys
December 31, 2008 balance sheet and
assumes most
pre-paid expenses are unrecoverable other than supplies.
e.
Assumes real estate lease deposits of
$35,703 are unrecoverable.
f.
Amount indicated is from the December 31,
2008 balance sheet and includes furniture, fixtures and equipment, leasehold
improvements, computer upgrades and website development costs.
g.
Assumes the Companys intellectual
property has no value in the marketplace.
h.
Assumes a liquidator recovery fee of 20%
of gross sales of furniture, fixtures and equipment, after sales tax.
i.
Assumes company uses a collection agency
to collect half of the accounts receivable; a collection fee of 15% of
recovered receivables is applied on the half recovered by the collection
agency.
18
Table of Contents
j.
Assumes normal use of cash plus payment
of additional commissions and advertising for two months, and two months with
reduced expenses; also includes severance of $1.2 million.
k.
Assumes approximately $750,000 for legal
and other professional fees for winding down the business, including, without
limitation, SEC filings, shareholder communication, possible litigation.
l.
Estimated real estate liability based on
leases as of December 31, 2008. Assumes
all offices and locations vacated by June 30, 2009.
m.
Estimated other contracts and lease
liabilities as of December 31, 2008.
n.
Accounts payable and accrued expenses as
of February 9, 2009.
o.
Includes payables associated with the
current inventory on order as of February 9, 2009.
p.
Assumes that credits in favor of
customers as of February 9, 2009 will be returned to customers.
q.
Assumes the last three weeks of February
2009 will result in use of cash in the amount of $150,000 per week.
r.
Outstanding checks as of February 9,
2009, estimated at $200,000.
Miscellaneous Assumption:
Assumes no recovery or additional liability with respect to the Companys U.S.
Graphic Arts, Inc. subsidiary.
Also discussed
at the meeting on February 12, 2009
was the fact
that, although the Company was cutting expenses wherever possible, the
condition of the embroidery marketplace together with the rate that the Company
was using its available cash was placing the Company in a precarious financial
position. The Companys strategic alternatives were again discussed, with the
following options being mentioned:
·
the Company pursuing a going
private transaction;
·
the Companys sale to a
third party;
·
the liquidation of the
Company;
·
the Company electing to go
dark(i.e. ceasing to be a Securities and Exchange Commission (the SEC)
reporting company as permitted under the rules promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange Act)); and
·
maintaining the status quo
while trying to further minimize the Companys expenses, and waiting for
improvement in the embroidery market.
During discussion of the
various alternatives, it was determined that it was appropriate at such time to
form a special committee comprised of independent members of the board of
directors, who would not be participants in any going private transaction if
one were proposed, to have full authority to consider and pursue the Companys
strategic alternatives. The directors
appointed to the special committee
, each of whom met the criteria referenced in the
preceding sentence,
were Marvin Broitman, Christopher J. Davino and
Mary Ann Domuracki and the special committee was empowered to retain legal,
financial and other advisors to assist the special committee in the fulfillment
of its duties.
During the remainder of February and during March the
special committee met several times to consider candidates to serve as
independent legal advisor to the special committee. During this period, the
special committee also interviewed and considered five different firms to serve
as independent financial advisor to the special committee. On March 31,
2009, the special committee retained Thompson Hine LLP (Thompson Hine) as its
independent legal advisor.
19
Table of Contents
Also during the remainder of February 2009, and
through the beginning of April, the board of directors met several times, at
which meetings the board of directors discussed, among other things, the
Companys business and financial condition and the Companys strategic
alternatives. Additionally, the special committee reported to the board of
directors on the status of retaining its independent financial and legal
advisors during several of these meetings.
On April 7, 2009, the special committee met to
discuss the Companys strategic alternatives with representatives of Thompson
Hine in attendance. The special
committee discussed the initial issues that should be considered in connection
with the pursuit of any strategic alternatives, including the interests of the
Companys stockholders, the interests of the Companys creditors, and the
interests of the Companys employees. The special committee also discussed the
likely process that would need to be completed with respect to considering any
strategic alternatives for the Company. Additionally, the special committee
discussed the status of its search for an investment banking advisor to solicit
and evaluate various strategic alternatives that might be considered by the
special committee.
Also during April, Mr. Gallagher
met with representatives of the special committee to confirm his interest in
possibly undertaking a going private transaction involving all of the
outstanding shares of the Company, and discuss with the special
committee
the status of potential
financing.
On April 21, 2009, the
special committee met to discuss retaining Burnham as its investment banking
advisor. Representatives of Thompson Hine attended the meeting and representatives
of Burnham attended a portion of the meeting. The special committee also
discussed the potential terms of retaining Burnham. The special committee discussed the Companys
strategic alternatives in light of its financial condition. Between April 21,
2009 and April 28, 2009, the special committee met several more times to
discuss the Companys strategic alternatives and the terms and scope of
retaining Burnham.
The special committee elected to retain Burnham after
interviewing several other financial advisory firms. In selecting Burnham, the special committee
considered, among other things, that Burnham is a nationally recognized
investment banking firm with substantial experience in similar transactions to
the merger, and that Burnham is familiar with the Company and its
business. A further description of
Burnhams experience is set forth in
Opinion of Burnham
Securities Inc.
On April 29, 2009, the
board of directors met to receive an update on the Companys business and financial
position. During the meeting, the special committee disclosed it was retaining
Burnham as its investment banking advisor and generally discussed the services
that Burnham would provide. A discussion ensued regarding the potential
strategic alternatives that might be available to the Company. During such
discussion, the members of the special committee requested that the officers of
the Company obtain an updated liquidation analysis from Clear Thinking Group
LLC, which had previously provided a liquidation analysis to the Company as
noted above.
From April 28, 2009,
through the first week of June 2009, Burnham began the process described
in
Opinion of Burnham Securities Inc.
below, including reviewing publicly available financial statements and other
business and financial information of the Company;
20
Table of Contents
reviewing
financial projections prepared by management of the Company; meeting with
senior executives of the Company and discussing with them the past and current
operations and financial condition and the prospects of the Company; and
conducting other financial analyses on the Company that Burnham deemed
appropriate.
Also during the month of
May, the special committee met several times to discuss the Companys strategic
alternatives with representatives of Burnham and Thompson Hine in attendance.
Additionally, in early May, representatives of the special committee contacted
Tajima Industries, Ltd. (Tajima), a major supplier to the Company equipment
accounts for approximately 54% of Hirschs sales, to discuss the potential
impact of various strategic alternatives upon the agreement between the Company
and that supplier. Tajimas contracts with the Company provide that it may be a
breach of such agreements (determinable by Tajima), if a material change should
occur in Hirschs stockholders, directors or officers, or a change in control
of Hirsch occurs. Tajima indicated to
the representatives of the special committee that they would be supportive of
the concept of the Company becoming a private company through an acquisition if
Mr. Gallagher would continue to be involved with the successor
company. They also confirmed their view
that an acquisition of Hirsch by a third party without their consent would be a
violation of their agreement with the Company.
On May 29, 2009, the Company received the
updated liquidation analysis from Clear Thinking Group LLC. The analysis indicated that the Companys
liquidation value was estimated to be in the range of $277,000 to $2.2 million
in the aggregate, resulting in an estimated per share value of $0.03 to $0.22.
The updated liquidation analysis was prepared based
upon a review of the Companys preliminary balance sheet as of April 30, 2009
and other historical income statements and balance sheets, estimated wind down
expenses, the consolidated 2009 forecast of net sales, gross profit, gross
margin by manufacturer, salary and other operating expenses that was utilized
in preparing the February Analysis, and updated information of the same type
reviewed for the February Analysis, except for an updated furniture, fixture and
equipment and miscellaneous lease and contract information. Similar to the February Analysis, Clear
Thinking assumed and relied upon, without independent verification, the
accuracy and completeness of the information that was publicly available or
supplied or otherwise made available to Clear Thinking by the Company, and
formed a substantial basis for its opinion.
As in the February Analysis, Clear Thinking continued
to assume that the Company would employ a carefully orchestrated and executed
wind down process which would maximize the value for the Companys
stockholders, and would employ the same two phase process as described in the
summary of the February Analysis. In the
present analysis, Clear Thinking assumed that the Company would have commenced
the wind down process by May 1, 2009, and would utilize the same sixty day
period for each of phase I and phase II, followed by the same thirty day period
needed to complete the necessary financial and legal requirements to close down
the business.
Based upon the foregoing, and the additional material
assumptions in the notes to the following table, Clear Thinking estimated the
Companys liquidation value in its May 29, 2009 report as follows:
21
Table of Contents
|
|
|
|
|
|
Liquidation Analysis Scenarios
|
|
|
|
Recoverable Assets as of 2/9/09
|
|
$ Amount
|
|
Low
|
|
Mid
|
|
High
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a
|
|
Cash Estimate
|
|
$
|
2,724,723
|
|
$
|
2,724,723
|
|
$
|
2,724,723
|
|
$
|
2,724,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
b
|
|
Accounts Receivable
|
|
$
|
3,696,127
|
|
$
|
3,571,111
|
|
$
|
3,787,861
|
|
$
|
4,001,071
|
|
|
|
|
|
Recovery Rate
|
|
88.3
|
%
|
93.6
|
%
|
98.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
c
|
|
Inventory Equipment & Parts (Recovery on Cost)
|
|
$
|
8,988,299
|
|
$
|
6,031,020
|
|
$
|
6,728,042
|
|
$
|
7,418,409
|
|
|
|
|
|
Recovery Rate
|
|
67.1
|
%
|
74.9
|
%
|
82.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
d,e
|
|
Pre-Paid Expenses (Supplies, etc.)
|
|
$
|
330,908
|
|
$
|
33,091
|
|
$
|
49,636
|
|
$
|
66,182
|
|
|
|
|
|
Recovery Rate
|
|
10.0
|
%
|
15.0
|
%
|
20.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
f
|
|
Furniture, Fixtures & Equipment (FF&E)
|
|
$
|
1,541,992
|
|
$
|
97,145
|
|
$
|
121,817
|
|
$
|
148,031
|
|
|
|
|
|
Recovery Rate
|
|
6.3
|
%
|
7.9
|
%
|
9.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
g
|
|
Intellectual Property (Patents, Trademarks, URLs,
etc.)
|
|
$
|
0
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
h
|
|
FF&E Recovery Fee (-20%)
|
|
|
|
$
|
(19,429
|
)
|
$
|
(24,363
|
)
|
$
|
(29,606
|
)
|
i
|
|
Accountsts Receivable Collection Fees (-15%)
|
|
|
|
$
|
(267,833
|
)
|
$
|
(284,090
|
)
|
$
|
(300,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Recovery before Wind Down Expenses, Professional
Fees, and Return to Shareholders
|
|
|
|
$
|
12,169,828
|
|
$
|
13,103,626
|
|
$
|
14,028,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and Administrative Expenses,
Professional Fees and Other Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
j
|
|
Company Operating Costs During Orderly Wind Down
|
|
$
|
5,161,056
|
|
$
|
5,161,056
|
|
$
|
5,161,056
|
|
$
|
5,161,056
|
|
k
|
|
Professional Fees & Expenses
|
|
|
|
$
|
750,000
|
|
$
|
750,000
|
|
$
|
750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross $ Available to Creditors
|
|
|
|
$
|
6,258,772
|
|
$
|
7,192,570
|
|
$
|
8,117,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
l
|
|
Property Lease Liabilities
|
|
$
|
575,513
|
|
$
|
575,513
|
|
$
|
575,513
|
|
$
|
575,513
|
|
m
|
|
Other Leases and Contracts Liabilities
|
|
$
|
13,872
|
|
$
|
13,872
|
|
$
|
13,872
|
|
$
|
13,872
|
|
n
|
|
Accounts Payable & Accrued Expenses Payable
|
|
$
|
4,257,240
|
|
$
|
4,257,240
|
|
$
|
4,257,240
|
|
$
|
4,257,240
|
|
o
|
|
Inventory On Order Commitment Payable
|
|
$
|
533,076
|
|
$
|
533,076
|
|
$
|
533,076
|
|
$
|
533,076
|
|
p
|
|
Customer Credits on Accounts Receivable
|
|
$
|
388,306
|
|
$
|
388,306
|
|
$
|
388,306
|
|
$
|
388,306
|
|
q
|
|
Taxes Payable Liability
|
|
$
|
229,829
|
|
$
|
229,829
|
|
$
|
229,829
|
|
$
|
229,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Available for Shareholders
|
|
|
|
$
|
260,936
|
|
$
|
1,194,734.82
|
|
$
|
2,119,838
|
|
a.
Available cash on hand as of May 6, 2009,
as per company cash flow summary report; less amounts committed for outstanding
letters of credit.
b.
Accounts receivable (includes credits
owed to customers, which are reflected in line p as an expense) as of April 30,
2009, as per the Companys aging accounts receivable records. This amount assumes that half of the balance
will be collected in the normal fashion, and the other half will be collected
utilizing a collection agency.
c.
Inventory value indicated is at cost as
per the Company aging inventory summary as of April 30, 2009. The total includes parts inventory and on
order inventory.
d.
Amount indicated is from the Companys
March 31, 2009 balance sheet and assumes most pre-paid expenses are
unrecoverable other than supplies.
e.
Assumes real estate lease deposits of
$35,703 are unrecoverable.
f.
Amount indicated is from the preliminary
April 30, 2009 balance sheet and includes furniture, fixtures and equipment,
leasehold improvements, computer upgrades and website development costs.
g.
Assumes the Companys intellectual
property has no value in the marketplace.
h.
Assumes a liquidator recovery fee of 20%
of gross sales of furniture, fixtures and equipment, after sales tax.
i.
Assumes company uses a collection agency
to collect half of the accounts receivable.
A collection fee of 15% of is applied on the half recovered by the
collection agency.
j.
Assumes normal use of cash plus payment
of additional commissions and advertising for two months, and two months with
reduced expenses; also includes severance of approximately $1 million.
22
Table of
Contents
k.
Assumes approximately $750,000 for legal
and other professional fees for winding down the business, including, without
limitation, SEC filings, shareholder communication and possible litigation.
l.
Estimated real estate liability based on
lease summary as of April 30, 2009.
Assumes all offices and locations vacated by August 31, 2009.
m.
Estimated other contracts and leases
liabilities as of April 30, 2009.
n.
Accounts payable and accrued expenses as
of April 30, 2009.
o.
Includes payables associated with the
current inventory on order as of May 23, 2009.
p.
From the preliminary April 30, 2009
balance sheet and assumes current accounts receivable credits returned to
customers.
q.
From the preliminary April 30, 2009
balance sheet.
Miscellaneous Assumption: assumes no recovery or
additional liability with respect to the Companys U.S. Graphic Arts, Inc.
subsidiary.
On June 9, 2009, the board of directors met to
discuss the Companys strategic alternatives. During the meeting, the special
committee inquired as to whether Mr. Gallagher intended to formulate and
submit an offer for the Company. To the extent a proposal was not forthcoming,
the special committee indicated that it would begin to seek offers for the
Company from other third parties, and that it would also prepare plans for the
Companys potential liquidation. The special committee indicated its urgency
was premised upon the rate at which the Company was utilizing its available
cash. Mr. Gallagher indicated that, subject to his receipt of a
satisfactory loan commitment letter, he expected to formulate and submit a proposal
for the special committees consideration within the next week.
On June 12, 2009, Mr. Gallagher sent to
the special committee a letter offering to acquire, through acquisition
entities to be formed by him, all of the outstanding shares of the Companys Class A
and Class B Common Stock, for $0.28 per share in cash, other than shares
held by Mr. Gallagher and any investors that may invest in his acquisition
entities, by way of a merger transaction. Mr. Gallaghers letter also
specified that any definitive agreement would need to include the right for him
to terminate such agreement in the event that he was unable to arrange
sufficient financing to make the acquisition, that he receive a break-up fee in
the event that the Company should accept an alternative acquisition proposal,
and other customary terms and conditions. On the same date that Mr. Gallagher
sent his proposal letter to the Company, he filed an amendment to his Schedule
13D disclosing his offer, and the Company issued a press release and filed a Form 8-K
with the SEC disclosing its receipt of Mr. Gallaghers offer.
On June 15, 2009, the special committee met to
discuss Mr. Gallaghers offer with representatives of Burnham and Thompson
Hine in attendance. The special committee discussed the price of $0.28 per
share contained in Mr. Gallaghers offer in light of the Companys
financial condition and the likelihood of locating any superior strategic
alternatives. The special committee discussed the approximately 30% premium
that the price of $0.28 per share offered to the Companys stockholders over
the Companys closing stock price on June 12, 2009. The special committee
also discussed the financing commitment to which Mr. Gallaghers offer was
subject, including the likelihood that Mr. Gallagher would be able to
obtain the financing in light of the Companys financial condition. The special
committee determined that it was in the best interests of the Company and its
stockholders to negotiate with Mr. Gallagher with respect to the price of
$0.28 per share. From June 15, 2009, until June 22, 2009,
representatives of the special committee negotiated with Mr. Gallagher
regarding the price of $0.28 per share.
Commencing on June 16, 2009, Burnham, on behalf of the
special committee, began conducting a market check, during which it contacted
a number of wholesale and distribution
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companies and private
equity firms to determine whether any of those entities would be interested in
considering an acquisition of the Company. Burnham selected the entities to
contact based on numerous factors, including perceived interest in the
businesses in which the Company operates, familiarity with the garment and
decorated apparel industries, financial position and ability to consummate an
acquisition of the Company.
On June 22, 2009, the
special committee held a meeting with Burnham and Thompson Hine in attendance.
During this meeting, a representative of Burnham reported on its market check
inquiries. Burnham reported that it had
contacted 20 financial and strategic buyers to determine whether
these
other parties might be
interested in engaging in a transaction with the Company, and that it had
received no indications of interest. Also during the meeting, the Committee
discussed Mr. Gallaghers indication that he would be willing to increase
his offer acquisition price per share to $0.31, subject to arriving at mutually
agreed terms and conditions for the transaction. The special committee then
discussed the fact that Mr. Gallaghers revised offer (conditional on
agreement on all other terms) was now substantially above the high-end
liquidation value estimate for the Company of $0.22 per share reflected in the
most recent liquidation report received. The special committee also discussed
several other issues regarding Mr. Gallaghers offer, including the credit
facility that was to be used to finance the offer and the conditions to which
it was subject. The special committee then discussed whether to enter into
negotiations with Mr. Gallagher with respect to a definitive merger
agreement. Based in part upon Burnhams report of the results of its market
check inquiries and the success of the special committee in negotiating a
higher price (conditioned on agreement on all other terms), the special
committee determined that it should participate in those discussions.
Following the meeting of the special committee, a
full board of directors meeting was held, in which representatives of Burnham
participated. At this meeting, the special committee and Mr. Gallagher
agreed to commence negotiation of a definitive merger agreement based upon the
terms specified in Mr. Gallaghers June 12, 2009 letter, subject to
the increased purchase price per share that representatives of the special
committee and Mr. Gallagher had previously discussed. Mr. Gallagher
indicated that he would have his counsel prepare an initial draft merger
agreement for review by the special committee and Thompson Hine.
On June 24, 2009, the special committee
requested that Mr. Gallagher extend the expiration date of his offer,
which was scheduled to expire pursuant to his proposal letter on June 25,
2009. Mr. Gallagher agreed to such request, and extended his offer until June 30,
2009. Additionally, on the same date, Mr. Gallagher
distributed to the special committee an initial draft agreement and plan of
merger, or merger agreement.
On June 26, 2009, the special committee held a
meeting with representatives of Burnham and Thompson Hine in attendance to
discuss the specific provisions of the merger agreement.
The special committee discussed various
issues regarding the merger agreement, including the provision requiring the
consent to the merger of Tajima, the waiver of the change of control severance
provisions of Mr. Gallaghers employment agreement, and the need for the merger
agreement to contain a go-shop provision to allow the special committee a
period of time to initiate, solicit and encourage competing offers. After
consideration of the initial draft merger agreement, the special committee
directed Thompson Hine to prepare and circulate a revised draft agreement to
Mr. Gallagher. Thereafter, the parties, with their respective legal counsel,
continued negotiations and exchanging drafts of the merger agreement.
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On
June 29, 2009, the special committee held a meeting with representatives of
Burnham and Thompson Hine in attendance to further discuss the specific
provisions of the merger agreement. The
special committee discussed the go-shop provision that had been added to the
revised draft of the merger agreement, pursuant to which the special committee
would be able to continue to explore other potential sale alternatives for a
specified period, notwithstanding any signed agreement to sell the Company to
Mr. Gallagher. After further discussion, the special committee determined that
it would be in the best interests of the Company and its stockholders to
consult with Delaware counsel about the use of go-shop provisions in similar
situations.
Counsel to Mr. Gallagher
joined the meeting and the special committee negotiated several specific
provisions of the merger agreement. The special committee again requested that Mr. Gallagher
extend the term of his offer, and Mr. Gallagher provided an extension
until July 2, 2009.
On June 30, 2009, the special committee met
again to discuss, among other matters, the advice received from Delaware
counsel regarding the inclusion of the go-shop provision in the merger
agreement. After further discussion, the special committee determined to
request a go-shop provision, which after a specified period of time, would
switch to a no-shop period, during which, the Company could not solicit
offers to engage in a strategic transaction with other parties, but which would
permit the special committee to consider unsolicited competing offers.
On July 1, 2009, the special committee met to
discuss the proposed merger agreement. At the meeting, the special committee
discussed the terms and conditions of the merger agreement as negotiated by
legal counsel. Representatives of Burnham also attended this meeting. At the
meeting, a representative of Burnham presented its financial and other analyses
with respect to the consideration to be paid to the unaffiliated stockholders
of the Company in the proposed merger. Burnham then rendered an oral opinion to
the special committee (which was confirmed in writing by delivery of Burnhams
written opinion dated July 1, 2009 to the special committee), to the
effect that, as of such date and based upon and subject to the procedures
followed, assumptions made, qualifications and limitations on the review
undertaken and other matters considered by Burnham in preparing its opinion,
the merger consideration to be received by the unaffiliated stockholders in the
merger was fair, in the opinion of Burnham, from a financial point of view.
Burnham was then excused from the meeting. Following further discussion, the
special committee unanimously determined that the terms of the proposed merger,
and the merger agreement and the other transactions contemplated thereby, were
advisable and fair to, and in the best interests of, our unaffiliated
stockholders, and recommended that our board of directors approve the proposed
merger and the merger agreement and the other transactions contemplated
thereby.
Immediately
following the meeting of the special committee, the compensation committee of
the board of directors, consisting of Messrs. Broitman, Davino and
Domuracki, held a meeting at which it considered and approved a second amended
and restated employment agreement for Mr. Gallagher to be entered into in
connection with the proposed merger agreement. The revised employment agreement
for Mr. Gallagher primarily amended his prior employment agreement in
order to (i) extend the termination date of the agreement one year to
September 11, 2010, and (ii) prevent Mr. Gallagher from being
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
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Table of Contents
transaction pursuant to
which (a) the shares of the Companys Class A Common Stock become
eligible for deregistration under the Exchange Act, and (b) Mr. Gallagher
becomes the beneficial owner, directly or indirectly, of 25% or more of the
Companys voting stock.
Early the next morning, before the commencement of
trading on the Nasdaq Capital Market, the board of directors met to consider
approval of the proposed transaction and the merger agreement and the other
transactions contemplated thereby. At this meeting, Burnham provided a summary
of its presentation to the special committee the previous evening regarding its
opinion, and the special committee reported the results of its meeting held the
previous evening. Additionally, counsel to the Company reviewed the material
terms and provisions of the merger agreement. Following this discussion, the
board of directors unanimously determined (without the participation of Mr. Gallagher
in voting) that the proposed merger and the merger agreement were advisable and
fair to, and in the best interests of, our unaffiliated stockholders. The board of directors then unanimously
approved (without the participation of Mr. Gallagher in voting) the
proposed merger and the merger agreement, and recommended that our stockholders
vote in favor of the proposed merger and directed that the merger agreement be
finalized and executed. Following these meetings, a definitive merger agreement
between the Company, Parent and Merger Sub was executed.
On July 2, 2009, prior to the commencement of
trading on the Nasdaq Capital market, we issued a press release announcing the
execution of the merger agreement.
On the morning of July 7, 2009, during the go-shop
period, Mr. Broitman received an unsolicited call from a prospective buyer
who had not previously expressed an interest in acquiring the Company. Given
the nature of the call, the special committee met with Burnham that afternoon
and discussed expanding the terms and scope of Burnhams engagement to include
conducting another market check during the go-shop period and delivering a bring-down
to Burnhams written opinion dated July 1, 2009 if requested by the
Company. On July 9, 2009, the special committee and Burnham amended
Burnhams engagement letter to expand the scope of its services to include,
among other things, conducting a market check and rendering a bring-down opinion
to its opinion dated July 1, 2009 if requested by the Company.
After engaging in initial discussions with members
of the special committee, the above mentioned prospective buyer informed the
members of the special committee on July 13, 2009 that he would not pursue
a competing proposal to acquire the Company.
From July 9, 2009 until
July 15, 2009, Burnham conducted a market check, contacting other parties
that might be potentially interested in presenting a takeover proposal to the Company.
On July 16, 2009, the special committee met with Burnham. During this
meeting, a representative of Burnham reported on its market check inquiries. Burnham
reported that it had contacted 24 financial and strategic buyers, including 15
parties that it had contacted in connection with its earlier market check
conducted before June 22, 2009, to determine whether other parties might
be interested in engaging in a transaction with the Company, and that at that
time it had received no indications of interest.
Burnham
selected the entities to contact based on numerous factors, including perceived
interest in the businesses in which the Company operates, familiarity with the
garment and decorated apparel industries, financial position and ability to
consummate an acquisition of the Company.
Neither Burnham nor the Company
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received any additional
indications of interest prior to the end of the go-shop period on July 22,
2009.
At this time, the Company has
not requested Burnham to update its opinion dated July 1, 2009. The Companys board of directors currently
does not expect that it will ask Burnham to update the fairness opinion.
Recommendation of the
Special Committee and of our Board of Directors; Reasons for Recommending
Approval of the Merger Agreement
The Special Committee
. On February 12, 2009, the board of
directors established a special committee consisting of three
members of the board of
directors, Mr. Davino,
who served as chairman, and Mr. Broitman and Ms. Domuracki, to
consider strategic alternatives for the Company,
with full authority from the board. The criteria for selecting the members of the
special committee was independence from the Company, and persons that would not
be a party to
a management led buy-out if one were to be proposed. The special committee was also empowered to
retain legal, financial and other advisors to assist the special committee in
the fulfillment of its duties. The special committee retained Thompson Hine as
its legal advisor, Burnham as its financial advisor, and also consulted special
Delaware counsel. The special committee conducted an extensive review and
evaluation of Mr. Gallaghers proposal and conducted negotiations with Mr. Gallagher
and his representatives with respect to the merger agreement. On July 1,
2009, the special committee, after considering the presentations and advice of
its financial and legal advisors, unanimously, among other things, (i) determined
that the merger is advisable and in the best interests of the Company and its
unaffiliated stockholders, (ii) recommended that the board of directors
approve and adopt the merger agreement in order to effect the merger.
In the course of reaching the determinations and
decisions and making the recommendations described above, the special committee
considered the following substantive positive factors and potential benefits of
the merger and the merger agreement, each of which the special committee
believed supported its decision:
·
its belief that
the merger was more favorable to the unaffiliated stockholders of the Company
than the alternative of remaining a stand-alone, independent company, because
of the uncertain returns to such stockholders if the Company remained
independent, in light of the challenging environment faced by the Company and
the Companys business, operations, financial condition, strategy and
prospects, as well as the risks involved in achieving those returns, and
general economic, market, credit, currency exchange rate and regulatory
conditions;
·
the special
committees belief that $0.31 per share was above the high end of the range of
liquidation values that could be payable for the Company, as provided in the
updated liquidation analysis prepared for the Company by Clear Thinking Group
LLC;
·
the fact that
the merger consideration of $0.31 per share represents a 47.6% premium above
the June 12, 2009 closing price of $0.21 per share (the last trading day
completed prior to receipt of Mr. Gallaghers initial offer) and a premium
of 54.5% above the volume-weighted average closing price of $0.2006 for the
thirty day period prior to the announcement of Mr. Gallaghers offer;
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·
the information
contained in the July 1, 2009 financial presentation of Burnham and
Burnhams opinion, as of July 1, 2009, based upon and subject to the
factors and assumptions set forth in the opinion and other matters as Burnham
considered relevant, as to the fairness, from a financial point of view, to the
unaffiliated stockholders of the Company of the merger consideration to be
received by such stockholders in the merger (see
Opinion of
Burnham Securities Inc.
);
·
the efforts
made by the special committee and its advisors to negotiate and execute a
merger agreement favorable to the Company;
·
the fact that
the merger will provide consideration to the unaffiliated
stockholders of the Company entirely in cash, which allows such stockholders to
immediately realize a fair value for their investment and provides such
stockholders certainty of value for their shares;
·
the fact that
the merger agreement provides the Company with a twenty day post-signing go-shop
period during which the Company can solicit interest in competing proposals
involving the Company, and, after such twenty day period, permits the Company
to respond to unsolicited proposals under certain circumstances;
·
the fact that,
subject to compliance with the terms and conditions of the merger agreement,
the board of directors is permitted to change its recommendation or terminate
the merger agreement, prior to the adoption of the merger agreement by the
Companys stockholders, in order to approve a superior proposal, upon the
payment to Parent of a termination fee equal to the expenses incurred by Parent
and Merger Sub incurred in connection with the merger, such amount not to
exceed $300,000; and
·
the
availability of appraisal rights to the holders of the Companys common stock
who comply with all of the required procedures under Delaware law, which allows
such stockholders to seek appraisal of the fair value of their shares as
determined by the Delaware Court of Chancery.
In the course of reaching the determinations and
decisions, and making the recommendations, described above, the special
committee considered the following factors relating to the procedural
safeguards that the special committee believes were and are present to ensure
the fairness of the merger and to permit the special committee to represent the
interests of the unaffiliated stockholders of the Company, each of which the
special committee believes supports its decision and provides assurance of the
fairness of the merger to us and our unaffiliated stockholders:
·
the fact that negotiations
were conducted by a special committee comprised of independent directors who
are not employees of the Company and who have no financial interest in the
merger that is different from that of the unaffiliated stockholders of the
Company;
·
the fact that the special
committee retained and received advice and assistance from its own independent
financial and legal advisors, each of which has
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extensive experience in
transactions similar to the proposed merger, in evaluating, negotiating or
recommending the terms of the merger agreement, as applicable;
·
the fact that neither
Thompson Hine nor Burnham previously represented the Company or Mr. Gallagher
before their respective engagement by the special committee;
·
the fact that the board of
directors could not proceed with a transaction involving Mr. Gallagher
without the approval of the special committee, which had the ultimate authority
to decide whether or not to pursue such a transaction (subject to approval of
the merger agreement by the board of directors);
·
the fact that the directors
of the Company (other than Mr. Gallagher) will not receive any merger
consideration in connection with the merger that is different from that
received by any other unaffiliated stockholder of the Company;
·
the fact that the financial
and other terms and conditions of the merger agreement were the product of
negotiations between the special committee and its independent advisors, on the
one hand, and Mr. Gallagher and his advisors, on the other hand;
·
the fact that the opinion of
Burnham, dated as of July 1, 2009, based upon and subject to the factors
and assumptions set forth in the opinion and the other matters as Burnham
considered relevant, addresses the fairness, from a financial point of view, to
the unaffiliated stockholders of the Company of the merger consideration to be
received by such stockholders in the merger;
·
the fact that the merger
agreement contains a go-shop provision pursuant to which the Company, at the
direction of the special committee, has the right to solicit and engage in
discussions and negotiations with respect to competing proposals for a period
of twenty days following execution of the merger agreement and, after that
time, to continue discussions with certain of such parties provided certain
conditions are met, and/or to respond to inquiries regarding competing
proposals under certain circumstances;
·
the fact that a provision in
the merger agreement allows the board of directors to withdraw or change its
recommendation of the merger agreement, and to terminate the merger agreement,
in certain circumstances; and
·
the fact that appraisal
rights under Delaware law are available to holders of shares of the Companys
common stock who dissent from the merger and comply with all of the required
procedures under Delaware law, which provides stockholders who dispute the
fairness of the merger consideration with an opportunity to have the Delaware
Court of Chancery determine the fair value of their shares.
The special committee
believes that the merger is procedurally fair despite the fact that the merger
agreement does not require that a majority of the shares of our common stock
held by unaffiliated stockholders is necessary to approve the merger agreement
and the merger. The special committee feels that the above-referenced
procedural safeguards, in combination with the
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requirement that a majority
of the outstanding shares of common stock approve the transaction, were a
sufficient safeguard to Mr. Gallaghers position with the Company, and as
a result, that a requirement that a majority of the shares of our common stock
held by unaffiliated stockholders would not materially enhance the fairness of
this transaction to the unaffiliated stockholders. The special committee also noted that Mr. Gallaghers
ownership of approximately 7.4% of the Companys outstanding shares was not
sufficient to control the outcome of the vote on the merger proposal.
The special committee also considered the following
risks and other potentially negative factors concerning the proposed merger and
merger agreement:
·
the fact that
the $0.31 per share to be paid for each share of the Companys common stock is
less than the 52-week high stock price for the Companys Class A Common
Stock of $1.61 in the 52-week period prior to execution of the merger
agreement;
·
the fact that
the unaffiliated stockholders of the Company will have no ongoing equity
participation in the Company following the merger, and that such stockholders
will cease to participate in the Companys future earnings or growth, if any,
or to benefit from increases, if any, in the value of the Companys common
stock;
·
the conflict of interest of Mr. Gallagher,
who, as a result of his interest in Parent will indirectly control all of the
shares of common stock of Hirsch, as the surviving company, following the
effective time of the merger;
·
the fact that an auction was
not conducted for the sale of the Company;
·
the merger agreement
restrictions on the conduct of the Companys business prior to the completion
of the merger, generally requiring the Company to conduct its business only in
the ordinary course, subject to specific limitations, which may delay or
prevent the Company from undertaking business opportunities that may arise
pending completion of the merger without Parents consent;
·
the risks and costs to the
Company if the merger does not close, including the diversion of management and
employee attention, potential employee attrition and the potential effect on
business and customer relationships;
·
that the receipt of cash in
exchange for shares of the Companys common stock pursuant to the merger will
be a taxable transaction for U.S. federal income tax purposes; and
·
the possibility that, under
the merger agreement, the Company may be required to reimburse Parent and
Merger Sub for its expenses incurred in connection with the merger of up to
$250,000 or $300,000, depending on the circumstances of termination.
In the course of reaching the determinations and
decisions, and making the recommendations, described above, the special
committee did not consider the going concern
30
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value
of the Company because, as disclosed in the Companys Quarterly Report on Form 10-Q
for the quarter ended March 31, 2009, there is substantial doubt as to the
Companys ability to continue as a going concern, and the special committee
therefore did not consider going concern value to be a relevant methodology. The
special committee did not believe that the Companys net book value as of March 31,
2009 of $1.09 per share was indicative of the Companys going concern value due
to the rapid rate at which the Company
was utilizing its available cash, which would prevent the Company from
sustaining such net book value.
The special
committee also did not consider the purchase price paid in the last two years
for shares of the Companys common stock, because neither the Company nor the
members of the Parent Group purchased any shares during this period. Finally, the special committee did not
consider any offers within the last two years made by a third-party to (a)
merge or consolidate the Company with or into another company, (b) sell or
otherwise transfer all or any substantial part of the assets of the Company, or
(c) purchase an amount of the Companys common stock that would enable the
holder to exercise control of the Company, because the Company is not aware of
any such offers.
The special committee expressly adopted the analyses
and the opinion of Burnham, among other factors considered, in the course of
reaching its decision to recommend to the board of directors that the board of
directors approve the merger agreement.
The foregoing discussion of the information and
factors considered by the special committee includes the material factors
considered by the special committee. In view of the variety of factors
considered in connection with its evaluation of the merger, the special
committee did not find it practicable to, and did not, quantify or otherwise
assign relative weights to the specific factors considered in reaching its
determination and recommendation. In addition, individual directors may have
given different weights to different factors. The special committee approved
and recommends the merger agreement and the merger based upon the totality of
the information presented to and considered by it.
The Board of Directors.
At a meeting on July 2, 2009, the board of
directors, based upon the unanimous recommendation of the special committee,
unanimously (without the participation of Mr. Gallagher in voting) (i) determined
that the merger and the merger agreement, are advisable, fair to, and in the
best interests of the unaffiliated stockholders of the Company, (ii) approved
and adopted the merger agreement, and (iii) recommended that our
stockholders adopt the merger agreement and approve the merger. In reaching
these determinations, our board of directors considered (i) the financial
presentation of Burnham that was prepared for the special committee and an
abbreviated version of which was delivered to the board of directors at its
request, as well as the fact that the special committee received a written
opinion delivered by Burnham as to the fairness, from a financial point of
view, to the unaffiliated stockholders of the Company of the merger
consideration to be received by such stockholders in the merger, and
(ii) the unanimous recommendation and analysis of the special committee to
approve the merger agreement. After
consideration of such factors, our board of directors adopted the special
committees discussion and analysis set forth above of the factors regarding
the fairness of the merger, and the discussion of Burnham set forth below in
Special FactorsOpinion of Burnham Securities Inc.
regarding the same topic.
The foregoing discussion of the information and
factors considered by the board of directors includes the material factors
considered by the board of directors. In view of the variety of factors
considered in connection with its evaluation of the merger, the board of
directors did
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not find it practicable to,
and did not, quantify or otherwise assign relative weights to the specific
factors considered in reaching its determination and recommendation. In
addition, individual directors may have given different weights to different
factors. The board of directors approved and recommends the merger agreement
and the merger based upon the totality of the information presented to and
considered by it.
Our Board of Directors recommends that you vote FOR the approval of
the proposed merger, and the approval and adoption of the merger agreement and
the other transactions contemplated thereby, and FOR any adjournment of the
special meeting, if necessary, to solicit additional proxies.
Opinion of Burnham
Securities Inc.
On July 1, 2009, at a meeting of the special
committee held to evaluate the proposed merger, Burnham delivered to the
special committee an oral opinion, confirmed by delivery of a written opinion,
dated July 1, 2009, to the effect that, as of that date and based on and
subject to various assumptions, matters considered and limitations described in
its opinion, the consideration to be received in the merger by the stockholders
of the Company other than the unaffiliated stockholders is fair from a
financial point of view to such stockholders.
The full text of Burnhams opinion describes the assumptions made,
procedures followed, matters considered and limitations on the review
undertaken by Burnham. The opinion is
attached as
Annex B
and is incorporated into this
proxy statement by reference.
Burnhams opinion is directed only to the fairness,
from a financial point of view, of the consideration to be received in the
merger by the unaffiliated stockholders and does not address any other aspect
of the merger. The opinion does not
address the relative merits of the merger or any related transaction as
compared to other business
strategies
or transactions that might be available with respect to the Company or the
Companys
underlying business
decision to effect the merger or any related transaction. The opinion does not constitute a
recommendation to any stockholder as to how such stockholder should vote or act
with respect to the merger or any related transaction. The Companys stockholders are encouraged to
read the opinion carefully in its entirety.
In arriving at its opinion, Burnham, among other
things:
(a)
reviewed
certain publicly available financial statements and other business and
financial information of the Company;
(b)
reviewed
an accounts
receivable reserve analysis and the Companys projected monthly cash flow
through 2009 prepared by management of
the
Company;
(c)
reviewed
certain financial projections prepared by management of the Company;
(d)
discussed the
past and current operations and financial condition and the prospects of the
Company with senior executives of the Company;
(e)
reviewed the
letter dated June 12, 2009 from Mr. Gallagher to the special
committee regarding his offer to acquire all of the shares of common stock of
the
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Company, which letter was
filed by the Company with the SEC under cover of a Current Report on Form 8-K
dated June 12, 2009;
(f)
at the request
of the special committee, conducted a market check after the public
announcement of Mr. Gallaghers offer letter;
(g)
reviewed the
Companys liquidity, liquidity projections prepared by management of the
Company and the Companys efforts to access additional capital;
(h)
reviewed a
liquidation analysis conducted by a third party commissioned by the special
committee;
(i)
reviewed the
limited trading in the Companys common stock and the Companys comparatively
small market capitalization;
(j)
compared the
market prices and trading history of the Companys common stock with those of
certain other publicly-traded companies that Burnham deemed relevant, as
reported by reliable information sources;
(k)
reviewed the
financial terms and premiums paid, to the extent publicly available, of certain
other transactions;
(l)
considered the
Companys prospects if it were to remain independent, as well as the risks
involved in achieving those prospects;
(m)
reviewed drafts
of the merger agreement as they became available; and
(n)
performed such
other analyses and considered such other factors as Burnham deemed appropriate.
In connection with Burnhams review, with the
consent of the special committee, Burnham assumed and relied upon, without
independent verification, the accuracy and completeness of the information that
was publicly available or supplied or otherwise made available to Burnham by
the Company, and formed a substantial basis for the opinion. With respect to the financial projections
provided to Burnham, Burnham assumed that they had been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
management of the Company of the future financial performance of the
Company. In addition, Burnham assumed
that the merger would be consummated in accordance with the terms set forth in
the merger agreement without any material waiver, amendment or delay of any
terms or conditions. Burnham further
noted that Burnham is not a legal, tax, regulatory or actuarial advisor, and
that it is a financial advisor only and relied upon, without independent
verification, the assessment of Parent and the Company and their respective
legal, tax, regulatory or actuarial advisors with respect to such matters. Burnham further noted that it had not made
any independent valuation or appraisal of the assets or liabilities of the
Company, nor had it been furnished with any such appraisals. Burnham took no responsibility for the
accuracy of the liquidation analysis provided to Burnham and did not
independently verify it or the assumptions or methodologies used to prepare
it. Burnhams opinion was necessarily
based upon economic, monetary and market conditions as they existed and could
be evaluated on the date of the opinion, and its opinion does not predict or
take into account any changes that may have
33
Table of Contents
occurred, or information
that may have become available, after the date of the opinion. Burnham has no responsibility for updating,
revising or reaffirming its opinion on circumstances or events occurring after
the date of the opinion.
At
the special committees direction, Burnham was not asked to, and it did not,
offer any opinion as to the terms, other than the merger consideration to the
extent expressly specified in Burnhams opinion, of the merger agreement or any
related documents or the form of the merger or any related transaction. Burnham expressed no opinion with respect to
fairness of the amount or nature of the compensation to any of the Companys
officers, directors or employees, or any class of such persons, relative to the
consideration to be received by the unaffiliated stockholders pursuant to the
merger agreement. The opinion is not,
and is not intended to be, a present or future valuation of the Company or of
its shares, nor is it an appraisal of any asset or liability. The opinion does not address, and is not
intended to address, whether Merger Sub or Parent is able to pay the
consideration in the merger or to fund post-merger operations, or the solvency
of the Company pre- or post-merger.
Specifically, the opinion does not address, and is not intended to
address:
·
whether the
remaining capital of the Company is a reasonable amount for the business in
which it is engaged,
·
whether
post-merger the Company will be able to pay its debt and contingent liabilities
as they mature, and
·
whether the
fair market value and present salable value of the Companys assets exceeds the
stated value of the contingent liabilities.
Except as described above, the special
committee imposed no other instructions or limitations on Burnham with respect
to the investigations made or the procedures followed by Burnham in rendering
its opinion. The issuance of Burnhams
opinion was approved by the fairness committee of Burnham.
In connection with
rendering its opinion to the special committee, Burnham performed a variety of
financial and comparative analyses that are summarized below. The following summary of the material
financial analyses performed by Burnham does not purport to be is not a
complete description of all analyses performed and factors considered by
Burnham in connection with its opinion.
The preparation of a financial opinion is a complex process involving
subjective judgments and is not necessarily susceptible to partial analysis or
summary description. With respect to the
selected public companies analysis and the selected transactions analysis
summarized below, no company or transaction used as a comparison was either
identical or directly comparable to the Company or the merger. These analyses necessarily involve complex
considerations and judgments concerning financial and operating characteristics
and other factors that could affect the public trading or acquisition values of
the companies concerned.
The estimates of the future
performance of the Company provided by the management of the Company in or
underlying Burnhams analyses are not necessarily indicative of future results
or values, which may be significantly more or less favorable than those
estimates. In performing its analyses,
Burnham considered industry performance, general business and economic
34
Table of Contents
conditions and other
matters, many of which are beyond the control of the Company. Estimates of the financial value of companies
do not purport to be appraisals or necessarily reflect the prices at which
companies actually may be sold.
The merger consideration was determined through
negotiation between the special committee and Mr. Gallagher, and the
decision by the special committee and the Companys board of directors to enter
into the merger agreement was solely that of the special committee and the
Companys board of directors. Burnhams
opinion and financial analyses were among many factors considered by the
special committee and the Companys board of directors in its evaluation of the
merger and should not be viewed as determinative of the views of the special
committee or the Companys board of directors or management with respect to the
merger or the merger consideration.
Financial Analyses of
Burnham Securities Inc.
The
following is a brief summary of the material financial analyses performed by
Burnham and reviewed with the special committee in connection with Burnhams
opinion relating to the proposed merger.
The financial analyses summarized below include
information presented in tabular format.
To fully understand Burnhams financial analyses, the tables must be
read together with the text of each summary.
The tables alone do not constitute a complete description of the
financial analyses. Considering the data
below without considering the full narrative description of the financial
analyses, including the methodologies and assumptions underlying the analyses,
could create a misleading or incomplete view of Burnhams financial
analyses. Burnham did not draw, in
isolation, conclusions from or with regard to any one factor or method of
analysis for purposes of its opinion, but rather arrived at its ultimate
opinion based on the results of all analyses it performed and assessed as a
whole. Except as otherwise noted, the
following quantitative information is based on market and financial data as it
existed on or before July 1, 2009, and is not necessarily indicative of
current market conditions.
Implied Valuation, Transaction Multiples and Transaction
Premiums.
Based on the cash consideration of $0.31 net
per share of the Companys common stock (the Per Share Equity Purchase Price)
Burnham calculated the implied equity purchase price to be $2.9 million.Equity
purchase price is defined as the Per Share Equity Purchase Price multiplied by
the Companys total number of diluted common shares outstanding, including
gross shares issuable upon the exercise of stock options, less assumed option
proceeds, as of March 31, 2009. In
addition, Burnham calculated the implied total purchase price to be $0.4
million. Total purchase price is defined
as the equity purchase price plus the book value of the Companys total debt
and preferred stock, less cash, cash equivalents and marketable securities, as
of March 31, 2009. Burnham then
calculated the multiples of the total purchase price to the Companys revenues,
to its earnings before interest, taxes, depreciation and amortization
(EBITDA), and to its earnings before interest and taxes (EBIT), for the
last twelve months (LTM) ended March 31, 2009. Burnham noted that, as per the Companys SEC
filings, both EBIT and EBITDA for the full year 2008 and for the LTM ended
March 31, 2009 were negative. The
following table summarizes these transaction multiples.
35
Table of Contents
|
|
Transaction Multiples
|
|
|
|
Revenue
|
|
EBITDA
|
|
EBIT
|
|
|
|
|
|
|
|
|
|
LTM as of March 31,
2009
|
|
0.01
|
x
|
Negative
|
|
Negative
|
|
Selected Comparable Publicly
Traded Company Analysis.
Burnham reviewed certain publicly available financial information and
stock market information for the publicly traded companies that Burnham deemed
relevant, in the following table.
Company
|
|
Symbol
|
|
|
|
Abatix Corp.
|
|
OTCPK: ABIX
|
|
|
|
DXP Enterprises Inc.
|
|
NasdaqGS: DXPE
|
|
|
|
Jingwei Textile Machinery Co. Ltd.
|
|
SEHK: 350
|
|
|
|
Kaulin Manufacturing Co. Ltd.
|
|
TSEC: 1531
|
|
|
|
Lawson Products Inc.
|
|
NasdaqGS: LAWS
|
|
|
|
Litho Supplies plc
|
|
LSE: LTS
|
|
|
|
Shima Seiki Manufacturing Ltd.
|
|
OSE: 6222
|
|
|
|
Tomita Co. Ltd.
|
|
Jasdaq: 8147
|
Burnham chose these companies based on a review of
publicly traded companies
engaged
in the business of distributing equipment and support services to industrial
customers
that possessed general business, operating and
financial characteristics representative of companies in the industry in which
the Company operates.
Specifically, Burnham attempted to
find U.S.-based companies that primarily distribute third party capital equipment
for the apparel industry and that have revenues of less than $100 million,
negative growth of less than 10% and negative EBITDA margins. Given that no publicly traded companies fit
these criteria, Burnham expanded the criteria and selected the companies listed
above, which Burnham believed had characteristics relevant to the Company.
Burnham
applied these criteria consistently and did not deliberately exclude any
company.
Burnham noted
that none of the companies reviewed is identical to the Company and that,
accordingly, the analysis of those companies necessarily involves complex
considerations and judgments concerning differences in the business, operating
and financial characteristics of each company and other factors that affect the
public market values of those companies.
F
or each
company, Burnham calculated the equity market value, defined as the market
price per share of each companys common stock multiplied by the total number
of diluted common shares outstanding of the company, including net shares
issuable upon the exercise of stock options and warrants. In addition, Burnham calculated the
enterprise value, defined as the equity market value plus the book value of
each companys total debt, preferred stock and minority interests, less cash,
cash equivalents and marketable securities.
Burnham calculated the multiples of each companys enterprise value to
its most recently disclosed LTM Revenues and
36
Table of Contents
EBITDA. Burnham then compared the transaction
multiples implied in the merger with the corresponding trading multiples for
the selected companies. Stock market and
historical financial information for the selected companies was based on
publicly available information as of June 29, 2009, and projected
financial information was based on publicly available research reports as of
that date. The following table provides
a summary of the implied multiples.
|
|
Selected Company
Multiples
|
|
|
|
Low
|
|
Average
|
|
Median
|
|
High
|
|
|
|
|
|
|
|
|
|
|
|
LTM Revenues
|
|
0.1
|
x
|
0.5
|
x
|
0.4
|
x
|
1.5
|
x
|
|
|
|
|
|
|
|
|
|
|
LTM EBITDA
|
|
1.3
|
x
|
5.0
|
x
|
5.9
|
x
|
7.3
|
x
|
In addition, Burnham
calculated the implied per share equity values of the Companys common stock
based on the trading multiples of the selected public companies. The following table summarizes the implied
per share equity values, based on the multiples that Burnham deemed relevant.
Specifically, the reference range was 0.1x to 1.5x for LTM Revenues
and 1.3x to 7.3X for EBITDA.
|
|
Implied Per Share Equity
Values
|
|
|
|
Low
|
|
Average
|
|
Median
|
|
High
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
0.51
|
|
$
|
2.22
|
|
$
|
1.96
|
|
$
|
6.06
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
Negative
|
|
Negative
|
|
Negative
|
|
Negative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No company
utilized in the Selected Comparable Publicly Traded Company Analysis is
identical to Hirsch. In fact, all eight
companies are more profitable, as measured by EBITDA, than Hirsch, and all
eight have revenues larger than Hirschs revenue. In evaluating the selected companies, Burnham
made judgments and assumptions with regard to industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond Hirschs and Burnhams control. A purely mathematical analysis
is not in itself a meaningful method of using comparable company data.
Selected
Precedent M&A Transaction Analysis.
Burnham reviewed certain publicly available
financial information concerning completed or pending acquisition transactions
that Burnham deemed relevant. The group
of selected acquisition transactions is listed below.
Target
|
|
Acquiror
|
|
Announcement
Date
|
|
|
|
|
|
Central Products LLC
|
|
K+K America Corporation
|
|
April 3, 2009
|
|
|
|
|
|
Anderson Power and Equipment, Inc.
|
|
Titan Machinery, Inc.
|
|
December 22, 2008
|
|
|
|
|
|
U.S. Graphic Arts, Inc.
|
|
Hirsch International Corp.
|
|
August 4, 2008
|
|
|
|
|
|
SeaCo Parts International Inc.
|
|
Axis Intermodal plc
|
|
May 12, 2008
|
|
|
|
|
|
Quad County Implement, Inc.
|
|
Titan Machinery, Inc.
|
|
April 28, 2008
|
37
Table of Contents
Target
|
|
Acquiror
|
|
Announcement
Date
|
|
|
|
|
|
S & A Supply, Inc.
|
|
Colonial Commercial Corp.
|
|
September 10, 2007
|
|
|
|
|
|
J.W. Burress, Inc. (now H&E Equipment Services
(Mid-Atlantic), Inc.)
|
|
H&E Equipment Services Inc.
|
|
May 15, 2007
|
|
|
|
|
|
Dauphin Graphic Machines, Inc. (now Manugraph DGM, Inc.)
|
|
Manugraph India Ltd
|
|
November 7, 2006
|
|
|
|
|
|
Dodson Steel Products, Inc.
|
|
Israel Mendelson Ltd.
|
|
October 25, 2006
|
|
|
|
|
|
Oxy-Dry Corporation
|
|
Baldwin Technology Co. Inc.
|
|
October 4, 2006
|
|
|
|
|
|
New York Fasteners Corp.
|
|
BE Aerospace Inc.
|
|
August 14, 2006
|
|
|
|
|
|
Production Pump Systems, Inc.
|
|
DXP Enterprises Inc.
|
|
April 7, 2006
|
|
|
|
|
|
J&L America, Inc.
|
|
MSC Industrial Direct Co. Inc.
|
|
March 15, 2006
|
|
|
|
|
|
Complete Power Solutions, Inc.
|
|
China Direct Trading Corporation (nka:CHDT Corporation)
|
|
January 27, 2006
|
|
|
|
|
|
RA Mueller, Inc.
|
|
DXP Enterprises Inc.
|
|
December 1, 2005
|
Burnham chose these
acquisition transactions based on a review of completed and pending acquisition
transactions involving target companies that possessed general business,
operating and financial characteristics representative of companies in the
industry in
which the
Company operates.
Burnham applied these criteria
consistently and did not deliberately exclude any transaction.
Burnham noted that none of
the acquisition transactions or subject target companies reviewed is identical
to the merger or the Company, respectively, and that, accordingly, the analysis
of such acquisition transactions necessarily involves complex considerations
and judgments concerning differences in the business, operating and financial
characteristics of each subject target company and each acquisition transaction
and other factors that affect the values implied in such acquisition
transactions.
For each transaction, Burnham calculated the implied
equity purchase price, defined as the purchase price per share of each target
companys common stock multiplied by the total number of the companys diluted
common shares outstanding, including gross shares issuable on the exercise of
stock options and warrants, less assumed option and warrant proceeds, or
alternatively defined as the value attributable to the equity of a target
company. In addition, Burnham calculated
the implied enterprise value, defined as the equity purchase price plus the
book value of each target companys total debt, preferred stock and minority
interests, less cash, cash equivalents and marketable securities. Burnham calculated the multiples of each
target companys implied enterprise value to its most recently disclosed LTM
Revenues and LTM EBITDA. A summary of
the implied multiples is provided in the table below.
38
Table of Contents
|
|
Selected Acquisition
Multiples
|
|
|
|
Low
|
|
Average
|
|
Median
|
|
High
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
0.1
|
x
|
0.6
|
x
|
0.5
|
x
|
1.6
|
x
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
3.8
|
x
|
7.3
|
x
|
5.3
|
x
|
12.3
|
x
|
Using a reference range of 0.1x to 1.6x for LTM
Revenues and 3.8x to 12.3x for EBITDA,
Burnham calculated the implied per share equity values
of the Companys common stock based on the acquisition transaction multiples of
the selected acquisition transactions.
The implied per share equity values are summarized in the table below.
|
|
Implied
Per Share Equity Values
|
|
|
|
Low
|
|
Average
|
|
Median
|
|
High
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
0.60
|
|
$
|
2.84
|
|
$
|
2.28
|
|
$
|
6.49
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
Negative
|
|
Negative
|
|
Negative
|
|
Negative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No company utilized in
the Selected Precedent M&A Transaction Analysis is identical to
Hirsch. In evaluating the merger,
Burnham made numerous judgments and assumptions with regard to industry
performance, general business, economic, market, and financial conditions and
other matters, many of which are beyond Hirschs and Burnhams control. A
purely mathematical analysis is not in itself a meaningful method of using
comparable transaction data.
Discounted Cash Flow Analysis.
Burnham performed a discounted cash flow analysis using the Companys
projected unlevered free cash flows from
2009
to
2013,
as provided by the Companys management.
Unlevered free cash flows is defined as net income excluding after-tax
net interest, plus depreciation and amortization, less capital expenditures and
increases in net working capital, plus/minus changes in other operating and
investing cash flows. Burnham noted that
the Companys management had projected negative unlevered free cash flows (or
free cash losses) for the Company for all future periods. In its analysis, Burnham calculated the
present values of the unlevered free cash flows from 2009 to 2013 by
discounting those amounts at rates ranging from 16.0% to 20.0%.
Burnham calculated these discount rates, or weighted average costs
of capital, using the Capital Asset Pricing Model, which considers the
risk-free rate, equity risk premium, industry risk as implied by the betas of
the companies included in the Selected Comparable Publicly Traded Company
Analysis, Hirschs size, tax-affected cost of debt financing and capital
structure.
Burnham
calculated the present values of the free cash flows beyond 2013 by assuming
terminal values based on unlevered free cash flow growth rates ranging from
1.0% to 5.0% and discounting the resulting terminal values at rates ranging
from 16.0% to 20.0%.
Burnham applied these growth rates
based on Hirschs historical growth and the sustainability of such growth rates
into perpetuity.
The
summation of the present values of the unlevered free cash flows and the
present values of the terminal values produced equity values ranging from a
negative ($0.60) to a negative ($0.45) per share.
39
Table of Contents
Control Premium Analysis.
Burnham reviewed certain publicly available
financial and stock market information for 17 completed transactions
since June 1, 2006 within selected
industries, including wholesale and distribution companies,
involving
certain publicly traded target companies with an enterprise value between $3.9
million and $7.3 billion in which greater than 50% ownership had been acquired
between January 1, 2006 and June 22, 2009.
Burnham applied these criteria
consistently and did not deliberately exclude any transaction. The 17 completed transactions are listed
below.
Target
|
|
Acquiror
|
|
Closing Date
|
|
|
|
|
|
BUCA, Inc.
|
|
Planet
Hollywood International, Inc.
|
|
September
29, 2008
|
|
|
|
|
|
MAXIM Crane Works Holdings, Inc.
|
|
Platinum
Equity LLC
|
|
July
2, 2008
|
|
|
|
|
|
Industrial Distribution Group, Inc.
|
|
Southwest
JLK Corp.
|
|
August
6, 2008
|
|
|
|
|
|
NuCo2, Inc.
|
|
Aurora
Capital Group LP
|
|
May
29, 2008
|
|
|
|
|
|
Performance Food Group Co.
|
|
Wellspring
Capital Management LLC / Blackstone
|
|
May
27, 2008
|
|
|
|
|
|
Keystone Automotive Industries, Inc.
|
|
LKQ
Corp.
|
|
October
15, 2007
|
|
|
|
|
|
ACR Group, Inc.
|
|
Watsco,
Inc.
|
|
August
10, 2007
|
|
|
|
|
|
CDW Corp.
|
|
Madison
Dearborn Partners
|
|
October
12, 2007
|
|
|
|
|
|
Global Imaging Systems, Inc.
|
|
Xerox
Corp.
|
|
May
11, 2007
|
|
|
|
|
|
The Topps Co., Inc.
|
|
Madison
Dearborn Partners / The Tornante Co. LLC
|
|
October
12, 2007
|
|
|
|
|
|
LQ Corp., Inc.
|
|
Dynabazaar,
Inc.
|
|
July
31, 2007
|
|
|
|
|
|
ADESA, Inc.
|
|
ADESA,
Inc. /Private Group
|
|
April
20, 2007
|
|
|
|
|
|
Valley National Gases, Inc.
|
|
Caxton-Iseman
Capital, Inc.
|
|
February
28, 2007
|
|
|
|
|
|
TransMontaigne, Inc.
|
|
Morgan
Stanley
|
|
September
1, 2006
|
|
|
|
|
|
Earle M. Jorgensen Co.
|
|
Reliance
Steel & Aluminum Co.
|
|
April
3, 2006
|
|
|
|
|
|
Hughes Supply, Inc.
|
|
The
Home Depot, Inc.
|
|
March
31, 2006
|
|
|
|
|
|
Fresh Brands, Inc.
|
|
Certified
Grocers Midwest, Inc.
|
|
February
27, 2006
|
Burnham analyzed the acquisition premiums paid in
these transactions on the basis of one day prior to announcement, five days
prior to announcement and thirty days prior to announcement. The control premiums paid are summarized in
the table below.
40
Table of Contents
|
|
Control Premium
|
|
|
|
Low
|
|
Average
|
|
Median
|
|
High
|
|
|
|
|
|
|
|
|
|
|
|
1-Day
|
|
|
|
24.8
|
%
|
20.6
|
%
|
53.0
|
%
|
|
|
|
|
|
|
|
|
|
|
5-Day
|
|
0.6
|
%
|
24.2
|
%
|
20.1
|
%
|
48.2
|
%
|
|
|
|
|
|
|
|
|
|
|
30-Day
|
|
(4.7
|
)%
|
19.1
|
%
|
19.1
|
%
|
45.7
|
%
|
Burnham
calculated the implied per share equity values of the Companys common stock
based on the control premiums paid in
these
transactions.
The implied per share equity values are summarized in the following
table.
|
|
Implied Per Share Equity
Values
|
|
|
|
Low
|
|
Average
|
|
Median
|
|
High
|
|
|
|
|
|
|
|
|
|
|
|
1-Day
|
|
$
|
0.21
|
|
$
|
0.26
|
|
$
|
0.25
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
5-Day
|
|
$
|
0.21
|
|
$
|
0.26
|
|
$
|
0.25
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
30-Day
|
|
$
|
0.20
|
|
$
|
0.25
|
|
$
|
0.25
|
|
$
|
0.31
|
|
Company Trading Premium Analysis.
Burnham reviewed the historical price and
trading activity of the Companys common stock and noted the high, low and
volume-weighted average closing prices for the Companys common stock over
periods ranging from the closing market price on June 12, 2009, the day
that Mr. Gallaghers offer to acquire all of the outstanding shares of the
Companys common stock was announced after the close of trading, to five years
prior to announcement of that offer.
Burnham noted that the Companys common stock price declined 84% over
the last twelve months and also declined 84% over the three years ended June 12,
2009. Burnham calculated the premiums
that the Per Share Equity Purchase Price represented over the volume-weighted
average price of the Companys common stock for various time periods as shown
in the table below, with those premiums based upon the closing market price on June 12,
2009.
Implied Per Share Equity
Values
|
|
1-Day
|
|
30-day
|
|
60-day
|
|
3-month
|
|
6-month
|
|
1-year
|
|
5-year
|
|
Volume-Weighted Average
Price
|
|
$
|
0.21
|
|
$
|
0.20
|
|
$
|
0.21
|
|
$
|
0.21
|
|
$
|
0.22
|
|
$
|
0.52
|
|
$
|
1.93
|
|
Premium to Per Share
Purchase Price
|
|
47.6
|
%
|
54.5
|
%
|
49.8
|
%
|
45.8
|
%
|
39.4
|
%
|
(40.4
|
)%
|
(83.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidation Analysis.
Burnham reviewed a liquidation analysis and
report dated May 29, 2009 compiled by Clear Thinking Group LLC, which the
special committee had commissioned.
Burnham took no responsibility for the accuracy of the liquidation
analysis provided to Burnham and did not independently verify it or the
assumptions or methodologies used to prepare it. The
41
Table of Contents
liquidation analysis stated
that the Company had an implied enterprise value range per share of $0.03 to
$0.22.
Valuation
Summary.
The
following table provides a summary of the valuation statistics from the
analyses presented above.
|
|
Implied Value / Share
|
|
|
|
Low
|
|
High
|
|
Public Comparables
|
|
|
|
|
|
LTM Revenue Multiple
|
|
$
|
0.51
|
|
$
|
6.06
|
|
LTM EBITDA Multiple
|
|
Negative
|
|
Negative
|
|
Precedent M&A
Transactions
|
|
|
|
|
|
LTM Revenue Multiple
|
|
$
|
0.60
|
|
$
|
6.49
|
|
LTM EBITDA Multiple
|
|
Negative
|
|
Negative
|
|
Discounted Cash Flow
|
|
$
|
(0.60
|
)
|
$
|
(0.45
|
)
|
Control Premium
|
|
|
|
|
|
Control Premium - 1-day
|
|
$
|
0.21
|
|
$
|
0.32
|
|
Control Premium - 30-day
|
|
$
|
0.20
|
|
$
|
0.31
|
|
Company Trading Premium
Analysis
|
|
$
|
0.20
|
|
$
|
1.93
|
|
Liquidation Analysis
|
|
$
|
0.03
|
|
$
|
0.22
|
|
The
1-day and 30-day control premiums in the table above are based upon the closing
market price on June 12, 2009, the day that Mr. Gallaghers offer to
acquire all of the outstanding shares of common stock was announced after the
close of trading.
Additional Considerations
Having reviewed the matters
noted above and performed the financial analyses described above, Burnham also
considered the following in rendering its opinion:
·
Tajima
Industries, Ltd., whose equipment accounts for 54% of Hirschs sales, has the
right to terminate its existing supply agreement with Hirsch on a number of
grounds, including if:
·
Tajima determines that a
change in control of Hirsch has occurred; and
·
Mr. Gallagher
is no longer the chief executive officer of the Company.
·
The market
check performed by Burnham yielded no indication of interest from a potential
competing buyer.
42
Table of Contents
·
The
unavailability of credit to the Company without a personal guarantee from Mr. Gallagher,
and Mr. Gallaghers unwillingness as a minority stockholder and a director
with fiduciary duties to public stockholders to provide a personal guarantee
for all of the debt of a public company (which guarantee would not have been
customary).
Although Burnham noted that the Companys current
net book value is substantially greater than the Per Share Equity Purchase
Price, Burnham discounted this data point due to its consideration of:
·
The Companys
rapid burn rate of its cash balances, with a projected depletion of all cash by
the end of the third quarter of 2009.
·
The liquidation
analysis conducted by Clear Thinking Group LLC described above.
·
Managements
projections, which demonstrated that the Company would not sustain the current
book value due to its continued losses and rapidly depleted cash balances.
Miscellaneous
Under the terms of Burnhams engagement, the Company
has agreed to pay Burnham a transaction fee of $175,000 for its services in
connection with the merger:
·
$50,000 of
which was paid on the execution of the special committees engagement letter
with Burnham;
·
$20,000 was
paid on June 22, 2009 on Burnhams delivery to the special committee of
the results of the market check; and
·
$40,000 of
which was paid on the delivery of Burnhams fairness opinion to the special
committee; and
·
$65,000 of
which was paid on the execution of the special committees amended engagement
letter with Burnham.
An additional $25,000 would
be payable to Burnham in the event the Company were to accept a superior
proposal and the Company were to request that a new fairness opinion be
delivered in connection with that proposal.
In addition, the Company has
agreed to reimburse Burnham for all of its reasonable out-of-pocket expenses,
including reasonable fees of counsel, and to indemnify Burnham and related
parties against liabilities, including liabilities under federal securities
laws, relating to, or arising out of, its engagement. In the two years before the date of its
fairness opinion, Burnham did not provide financial advisory services to the
Company, its officers or directors (including the independent directors) or
receive any fees from the Company, its officers or directors (including the
independent directors), and there were no material relationships between
Burnham and the Company or any other party to the merger and no such material
relationships are contemplated.
43
Table of Contents
Burnham
may seek to provide services to the Company and Parent in the future and would
expect to receive fees for those services.
In the ordinary course of business, Burnham, its successors and
affiliates may hold or trade, for their own accounts and the accounts of their
customers, securities of the Company and, accordingly, may at any time hold a
long or short position in those securities.
The special committee
interviewed and considered
several different firms to serve as independent financial advisor to the
special committee. The special committee
selected
Burnham as its financial advisor in connection with the merger because
, among other factors considered,
Burnham is a recognized investment banking firm
with substantial experience in similar transactions and is familiar with the
Company and its business. Burnham is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, leveraged buyouts, negotiated underwritings,
competitive bids, secondary distributions of listed and unlisted securities and
private placements.
Purpose and Reasons for the
Merger of Parent Group
For Paul Gallagher and Parent, the primary purpose
of the merger is to benefit from any future earnings and growth of Hirsch after
the merger of Merger Sub with and into Hirsch, making Hirsch a privately held
company owned entirely by the Parent Group. For Merger Sub, the purpose of the
merger is to effectuate the transactions contemplated by the merger
agreement. Parent Group believes that
structuring the transaction in such a manner is preferable to other transaction
structures because it will enable the acquisition of all of our shares at the
same time and it provides an opportunity for our unaffiliated stockholders to
immediately receive a substantial premium for their shares based upon the
closing price of our common stock on June 12, 2009, the date that Mr. Gallaghers
offer to acquire all of the outstanding shares of common stock of Hirsch was
announced. In addition, Parent Group
believes that this transaction was the best way to address Hirschs liquidity
needs, as Hirsch was unsuccessful in obtaining new credit facilities without
personal guarantees which were not available. Paul Gallagher and Parent also
believe that the merger will provide additional means to enhance stockholder
value for such person or entity, including improved profitability due to the
elimination of expenses of approximately $1,000,000 per year associated with public
company reporting and compliance, increased flexibility and responsiveness in
management of the business to achieve growth and respond to competition without
the restrictions of quarterly earnings comparisons, and alternative means for
making liquidity available to current and future stockholders of Parent, such
as through payment of dividends or other distributions to the extent permitted
under the terms of relevant financing agreements.
Position of Parent Group as
to the Fairness of the Merger
Parent Group believes that
the proposed merger is substantively fair to the unaffiliated stockholders
based upon the following factors in addition to the
analyses
and discussion of the
factors considered by the special committee,
the board of directors
and Burnham
with respect
to the substantive fairness of the merger to the unaffiliated stockholders,
which the Parent Group
adopted
in their entirety:
·
Current
Market Price
: The price of $0.31 per share to be paid in the
proposed merger to the unaffiliated stockholders represents a premium of
approximately 47.6% above the June 12, 2009 closing price of $0.21 per
share (the last trading day completed prior to receipt of Mr. Gallaghers
initial offer) and a premium of
44
Table of Contents
54.5% above the
volume-weighted average closing price of $0.2006 for the thirty day period
prior to the announcement of Mr. Gallaghers offer;
·
Cash Consideration and Liquidity
. The merger will provide immediate and
certain liquidity, without brokerage and other costs typically associated with
market sales, for the unaffiliated stockholders whose ability, absent the
merger, to sell their shares of Hirsch common stock is adversely affected by
the limited trading volume and low public float of the shares;
·
Negotiated Price
. The $0.31 per share merger
consideration and other terms and conditions of the merger agreement were the
result of extensive negotiations between the independent special committee, on
the one hand, and the Parent Group, on the other hand, and each partys
respective advisors.
·
Opportunity for Third Party Bids
.
The merger agreement permits the special committee and its advisors to
furnish information to and to conduct negotiations with third parties regarding
other acquisition proposals (as described in
The Merger
AgreementRestrictions on Solicitations of Other Offers
beginning
on page 78). More specifically,
during the go-shop period between July 2, 2009, the date that the merger
agreement was signed, and July 22, 2009, Hirsch is permitted to initiate,
solicit, encourage and enter into and maintain discussions or negotiations
regarding competing takeover proposals.
Moreover, the merger agreement allows the special committee to entertain
unsolicited offers, to accept a superior proposal and to change its
recommendations and terminate the merger agreement (which would trigger an
obligation to reimburse expenses of the Parent Group, up to a maximum of
$300,000).
·
Independent Advisors
.
To advise it in the negotiations with Parent Group, the special
committee retained its own financial and legal advisors, each of which has
extensive experience in transactions similar to the proposed merger and neither
of which the special committee determined to have a relationship that would compromise
its independence in the process.
·
Opinion of Burnham Securities
.
Before the special committee approved the merger, Burnham, the financial
advisor to the special committee and the Company, delivered its oral opinion to
the special committee, which was subsequently confirmed in writing, that as of
the date of its opinion and based upon and subject to the factors and
assumptions set forth in its opinion, the consideration of $0.31 per share in
cash to be received by Hirschs stockholders (other than Mr. Gallagher,
Parent and Merger Sub) under the merger agreement is fair from a financial
point of view to such holders. A copy of
Burnhams opinion is attached to this proxy statement as
Annex B
.
·
Analysis of Clear Thinking Group
LLC
. The updated liquidation analysis prepared
for the Company by Clear Thinking Group LLC indicated that the Companys
liquidation value was estimated to be in the range of $277,000 to $2.2
45
Table of Contents
million in the aggregate,
resulting in an estimated per share value of $0.03 to $0.22, prices well below
the proposed merger price.
The Parent Group believes
that the proposed merger is procedurally fair to the unaffiliated stockholders
based upon the following factors, in addition to the analyses and discussions
of the factors considered by the special committee and the board of directors
with respect to the procedural fairness of the merger to the unaffiliated
stockholders, which the Parent Group adopted in their entirety:
·
Independence of Special Committee
.
Hirschs board of directors formed the special committee, consisting
solely of directors who are not current officers, employees or controlling
stockholders of Hirsch and are not affiliated with Parent Group to negotiate
with Parent Group, and to determine if, and under what conditions, Hirsch would
enter into a merger agreement with Parent and Merger Sub. The special committee had the authority to
reject any proposals made by Parent and Merger Sub. The Parent Group did not participate in or
have any influence over the conclusions reached by the special committee or the
negotiating positions of the special committee.
·
Opportunity to Change
Recommendation
. Although the merger agreement requires Hirsch
to cease seeking other proposals at the end of the go-shop period on July 22,
2009, the merger agreement continues to permit a change in the recommendation
of the special committee and the board of directors and the termination of the
merger agreement in response to a bona fide unsolicited proposal if the Companys
board of directors and the special committee deems such proposal to be a
superior proposal or if the Companys board of directors otherwise determines
that such a change in recommendation or termination of the merger agreement is
necessary in order for the board of directors to comply with its fiduciary
duties to Hirschs stockholders, subject, in certain cases, to a payment by
Hirsch to Parent of up to a $300,000 termination fee, to cover expenses of the
Parent Group.
·
Appraisal Rights
.
Hirsch stockholders who do not vote in favor of the merger agreement and
who comply with certain procedural requirements will be entitled, upon
completion of the merger, to exercise statutory appraisal rights under Delaware
law, which allow stockholders to have the fair value of their shares determined
by the Delaware Court of Chancery and paid to them in cash.
·
Vote Required
.
Approval of the merger requires the affirmative vote of a majority of
all outstanding shares of Class A Common Stock and Class B Common
Stock voting as a single class. Although
the merger agreement does not provide for a vote by a majority of the
unaffiliated stockholders of the Company, Mr. Gallaghers ownership
interest in the Company (7.4%) means that approval of the transaction is not
controlled by Mr. Gallagher.
The foregoing discussion of the information and factors considered and given
weight by the Parent Group in connection with the fairness of the proposed
merger and the merger
46
Table of Contents
agreement to the unaffiliated stockholders is not
intended to be exhaustive. Mr. Gallagher,
Parent and Merger Sub did not find it practicable to, and did not, quantify or
otherwise attach relative weights to the foregoing factors or the other factors
considered by the special committee and board of directors in reaching their
position as to the fairness of the proposed merger and the merger agreement to
the unaffiliated stockholders. Mr. Gallagher,
Parent and Merger Sub believe that the foregoing factors (together with those
additional factors considered by the special committee and board of directors),
provide a reasonable basis for their belief that the proposed merger is fair,
both substantively and procedurally, to the unaffiliated stockholders.
Purposes and Reasons
for the Merger of the Company
The
purpose of the merger for us is to enable our stockholders (other than the
Parent Group, and stockholders who properly exercise their dissenters rights
of appraisal under Delaware law) to immediately realize the value of their
investment in us through their receipt of the per share merger consideration of
$0.31 in cash, representing a premium of approximately 47.6% over the closing
trading price of our Class A Common Stock on June 12, 2009, the last
completed trading day before it was publicly announced that Mr. Gallagher
had had made an offer to acquire all of our outstanding common shares. The per share merger consideration of $0.31
in cash also represents a premium of approximately 24% over the closing trading
price on July 1, 2009, the last completed trading day before we announced
our entry into the merger agreement. For
the reasons discussed under
Recommendation of the
Special Committee and if our Board of Directors; Reasons for Recommending
Approval of the Merger Agreement,
our board of directors
unanimously determined (with Mr. Gallagher taking no part in the vote or
recommendation) that the merger agreement and the merger are advisable, fair to
and in the best interests of us and our unaffiliated stockholders.
Alternatives to the
Merger for the Company
As indicated in
Special FactorsBackground
of the Merger,
several alternative transactions were considered by
our board of directors and special committee prior to the Companys entry into
the merger agreement, pursuant to which it will become wholly-owned by an
affiliate of Mr. Gallagher upon consummation of the merger, or go
private. One alternative considered was
the sale of the Company to an unaffiliated third-party. However, no interest in acquiring the Company
materialized when Burnham approached numerous financial and strategic buyers,
both before and after the Companys entry into the merger agreement, to see if
any such party might be interested in acquiring the Company.
The liquidation of the Company was also
considered. However, the uncertain value
that would be realized in such a transaction, as reflected by the wide range in
estimated value of the Company in the two liquidation analyses received from
Clear Thinking Group LLC, made this an undesirable option.
The Company also considered going dark, or ceasing
to be an SEC reporting company as permitted under the rules promulgated under
the Exchange Act. Going dark would have
saved the Company approximately $1,000,000 per year as a result of no longer
being subject to the costs associated with public company reporting and
compliance obligations. However, to take
such action, the Company would have been required to terminate its listing on
the Nasdaq Capital Market and would likely thereafter have had little or no
public market for its shares of
47
Table of Contents
Class A Common Stock, which would likely have resulted
in a reduction in our stock price.
Additionally, if the Company had gone dark, it is possible under the
Exchange Act rules that the Company would have again become involuntarily
subject to the SEC reporting requirements, again, eliminating the Companys
cost savings. As a result of the
foregoing factors, the Company determined not to go dark.
Finally, the Company considered remaining a public
company, but minimizing its expenses to the greatest extent possible, and
waiting for improvement in the embroidery market. However, given the rate at which the Company
was using its available cash, its inability to enter into a new credit facility
without a personal guarantee which was not available to it as a public company,
and the uncertainty as to when the Company might return to profitability, it
was determined that this option may not have been viable for the Company.
Plans for Hirsch after the Merger
It is
expected that, upon consummation of the merger, our operations will be conducted
substantially in the same manner as they currently are being conducted except
that Parent and the surviving corporation will enter into a new credit facility
on our behalf, pursuant to which Mr. Gallagher will provide a personal
guarantee of the surviving corporations obligations under the credit facility,
and also that our common stock will cease to be publicly traded and will no
longer be listed on any exchange or quotation system, including the Nasdaq
Capital Market, so price quotations will no longer be available. We will not be
subject to many of the obligations and constraints, and the related direct and
indirect costs, in connection with having publicly traded equity securities and
the associated regulatory and reporting requirements.
Following
the merger, Hirsch, as the surviving corporation, will continue to evaluate and
review our assets, capital structure, business, operations and personnel, and
may develop new plans and proposals, implement changes believed to be
appropriate to enhance business and operations, or elect to pursue acquisitions
or other opportunities that we consider appropriate to maximize our value.
The
Parent Group currently does not have any other plans to engage in a going
private transaction if the merger is not consummated.
Effects of the Merger
If the
merger is consummated, Merger Sub will be merged with and into us, and we will
continue as the surviving corporation, privately held company, wholly owned by
Parent.
Upon
the consummation of the merger, each share of our common stock issued and
outstanding immediately prior to the effective time of the merger (other than
shares owned by Parent Group, held in treasury by us or owned by stockholders
who properly exercise their dissenters rights of appraisal under Delaware law)
will be converted into the right to receive $0.31 in cash, without interest.
Upon consummation of the merger, all outstanding options to purchase shares of
our common stock granted under our 2003 Stock Option Plan and 2004 Non-Employee
Director Stock Option Plan, as amended, whether vested or unvested, will at the
effective time of the merger become fully vested and be cancelled and converted
into the right to receive a cash payment equal to the number of shares of
common stock underlying the options multiplied by the amount, if any, by which
$0.31 exceeds the option exercise price, without
48
Table of Contents
interest; provided, however, each holder of a stock
option issued pursuant to our 2004 Non-Employee Director Stock Option Plan, as
amended, shall be required to execute a written cancellation and release
agreement. Upon cancellation, none of
our outstanding options will receive the consideration set forth in the prior
sentence, as all of the outstanding options have an exercise price above $0.31.
Following the merger, Hirsch will be a privately held
corporation wholly-owned by Parent. Mr. Gallagher
is presently Parents sole stockholder.
See
Interests of Certain Persons in the Merger
beginning on page 56.
If the merger is consummated, our stockholders other
than Parent and Mr. Gallagher will have no interest in our net book value
or net earnings. The table below sets
forth the direct and indirect interests in our book value and net earnings of Mr. Gallagher
prior to and, indirectly through Parent, immediately following the merger,
based on our net book value as of December 31, 2008 and June 30, 2009 and net
loss for the year ended December 31, 2008.
As of each such date, Mr. Gallagher owned 697,899 shares of our
common stock.
|
|
Ownership
Prior to the Merger
|
|
|
|
Net Book
Value
|
|
Loss
|
|
|
|
December 31,
2008
|
|
June 30,
2009
|
|
December 31, 2008
|
|
Name
|
|
%
|
|
$(000s)
|
|
%
|
|
$(000s)
|
|
%
|
|
$(000s)
|
|
Paul Gallagher
|
|
7.4
|
|
964
|
|
7.4
|
|
603
|
|
7.4
|
|
(508
|
)
|
|
|
Ownership
After the Merger
|
|
|
|
Net Book
Value
|
|
Loss
|
|
|
|
December 31,
2008
|
|
June 30,
2009
|
|
December 31, 2008
|
|
Name
|
|
%
|
|
$(000s)
|
|
%
|
|
$(000s)
|
|
%
|
|
$(000s)
|
|
Paul Gallagher
|
|
100
|
|
13,100
|
|
100
|
|
8,194
|
|
100
|
|
(6,900
|
)
|
The
primary benefits of the merger to the unaffiliated stockholders include the
following:
·
the receipt by such stockholders (other
than any exercising their rights of appraisal under Delaware law) of a cash
payment of $0.31, without interest and less any applicable withholding taxes,
for each share of our Class A Common Stock held by such stockholders as
described above, representing a premium of approximately 46.7% over our closing
stock price of $0.21 per share on June 12, 2008, the last completed
trading day before the announcement of Mr. Gallaghers offer to acquire
all of our outstanding shares of common stock, and 24% over our Class A
Common Stock closing price of $0.25 per share on July 1, 2009, the last
completed trading day before we announced the execution of the merger
agreement;
·
the avoidance of the investment risk of
holding shares of our common stock, which historically has been thinly traded,
which can result in price volatility and illiquidity; and
49
Table of Contents
·
the avoidance of the risk associated with
any possible decrease in our future earnings, growth or value or the
possibility of our insolvency or other financial problems following the merger.
The
primary detriments of the merger to the unaffiliated stockholders include the
following:
·
such stockholders will cease to have an
interest in Hirsch and, therefore, will no longer benefit from possible
increases in our future earnings, growth or value or payment of dividends on
shares of our common stock, if any;
·
in general, the receipt of cash pursuant
to the merger will be a taxable transaction for U.S. federal income tax
purposes and may also be a taxable transaction under applicable state, local,
foreign and other tax laws. As a result, a Hirsch stockholder who receives cash
in exchange of all of such stockholders Hirsch common stock in the merger
generally will be required to recognize taxable gain or loss as a result of the
merger for U.S. federal income tax purposes equal to the difference between the
amount of cash received and such stockholders aggregate adjusted tax basis in
such stock; and
·
the possibility that Hirsch could, at a
later date, engage in acquisitions or other transactions that create value, and
that the non-continuing stockholders will not participate in such value
creation.
The
primary benefits of the merger to Mr. Gallagher and Parent include the
following:
·
if Hirsch successfully executes its
business strategies, the value of Mr. Gallaghers and Parents equity
investment could increase because of possible increases in future earnings,
increases in underlying value of Hirsch or the payment of dividends, if any,
that will accrue to such parties;
·
because Hirsch would no longer be a
publicly-traded company, it will no longer have continued pressure to make
decisions that may produce better short term results, but which may not over
the long term lead to a maximization of the companys equity value;
·
Hirschs directors, officers and
beneficial owners of more than 10% of the shares of common stock will be
relieved of the reporting requirements and liability for short-swing profit
recovery under Section 16 of the Exchange Act;
·
Hirsch will not have the expenses
associated with being a public company; and
·
following the merger, Mr. Gallagher,
who is currently the President, Chief Executive Officer and Chief Operating
Officer of Hirsch, will retain his officer positions with the surviving
corporation.
The
primary detriments of the merger to Mr. Gallagher and Parent include the
following:
50
Table of Contents
·
all of the risk of any possible decrease
in the earnings, growth or value of Hirsch following the merger will be borne
by Mr. Gallagher and Parent;
·
Mr. Gallaghers and Parents equity
investment in the surviving corporation following the merger will involve
substantial risk resulting from the very limited liquidity of such an
investment in a private company;
·
following the merger, there will be no
trading market for, and substantial restrictions on the transfer of, equity
interests in the surviving corporation;
·
following the merger, the surviving
corporation will have a higher level of debt, which will create fixed payment
obligations unrelated to the surviving corporations performance and will
restrict the ability to make distributions to Parent and its stockholders; and
·
Keltic Financial is requiring an
unlimited personal guarantee of Mr. Gallagher in connection with the
credit facility in respect of the transaction meaning that Mr. Gallagher
will bear the risk of the surviving corporations inability to service the debt
incurred in connection with this transaction.
Our
common stock is currently registered under the Exchange Act and is quoted on
the Nasdaq Capital Market under the symbol HRSH. As a result of the merger,
we, as the surviving corporation, will become a privately held corporation, and
there will be no public market for our common stock. After the merger, our
common stock will cease to be quoted on the Nasdaq Capital Market, and price
quotations with respect to sales of shares of our common stock in the public
market will no longer be available. In addition, registration of our common
stock under the Exchange Act will be terminated.
At the effective time of
the merger, our certificate of incorporation, as in effect immediately prior to
the merger, will be amended in the form of Exhibit A to the merger
agreement and will become the certificate of incorporation of the surviving
corporation immediately following the merger. The bylaws of Merger Sub, as in
effect immediately prior to the merger, will become the bylaws of the surviving
corporation immediately after the merger. Upon consummation of the merger, the
directors of Merger Sub will be the initial directors of the surviving
corporation and our officers will be the officers of the surviving corporation.
All surviving corporation directors and officers will hold their positions in
accordance with and subject to the certificate of incorporation and bylaws of
the surviving corporation. None of
Hirschs officers or directors will be entitled to any payments under any
employment or other agreements pursuant to change-of-control or similar
provisions as a result of the completion of the proposed merger.
Effects on the Company if the Merger is Not Completed
If the merger agreement is not adopted by our
stockholders or if the merger is not completed for any other reason, our
stockholders will not receive any payment for their shares of our common stock
pursuant to the merger agreement.
Instead, we will remain a public company and our common stock will
continue to be registered under the Exchange Act and quoted on the Nasdaq
Capital Market. If the merger is not completed, our common stock price may be
likely to decrease from its current trading price, which is likely supported by
the expectation that the
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merger will be consummated at a cash price of $0.31
per share. In addition, if the merger is
not completed, our special committee will continue to seek other strategic
alternatives for us, which may include the liquidation of the Company. In the interim, we expect that our management
will operate our business in a manner similar to that in which it is being
operated today and that our stockholders will continue to be subject to the
same risks and opportunities to which they currently are subject, including,
among other things, our liquidity concerns, the nature of the industry on which
Hirschs business largely depends, and general industry, economic, regulatory
and market conditions.
If the
merger is not consummated, there can be no assurance as to the effect of these
risks and opportunities on the future value of your shares of our common stock.
In
addition, if the merger agreement is terminated under certain circumstances, we
will be obligated to reimburse Parents actual out-of-pocket fees and expenses,
up to a cap of $250,000 or $300,000, depending upon the circumstances. For a
description of the circumstances triggering payment of the termination fee, see
The Merger AgreementTermination Fee
.
Financing of the Merger
Parent
estimates that the aggregate amount of financing
necessary
to complete the merger and make payment of related fees and expenses in
connection with the merger and the financing arrangements is anticipated to be
approximately $3.4 million, which does not include the value of the 697,899
shares of Class A Common Stock that Mr. Gallagher intends to
contribute to Parent in exchange for shares of common stock of Parent
immediately prior to the effective time. The estimated $3.4 million is expected
to be funded by Parent with a portion of the proceeds from the debt financing
described below and cash of the Company. The debt financing is subject to the
satisfaction of the conditions set forth in the debt commitment letter pursuant
to which the financing will be provided.
Debt
Financing
In
connection with the execution and delivery of the merger agreement, Mr. Gallagher
has entered into a debt commitment letter for up to $4 million of debt financing
from Keltic Financial. Under the terms
of the commitment letter, Parent or Merger Sub as the borrower will enter into
a senior secured revolving credit facility in an aggregate principal amount of
up to $4 million with a term of three years.
Keltic Financial will be granted a first perfected security interest in
all tangible and intangible assets of the surviving corporation in connection
with such credit facility. Additionally,
Keltic Financial will require an unlimited personal guarantee of Mr. Gallagher
under the credit facility. The proceeds
of borrowings under the credit facility will be used (a) to partially pay
the aggregate amount of merger consideration and payment of related fees and
expenses in connection with the merger, and (b) to provide ongoing working
capital.
The
debt financing commitment offer expires on September 30, 2009. The debt financing commitment is conditioned
upon customary conditions, including, but not limited to:
·
completion of due diligence by Keltic
Financial;
·
negotiation of definitive loan documentation
acceptable to Keltic Financial;
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·
that no material adverse change in the
operations, financial condition or prospects of Hirsch shall have occurred;
·
a warranty reserve being implemented and
updated based upon historical trends of warranty expense; and
·
that at least $500,000 shall remain available to be
borrowed under the credit facility after giving effect to (i) the closing
of the credit facility and payment of the aggregated merger consideration and
all related fees and expenses, and (ii) if required by Keltic Financial,
bringing the accounts payable into a current status.
We
have agreed to reasonably cooperate with the arrangement of the debt financing
as requested by Parent, including agreeing to enter into such agreements as are
customary in financings such as the credit facility, and taking such other
corporate actions, subject to the consummation of the merger, to permit the
consummation of the debt financing and the direct borrowing by Hirsch, as the
surviving corporation in the merger, immediately following the effective time
of the merger.
Parent
will use its commercially reasonable efforts to consummate the credit facility
on the terms and conditions described in the debt commitment letter. If any portion of the debt financing becomes
unavailable on the terms and conditions contemplated by the debt commitment
letter, Parent will be required to use its reasonable best efforts to arrange
or obtain alternative financing from alternative sources in an amount
sufficient to consummate the merger on terms and conditions not materially less
favorable to Parent than those set forth in the debt commitment letter. In the
event that Parent is required to obtain an alternative source of financing to
consummate the merger, it may be difficult, or impossible, to do so on such
terms. It is a condition to Parent and
Merger Subs obligation to consummate the merger that Parent shall have
obtained the debt financing on the terms contained in the commitment letter or from
an alternative financing source.
The
documentation governing the credit facility has not been finalized and,
accordingly, the actual terms may differ from those described in this proxy
statement. Although there can be no assurance, Parent believes that cash flow
from operations should be sufficient to service the repayment obligations under
the debt financing for the foreseeable future. The revolving loans under the
credit facility are expected to bear interest, at the higher of (a) the
prime rate plus 3.5%, (b) the ninety day London interbank offer rate, or
LIBOR, plus 5.75%, or (c) 7.5%.
The
senior secured facilities are expected to contain customary representations and
warranties and customary affirmative and negative covenants, including, among
other things, restrictions on additional indebtedness and the payment of
dividends, a limitation on loans or advances to employees and stockholders and
restrictions on transactions with affiliated parties. The financial maintenance covenants will
consist of minimum EBITDA and capital expenditure requirements. The credit
facility is expected to include customary events of default.
Material United States Federal Income Tax Consequences
The following is a summary of certain material U.S.
federal income tax consequences of the merger that are relevant to beneficial
holders of the Companys common stock whose shares will be converted to cash in
the merger and who will not own (actually or constructively) any
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shares of the Companys common stock after the merger.
The following discussion does not purport to consider all aspects of U.S.
federal income taxation that might be relevant to beneficial holders of the
Companys common stock. The discussion is based on current provisions of the
Internal Revenue Code of 1986, as amended, which we refer to as the Code,
existing, proposed, and temporary regulations promulgated under the Code, and
rulings, administrative pronouncements, and judicial decisions as in effect on
the date of this proxy statement, changes to which could materially affect the
tax consequences described below and could be made on a retroactive basis. The
discussion applies only to beneficial holders of the Companys common stock in
whose hands the shares are capital assets within the meaning of Section 1221
of the Code.
For
purposes of this discussion, the term U.S. holder means a beneficial owner of
the Companys common stock that is, for U.S. federal income tax purposes, any
of the following:
·
a citizen or individual resident of the
United States;
·
a corporation (or any other entity
treated as a corporation for U.S. federal income tax purposes) created or
organized under the laws of the United States or of any state thereof
(including the District of Columbia);
·
an estate, the income of which is subject
to U.S. federal income taxation regardless of its source; or
·
a trust (1) if a court within the
United States is able to exercise primary supervision over the administration
of the trust and one or more U.S. persons have the authority to control all
substantial decisions of the trust, or (2) that has a valid election in
effect under applicable U.S. Treasury Regulations to be treated as a U.S.
person.
For
purposes of this discussion, the term non-U.S. holder means a beneficial
owner of the Companys common stock that is not a U.S. holder.
This
discussion does not consider:
·
U.S. federal gift tax consequences, or
U.S. state or local or non-U.S. tax consequences;
·
specific facts and circumstances that may
be relevant to a particular beneficial holders tax position;
·
the tax consequences for the
stockholders, partners, or beneficiaries of a non-U.S. holder;
·
special tax rules that may apply to
particular beneficial holders, such as financial institutions, insurance
companies, tax-exempt organizations, hybrid entities, certain former citizens
or former long-term residents of the United States, broker-dealers, and traders
in securities;
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·
special tax rules that may apply to
a beneficial holder that holds our common stock as part of a straddle, hedge,
conversion transaction, synthetic security, or other integrated investment;
or
·
special tax rules that may apply to
a beneficial holder that acquired its shares pursuant to the exercise of stock
options or other compensation arrangements with the Company.
If a
partnership (including for this purpose any entity treated as a partnership for
United States federal income tax purposes) is a beneficial owner of the Companys
common stock whose shares will be converted to cash in the merger, the
treatment of a partner in the partnership will generally depend upon the status
of the partner and upon the activities of the partnership. Partnerships and partners should consult
their tax advisors about the United States federal income tax consequences of
owning and disposing of our common stock.
U.S.
Holders
The
receipt of cash in exchange for the Companys common stock pursuant to the
merger will be a taxable transaction for U.S. federal income tax purposes. In
general, a U.S. holder who receives cash in exchange for shares pursuant to the
merger will recognize gain or loss for U.S. federal income tax purposes equal
to the difference, if any, between the amount of cash received and the U.S.
holders adjusted tax basis in the shares surrendered for cash pursuant to the
merger. Gain or loss will be determined separately for each block of shares
(i.e., shares acquired at the same price per share in a single transaction)
surrendered for cash pursuant to the merger. Such gain or loss will be capital
gain or loss and will be long-term capital gain or loss if the U.S. holders
holding period for such shares is more than one year at the time of consummation
of the merger. The maximum federal income tax rate on net long-term capital
gain recognized by individuals is 15% under current law. Deduction of capital
losses may be subject to certain limitations.
Non-U.S.
Holders
A
non-U.S. holder generally will not be subject to U.S. federal income tax with
respect to gain recognized pursuant to the merger unless one of the following
applies:
·
The gain is effectively connected with a
non-U.S. holders conduct of a trade or business within the United States or,
alternatively, if an income tax treaty applies, the gain is attributable to a
permanent establishment maintained by the non-U.S. holder in the United States.
In such case, the non-U.S. holder will, unless an applicable tax treaty
provides otherwise, generally be taxed on its net gain derived from the merger
at regular graduated rates and in the manner applicable to U.S. persons and, if
the non-U.S. holder is a foreign corporation, it may also be subject to the
branch profits tax; or
·
A non-U.S. holder who is an individual
holds the Companys common stock as a capital asset, is present in the United
States for 183 or more days in the taxable year of the merger, and certain
other conditions are met. In such a case, the non-U.S. holder will be subject
to a flat 30% tax on the gain derived from the merger, which may be offset by
certain U.S. capital losses.
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Information Reporting and Backup
Withholding
Cash payments made
pursuant to the merger will be reported to the recipients and the Internal
Revenue Service to the extent required by the Code and applicable U.S. Treasury
Regulations. In addition, certain non-corporate beneficial owners may be
subject to backup withholding at a 28% rate on cash payments received in
connection with the merger. Backup withholding will not apply, however, to a
beneficial owner who (a) furnishes a correct taxpayer identification
number and certifies that he, she or it is not subject to backup withholding on
the Form W-9 or successor form, (b) provides a certification of
foreign status on Form W-8 or successor form or (c) is otherwise
exempt from backup withholding. Backup withholding is not an additional tax.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against your U.S. federal income tax liability provided
the required information is timely furnished to the Internal Revenue Service.
The
discussion set forth above is included for general information only. Each
beneficial owner of shares of the Companys common stock should consult his,
her or its own tax advisor with respect to the specific tax consequences of the
merger to him, her or it, including the application and effect of state, local
and foreign tax laws.
Interests of Certain Persons in the Merger
In
considering the recommendation of our special committee and board of directors
with respect to the merger agreement, you should be aware that an executive
officer and our directors have interests in the merger that are different from,
or in addition to, the interests of our stockholders generally, as more fully
described below. Our special committee and board of directors were aware of
these interests and considered them, among other matters, in reaching their
decision to approve the merger agreement and recommend that the Companys
stockholders vote in favor of adopting the merger agreement.
Interests
of Mr. Gallagher
Parent
is currently wholly-owned by Mr. Gallagher, and Merger Sub is wholly-owned
by Parent. Following the consummation of
the merger, it is expected that Mr. Gallagher will own, indirectly through
Parent, a controlling interest in the common stock of Hirsch. As a result of the merger, Parent will enjoy
the full benefits from any future earnings and growth of Hirsch and Mr. Gallagher
will enjoy his proportionate share of such benefits based upon whatever share
ownership interest he may have in Parent following the merger.
In
addition, Mr. Gallagher is a party to an employment agreement with Hirsch,
which agreement was amended and restated in connection with the Companys entry
into the merger agreement. Mr. Gallaghers
former employment agreement was modified, to, among other things, extend the
term of Mr. Gallaghers 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 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 Companys Class A common stock become eligible for deregistration
under the Exchange Act, and (b) Mr. Gallagher becomes the beneficial
owner, directly or indirectly, of 25% or more of
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the Companys voting stock. However, if we do not consummate the merger
and instead consummate a superior proposal, and Mr. Gallaghers employment
is terminated within six months of the consummation of such transaction, or he
terminates his employment for good cause within six months of the consummation
of such transaction, we estimate that Mr. Gallagher could receive payments
and benefits under his employment agreement with a total value of approximately
$446,000.
Interests
of Our Directors and Officers
The
merger agreement provides that the surviving corporation shall maintain in
effect, for a period of six years following the effective time of the merger,
the exculpation, indemnification and advancement of expenses provisions of
Hirschs and any of our subsidiarys organizational documents in effect
immediately prior to the effective time of the merger or in the indemnification
agreements with our and our subsidiarys respective directors, officers or
employees in effect as of the date of the merger agreement. All rights of
indemnification with respect to any claim, action, suit, proceeding or
investigation brought would continue until the disposition of the action or
resolution of the claim.
The
merger agreement further provides that for a period of six years following the
effective time of the merger, the surviving corporation shall maintain in
effect directors and officers liability insurance covering acts or omissions
occurring at or prior to the effective time of the merger for those persons who
are currently covered by the Companys directors and officers liability
insurance policy. The terms and amount
of such coverage shall be comparable to the Companys existing directors and
officers liability insurance policy (or the surviving corporation may
substitute such policy with a tail policy). If the annual premiums for such insurance
policy exceeds 200% (or in the case of a tail policy, 300% of the last annual
premium), then Parent must provide a policy or tail for the directors and
employees with as much coverage as then available for 200% of the existing
policy (or 300% for the tail policy).
See
The Merger AgreementIndemnification and Insurance
.
Prior
to the consummation of the merger, all unvested options will be accelerated so
that they will be vested and become fully exercisable immediately prior to the
consummation of the merger. Immediately
prior to the effective time, the Company will cancel each outstanding option,
and each option holder will be entitled to receive in exchange therefor an
amount of cash payable at the effective time of the merger, or as soon as
practicable thereafter, equal to the product of (a) the total number of shares
of Class A Common Stock that was subject to such option, and (b) the
excess, if any, of $0.31 over the per share exercise price of such stock
option; provided, however, each director shall be required to execute a written
cancellation and release agreement. None
of the directors or executive officers of the Company will receive the above
benefit, as none of them hold options with exercise prices under $0.31.
Special Committee Compensation
The special committee of
our board of directors is composed of its chairman, Christopher J. Davino, and
members Mary Ann Domuracki and Marvin Broitman. In accordance with Hirschs
customary practice for each of its commitees, the members of the special
committee are compensated for their participation in meetings of the special
committee. Through July 31, 2009, Mr. Davino
has received $22,500, Ms. Domuracki has received $18,000 and Mr.
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Broitman, $17,000, for
their respective participation in meetings of the special committee. Mr. Davino is compensated in a greater
amount than Ms. Domuracki and Mr. Broitman for participation in
special committee meetings as a result of his service as chairman of the
special committee.
Projected Financial Information
We do not as a matter of
course make public projections as to future performance or earnings, and we are
especially wary of making projections for extended earnings periods due to the
unpredictability of the underlying assumptions and estimates. However, non-public prospective financial
information for the five years ending December 31, 2013 was prepared by
our senior management at the direction of the special committee during the beginning
of May 2009, based upon information available to our senior management at that
time, and was made available to and considered by Burnham in connection with
its opinion.
We have included the material projections in this
proxy statement to give our stockholders access to certain nonpublic
information considered by Burnham for purposes of considering and evaluating
the merger. We made a number of key
assumptions in preparing the projections, including:
·
that we have sufficient capital to
sustain operations;
·
that we operate as an ongoing business
and not in liquidation;
·
that we remain a public company, subject
to costs associated with our public company reporting and compliance
obligations of approximately $1,000,000 per year;
·
that sales growth will occur at 5% per
year, with an increase of expenses at 2.5% each year; and
·
that our gross margin will improve based
on a stronger U.S. Dollar as compared to the Japanese Yen or the Euro.
Additionally,
we informed Burnham of the following essential factors at the time of
presenting our financial projections: (i) that we have not met our
forecasted budget within the last 18 months, and missed our 2009 first quarter
revenue projection by over 35%, (ii) as a result of the Company having no
historical sales backlog, we have very limited ability to forecast our sales, (iii) that
we are uncertain how the disclosure of the uncertainty of our ability to
continue as a going concern in our Quarterly Report on Form 10-Q for the
three months ended March 31, 2009 will affect our sales. Based upon the foregoing, and the other factors
discussed below, the inclusion of this information should not be regarded as an
indication that Burnham or any other recipient of this information considered,
or now considers, it to be a reliable prediction of future results.
We have advised Burnham that our internal financial
forecasts upon which the projections were based are subjective in many
respects. The projections reflect numerous assumptions with respect to industry
performance, general business, economic, regulatory, market and financial conditions
and other matters, all of which are difficult to predict and beyond our
control. The projections also reflect estimates and assumptions related to our
business that
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are
inherently subject to significant economic, political, and competitive
uncertainties, all of which are difficult to predict and many of which are
beyond our control. As a result, there can be no assurance that the projected
results will be realized or that actual results will not be significantly
higher or lower than projected. The financial projections were prepared for
internal use and to assist Burnham with its due diligence investigation of us
and not with a view toward public disclosure or toward complying with GAAP, the
published guidelines of the SEC regarding projections or the guidelines
established by the American Institute of Certified Public Accountants for
preparation and presentation of prospective financial information. The
projected financial information included below has been prepared by, and is the
responsibility of our management, and none of Parent, Merger Sub, the board of
directors, the special committee or Burnham was involved in the preparation of
the projected financial information or has any responsibility for the projected
financial information. BDO Seidman, LLP, our independent registered public
accounting firm, has not examined or compiled any of the accompanying projected
financial information, and accordingly, BDO Seidman, LLP does not express an
opinion or any other form of assurance with respect to it. The BDO Seidman, LLP
report included in our Annual Report on Form 10-K for the year ended December 31,
2008, which is attached as
Annex D
,
relates to our historical financial information. It does not extend to the projected
financial information and should not be read to do so.
Projections of this type are based on estimates and
assumptions that are inherently subject to factors such as industry
performance, general business, economic, regulatory, market and financial conditions,
as well as changes to the business, financial condition or results of our
operations, including the factors described under
Cautionary
Statement Concerning Forward-Looking Information
, which factors may
cause the financial projections or the underlying assumptions to be inaccurate.
Since the projections cover multiple years, such information by its nature
becomes less reliable with each successive year. The financial projections do
not take into account any circumstances or events occurring after the date they
were prepared.
Readers of this proxy statement are cautioned not to
place undue reliance on any of the projections set forth below. No one has made
or makes any representation to any stockholder regarding the information
included in these projections.
The projected financial information has been prepared
on a basis consistent with the accounting principles used in the historical
financial statements. For the foregoing reasons, as well as the basis and
assumptions noted above on which the financial projections were compiled, the
inclusion of the material projections in this proxy statement should not be
regarded as an indication that such projections will be an accurate prediction
of future events, and they should not be relied on as such. Except as required
by applicable securities laws, we do not intend to update, or otherwise revise
the material projections to reflect circumstances existing after the date when
made or to reflect the occurrence of future events, even if any or all of the assumptions
prove to be incorrect.
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Hirsch International Corp.
Income Statement - Projections
For the years ending 12/31/09 - 12/31/13
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
Net
Revenues
|
|
$
|
27,491,477
|
|
$
|
28,866,051
|
|
$
|
30,309,353
|
|
$
|
31,824,821
|
|
$
|
33,416,062
|
|
Total
Gross Margin
|
|
8,534,422
|
|
9,237,136
|
|
10,002,087
|
|
10,502,191
|
|
11,027,300
|
|
As a
% of Net Revenues
|
|
31.0
|
%
|
32.0
|
%
|
33.0
|
%
|
33.0
|
%
|
33.0
|
%
|
Total
Selling, General and Administrative
|
|
11,846,000
|
|
10,800,000
|
|
11,070,000
|
|
11,346,750
|
|
11,630,419
|
|
Operating
Loss
|
|
(3,311,578
|
)
|
(1,562,864
|
)
|
(1,067,913
|
)
|
(844,559
|
)
|
(603,118
|
)
|
Other
(Income) Expense
|
|
(28,000
|
)
|
|
|
|
|
|
|
(28,000
|
)
|
Net
loss before taxes
|
|
(3,283,578
|
)
|
(1,562,864
|
)
|
(1,067,913
|
)
|
(844,559
|
)
|
(575,118
|
)
|
Corporate
Taxes
|
|
25,000
|
|
25,000
|
|
25,000
|
|
25,000
|
|
25,000
|
|
Net
Loss
|
|
(3,308,578
|
)
|
(1,587,864
|
)
|
(1,092,913
|
)
|
(869,559
|
)
|
(600,118
|
)
|
EBITDA
|
|
$
|
(2,858,578
|
)
|
$
|
(1,112,864
|
)
|
$
|
(617,913
|
)
|
$
|
(394,559
|
)
|
$
|
(153,118
|
)
|
EBITDA
consists of net income from continuing operations plus income tax provision,
depreciation and amortization, interest expense, non-cash expenses, results of
discontinued operations and other non-recurring costs.
Provisions for Unaffiliated Stockholders
No
provision has been made to grant the unaffiliated stockholders access to the
files of the Company, Parent, Merger Sub, or to obtain counsel or appraisal
services at the Companys or any other such partys expense.
Estimated Fees and Expenses of the Merger
Except
as set forth below, we will not pay any fees or commissions to any broker,
dealer or other person in connection with the merger. Under certain
circumstances described under
The Merger Agreement
Termination Fee
we will be obligated to reimburse Parent for
reasonable out-of-pocket fees and expenses not to exceed either $250,000 or
$300,000 in the aggregate, incurred by Parent and Merger Sub in connection with
the proposed merger and the other transactions contemplated by the merger
agreement.
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The following is an estimate of our fees and expenses
to be incurred in connection with the merger:
Description
|
|
Amount to be Paid
|
SEC Filing Fee
|
|
$
|
Legal
|
|
$
|
Financial
Advisor
|
|
$
|
Accounting
|
|
$
|
Printing and
Mailing Expense
|
|
$
|
Paying Agent
|
|
$
|
Miscellaneous
expenses
|
|
$
|
Total
|
|
$
|
Regulatory Approvals and Requirements
The
size of the merger transaction does not require federal antitrust filings. In connection with the merger and its
financing, Hirsch, Parent and Merger Sub are only required to:
·
file a certificate of merger with the
Secretary of State of the State of Delaware in accordance with Delaware law
after the approval and adoption of the merger agreement by Hirschs
stockholders; and
·
deregister Hirschs common stock under Section 12
of the Exchange Act.
Litigation Related to the Merger
The
Company is aware of a stockholder lawsuit, dated July 14, 2009,
purportedly filed in connection with the merger against the Company and its
directors, Parent and Merger Sub, by Anthony Chiarenza, an individual who
claims to be a stockholder of the Company, in the Supreme Court of the State of
New York, County of Suffolk (Index No. 09-26487). The complaint contends that the proposed
price of $0.31 per share is an unfair price in light of the value of the
Company. It further alleges terms of the
merger agreement are unfair because (a) the Company is required to notify
Parent and Merger Sub before a recommendation to accept a superior proposal, (b) the
merger agreement defines a superior proposal solely as one that is more
favorable from a financial point of view and (c) the merger agreement
includes a $300,000 termination fee. The
complaint asserts claims of breach of fiduciary duty against the individual
defendants, and claims of aiding and abetting breach of fiduciary duty against
the Company, Parent and Merger Sub. It seeks as relief, among other things, an
order enjoining the proposed transaction as well as damages and fees and
expenses, including the plaintiffs attorneys fees.
We
believe these allegations are without merit.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING
INFORMATION
This
proxy statement and the documents to which we refer you in this proxy statement
include forward-looking statements based on estimates and assumptions. There
are forward-looking statements throughout this proxy statement, including,
without limitation, under the headings
Summary
Term Sheet
,
Questions and
Answers about the Merger and the Special Meeting
,
Special Factors
,
Special FactorsOpinion of Burnham Securities Inc.
,
Special FactorsPurposes, Reasons and Plans
for Hirsch After the Merger
,
Special
FactorsEffects of the Merger
, and
Special FactorsProjected Financial Information
, and in
statements containing words such as believes, plans, estimates, anticipates,
intends, continues, contemplates, expects, may, will, could, should
or would or other similar words or phrases. These statements are not
guarantees of the underlying expected actions or our future performance and may
involve risks and uncertainties that could cause our actual growth, results of
operations, performance and prospects to materially differ from those expressed
in, or implied by, these statements. In addition to other factors and matters
contained or incorporated in this document, these statements are subject to
risks, uncertainties, and other factors, including, among others:
·
the occurrence of any event, change or
other circumstances that could give rise to the termination of the merger
agreement;
·
the outcome of any legal proceedings that
have been or may be instituted against Hirsch and others relating to the merger
agreement and related transactions or relating to other matters;
·
the inability to complete the merger due
to the failure to obtain stockholder approval or the failure to satisfy other
conditions to consummation of the merger;
·
the failure to obtain the necessary debt
financing arrangements set forth in the debt commitment letter received in
connection with the merger;
·
the failure of the merger to close for
any other reason;
·
risks that the proposed transaction
disrupts current plans and operations and the potential challenges for employee
retention as a result of the merger;
·
business uncertainty and contractual
restrictions during the pendency of the merger;
·
the diversion of managements attention
from ongoing business concerns;
·
the possible effect of the announcement
of the merger on our customer and supplier relationships, operating results and
business generally;
·
the amount of the costs, fees, expenses
and charges related to the merger and the actual terms of certain financings
that will be obtained for the merger;
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·
the impact of the substantial
indebtedness incurred to finance the consummation of the merger;
and other risks detailed
in our current filings with the SEC, including our most recent filings on Forms
10-Q and 10-K. See
Where You Can Find More
Information
beginning on page 107. Many of the factors that
will determine our future results are beyond our ability to control or predict.
We cannot guarantee any future results, levels of activity, performance or
achievements. In light of the significant uncertainties inherent in the
forward-looking statements, readers should not place undue reliance on
forward-looking statements, which speak only as of the date on which the
statements were made and it should not be assumed that the statements remain
accurate as of any future date. Moreover, we assume no obligation to update
forward-looking statements or update the reasons that actual results could
differ materially from those anticipated in forward-looking statements, except
as required by law.
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THE SPECIAL MEETING
Date, Time and Place
The
special meeting will take place at the office of Bryan Cave LLP, 1290 Avenue of
the Americas, New York, New York on ,
2009 at A.M.
New York time.
Purpose
At the
special meeting, stockholders will be asked to:
·
consider and vote upon a proposal to approve the
Agreement and Plan of Merger, dated as of July 2, 2009, among the Company,
Parent and Merger Sub, as a result of which (a) the Company will be the
surviving corporation in the merger and will be owned by Parent and (b) each
share of our common stock (other than shares held by Parent, Merger Sub or Mr. Gallagher,
shares owned by stockholders who properly exercise dissenters rights of
appraisal under Delaware law or shares of our common stock held in treasury by
us) will be cancelled and converted into the right to receive $0.31 in cash,
without interest; and
·
approve any motion to adjourn the special meeting to a
later date, if necessary or appropriate, to solicit additional proxies if there
are insufficient votes at the time of the special meeting to approve the
foregoing proposal.
Board Recommendation
The
board of directors (with Mr. Gallagher taking no part in the vote or
recommendation) has determined that the merger agreement and the merger are
advisable, fair to and in the best interests of us and our unaffiliated
stockholders and has unanimously approved the merger agreement and the merger.
The board of directors (with Mr. Gallagher taking no part in the vote or
recommendation) recommends that you vote FOR approval of the merger agreement
and the merger and FOR the adjournment proposal.
Our
board of directors recommends that you vote FOR the proposal to adopt the
merger agreement.
Record Date
We
have fixed the close of business on ,
2009 as the record date for the special meeting, and only holders of record of
our common stock at the close of business on the record date are entitled to
notice of, and to vote at, the special meeting or any adjournment or
postponement thereof. On ,
2009, there were 9,483,083 shares of our common stock entitled to be
voted. Each share of common stock outstanding on the record date entitles its
holder to one vote on all matters properly coming before the stockholders. Votes may be cast at the special meeting in
person or by proxy.
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Vote Required
The
adoption of the merger agreement requires the affirmative vote of the holders
of a majority of the outstanding shares of our common stock entitled to vote at
the special meeting on the adoption of the merger. Approval of the adjournment proposal requires
the affirmative vote of the holders of the majority of the shares of our common
stock present, in person or by proxy, and entitled to vote at the special
meeting (even if less than a quorum). In
order to vote, you should simply indicate on your proxy card how you want to
vote, and sign and mail your proxy card in the enclosed return envelope as soon
as possible so that your shares will be represented at the special
meeting. If you receive more than one
proxy card, it means that you have multiple accounts at the transfer agent
and/or with brokers, banks or other nominees. Please sign and return all the
proxy cards you have received to ensure that all your shares are voted.
For
the proposal to adopt the merger agreement, you may vote FOR or AGAINST or
ABSTAIN. Abstentions will not be counted as votes cast or shares voting on the
proposal to adopt the merger agreement.
If
you abstain, it will have the same effect as a vote AGAINST the adoption of
the merger agreement for purposes of the Company Stockholder Approval.
If
your shares of common stock are held in street name, you will receive
instructions from your broker, bank or other nominee that you must follow in
order to have your shares voted. Under applicable rules, brokers who hold
shares in street name for customers have the authority to vote on routine
proposals when they have not received instructions from beneficial owners.
However, brokers are precluded from exercising their voting discretion with
respect to approving non-routine matters such as the adoption of the merger
agreement and, as a result, absent specific instructions from the beneficial
owner of the shares, brokers are not empowered to vote those shares, referred
to generally as broker non-votes.
If you
sign and send in your proxy and do not indicate how you want to vote, your
proxy will be counted as a vote FOR approval of the merger agreement and the
merger and FOR the adjournment proposal.
As of
the record date, our directors and executive officers beneficially owned
approximately 21.5% of the outstanding shares, excluding options to purchase
shares of our common stock. We believe our directors and executive officers
intend to vote all of their shares of our outstanding common stock FOR the
approval of the merger agreement and the merger and FOR the adjournment
proposal.
Voting of Proxies
Shares
of our common stock represented by duly executed and unrevoked proxies in the
form of the enclosed proxy card received by the board of directors will be
voted at the special meeting in accordance with specifications made therein by
the stockholders, unless authority to do so is withheld. If no specification is
made, shares represented by duly executed and unrevoked proxies in the form of
the enclosed proxy card will be voted FOR approval of the merger agreement and
the merger and FOR the adjournment proposal.
The
board of directors does not know of any matters other than those described in
the notice of the special meeting that are expected to come before the special
meeting. However, if
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any other matters are properly presented at the
special meeting for consideration, the persons named in the proxy card and
acting thereunder generally will have discretion to vote on such matters in
accordance with their best judgment unless authority is specifically withheld.
PLEASE DO
NOT SEND IN YOUR STOCK CERTIFICATES WITH YOUR PROXY CARD. IF THE MERGER IS
COMPLETED, A SEPARATE LETTER OF TRANSMITTAL WILL BE MAILED TO YOU IF YOU ARE A
STOCKHOLDER OF RECORD THAT WILL ENABLE YOU TO RECEIVE THE MERGER CONSIDERATION
IN EXCHANGE FOR YOUR HIRSCH STOCK CERTIFICATES.
Revocation of Proxies
Any
holder of shares of our common stock giving a proxy with respect to such shares
may revoke it at any time prior to its exercise at the special meeting by
sending us a written notice of such revocation or completing and submitting a
new proxy card bearing a later date to our Secretary at our executive offices,
or attending the special meeting and voting in person. Attendance at the
special meeting will not, by itself, constitute revocation of a proxy. If your
shares are held in street name and you have instructed a broker to vote your
shares, you must follow directions received from your broker to change your
vote or to vote at the special meeting.
Adjournment of the Special Meeting
We may
ask our stockholders to vote on a proposal to adjourn the special meeting to a
later date to solicit additional proxies if there are insufficient votes at the
time of the special meeting to approve the merger agreement and the merger. We
currently do not intend to propose adjournment at our special meeting if there
are sufficient votes to approve the merger agreement and the merger. If the
proposal to adjourn our special meeting for the purpose of soliciting
additional proxies is submitted to our stockholders for approval, such approval
requires the affirmative vote of the holders of a majority of the shares of our
common stock present or represented by proxy and entitled to vote on the
matter, even if less than a quorum.
Appraisal Rights of Stockholders
Our stockholders have the right under Delaware law to
dissent from the approval of the merger agreement and the merger to exercise
appraisal rights and to receive payment in cash of the judicially determined
fair value for their shares, plus interest, if any, on the amount determined to
be the fair value, in accordance with Delaware law. The fair value of shares of
our common stock, as determined in accordance with Delaware law, may be more or
less than, or equal to, the merger consideration to be paid to non-dissenting
stockholders in the merger. To preserve their rights, stockholders who wish to
exercise appraisal rights must not vote in favor of the approval of the merger
agreement and the merger and must follow the specific procedures provided under
Delaware law for perfecting appraisal rights. Dissenting stockholders must
precisely follow these specific procedures to exercise appraisal rights or
their appraisal rights may be lost. These procedures are described in this
proxy statement, and a copy of Section 262 of the DGCL, which grants
appraisal rights and governs such procedures, is attached as
Annex C
to this proxy statement. See
Appraisal
Rights
beginning on page 92.
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Solicitation of Proxies
This
proxy solicitation is being made on behalf of our board of directors and paid
for by the Company. We have engaged
Georgeson Inc. to assist in the solicitation of proxies and provide related
advice and informational support, for a service fee of approximately $7,500
plus reasonable out-of-pocket expenses.
Our directors, officers and employees may also solicit proxies by
personal interview, mail, e-mail, telephone, facsimile or other means of
communication. These persons will not be paid additional compensation for their
efforts. We will also request brokers, banks and other nominees to forward
proxy solicitation material to the beneficial owners of our shares of common
stock that the brokers, banks and nominees hold of record. Upon request, we
will reimburse them for their reasonable out-of-pocket expenses related to
forwarding the material.
Questions and Additional Information
If you
have questions about the merger, need assistance in submitting your proxy or
voting your shares, or need additional copies of the proxy statement or the
enclosed proxy card, you should contact Georgeson Inc., our proxy solicitor,
toll free-at 1-888-264-6999. Banks and
brokers should contact Georgeson Inc. at 212-440-9800.
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THE PARTIES TO THE MERGER
Hirsch
International Corp.
50 Engineers Road
Suite 100
Hauppauge, New York 11788
(631) 701-2169
Hirsch
International Corp., a Delaware corporation, is a leading provider of equipment
and education and support services to the graphic and decorated apparel
industry. The Company represents the
decorated apparel industrys leading brands including Tajima embroidery
equipment, MHM screen printing equipment, SEIT textile bridge lasers, Pulse
Microsystems digitizing and design software and Kornit and Mimaki digital
garment printers. Hirschs customer
group includes a wide range of contract manufacturers that outsource their
embellishment requirements; manufacturers who use embroidery, screenprinting,
laser etching or digital printing to embellish their apparel and fashion
accessories; promotional products, uniform, and sportswear companies; retail
stores; and graphic and decorated apparel entrepreneurs servicing the athletic
apparel, corporate logo-wear, and advertising specialties markets. A detailed description of our business is
contained in our annual report on Form 10-K for the year ended December 31,
2008, which is attached as
Annex D
to this proxy statement.
Hirsch Holdings Inc.
50 Engineers Road
Suite 100
Hauppauge, New York 11788
(631) 701-2169
Hirsch
Holdings Inc., to which we refer in this proxy statement as Parent, is a
Delaware corporation, and was formed solely for purposes of engaging in the
merger and the other transactions contemplated by the merger agreement and has
not engaged in any business activities or conducted any operations to date
other than in connection with the transactions contemplated by the merger
agreement. Mr. Gallagher intends,
immediately prior to the effective time of the proposed merger, to contribute
his shares of Hirsch Class A Common Stock to Hirsch Holdings in
consideration of the issuance to him of shares of capital stock of Hirsch
Holdings. Hirsch Holdings is qualified
to do business as a foreign entity in the State of New York under the name
Hirsch International Holdings. Mr. Gallagher
is the sole director and executive officer of Hirsch Holdings.
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HIC Acquisition Company
c/o Hirsch Holdings Inc.
50 Engineers Road
Suite 100
Hauppauge, New York 11788
(631) 701-2169
HIC Acquisition
Company, to which we refer in this proxy statement as Merger Sub, is a
Delaware corporation and a wholly-owned subsidiary of Hirsch Holdings Inc., was
formed solely for purposes of engaging in the merger and the other transactions
contemplated by the merger agreement and has not engaged in any business
activities or conducted any operations to date other than in connection with
the transactions contemplated by the merger agreement. Pursuant to the merger, HIC Acquisition
Company will be merged with and into Hirsch, and therefore following the
effective date of the merger, HIC Acquisition Company will cease to exist. Mr. Gallagher is the sole director and
executive officer of HIC Acquisition Company.
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THE MERGER AGREEMENT
This section of the proxy statement
describes the material provisions of the merger agreement, but does not purport
to describe all of the terms of the merger agreement
.
The merger agreement is attached as Annex A to this
proxy statement and incorporated into this proxy statement by reference
.
We urge you to read the full text of the merger
agreement in its entirety for a more complete description of the terms and
conditions of the merger, and because it, and not this summary or proxy
statement, is the legal document that governs the merger
.
The merger agreement, which is
incorporated into this proxy statement by reference, and this summary of its
terms have been included to provide you with information regarding the
contractual rights among the Company, Parent and Merger Sub, with respect to
the merger. For more complete
information regarding the Company, Parent, Merger Sub and their respective
affiliates, the merger agreement and this summary of the agreement should be
read together with the information about these parties found elsewhere in this
proxy statement and in the Companys other public filings.
The Merger
Upon
the terms and subject to the conditions set forth in the merger agreement, at
the effective time, Merger Sub, a wholly-owned subsidiary of Parent, will merge
with and into the Company. After the merger, the Company will continue as the
surviving corporation and as a wholly-owned subsidiary of Parent. The surviving
corporation will be a privately-held corporation and the current stockholders
of the Company will cease to have any ownership interest in the surviving
corporation or rights as our stockholders. Therefore, such current stockholders
will not participate in any future earnings or growth of the surviving
corporation and will not benefit from any appreciation in value of the
surviving corporation.
Upon
consummation of the merger, the directors of Merger Sub immediately prior to
the effective time of the merger will be the initial directors of the surviving
corporation, and the officers of the Company immediately prior to the effective
time of the merger will be the initial officers of the surviving corporation.
All directors and officers of the surviving corporation will hold their positions
until their successors are duly elected or appointed and qualified or their
earlier death, resignation or removal.
The
Company or Parent may terminate the merger agreement prior to the consummation
of the merger in some circumstances, whether before or after the adoption by
our stockholders of the merger agreement. Additional details regarding
termination of the merger agreement are described in
Termination of the Merger Agreement
below.
Effective Time
The
closing of the merger will take place on a date to be specified by the parties,
which will be no later than the third business day after the satisfaction or
waiver of the closing conditions stated in the merger agreement (other than
those conditions that by their nature are to be satisfied at the closing, but
subject to the satisfaction or waiver of such conditions) unless another date
is agreed to in writing by Parent and the Company, provided that if all of the
closing conditions stated in the merger agreement cease to be satisfied and are
not thereafter waived by such third business day, then the closing of the
merger will take place on the first business day
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on which all such conditions shall again have been
satisfied or waived unless another time is agreed to in writing by Parent and
the Company. The conditions to the closing of the merger are outlined below in -
Conditions to the Completion of the Merger
. The merger will
become effective at the time, which we refer to as the effective time of the
merger, when the parties to the merger agreement file the certificate of merger
with the Secretary of State of the State of Delaware or at such later time as
Parent and the Company agree in writing and specify in the certificate of
merger.
Merger Consideration
Except
as noted below, each share of our common stock issued and outstanding
immediately prior to the effective time of the merger will be automatically
cancelled and cease to exist and will be converted at the effective time of the
merger into the right to receive the merger consideration of $0.31 in cash per
share, without interest and less any applicable withholding taxes. The
following shares will not receive the merger consideration:
·
shares held in treasury by the Company,
which shares will be cancelled without consideration;
·
shares owned by Parent Group, which
shares will be cancelled without consideration;
·
shares held by holders who did not vote
in favor of the merger (or consent thereto in writing) and who are entitled to
demand and have properly demanded appraisal of such shares pursuant to, and who
have complied in all respects with, the provisions of Section 262 of the
DGCL, which shares will be entitled to payment of the appraised value of such
shares as may be determined to be due to such holders pursuant to Section 262
of the DGCL (unless and until such holder has failed to perfect or has
effectively withdrawn or lost rights of appraisal under the DGCL). At the effective time of the merger, such
shares shall automatically be cancelled and shall cease to exist, and each
holder of such shares shall cease to have any rights with respect thereto,
except the right to receive the fair value of such shares in accordance with Section 262
of the DGCL. See
Appraisal Rights
elsewhere in this proxy
statement for a discussion of the appraisal rights with respect to the Companys
shares of common stock.
At the
effective time of the merger, each holder of a certificated or uncertificated
share of our common stock (other than shares for which appraisal rights have
been properly demanded, perfected and not withdrawn or lost under the DGCL)
will no longer have any rights with respect to such shares, except for the
right to receive the merger consideration (or the appraised fair value of such
shares, as the case may be) upon surrender thereof.
Payment Procedures
Prior
to the effective time of the merger, Parent will designate a paying agent
reasonably acceptable to the Company to receive the aggregate merger
consideration for the benefit of the holders of shares of our common stock.
Prior to the effective time of the merger, Parent will deposit or cause to be
deposited with the paying agent a sufficient amount of cash to pay the aggregate
merger consideration.
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At the close of business on the day that the merger
becomes effective, we will close our stock transfer books. After that time,
there will be no further registration of transfers of shares of our common
stock on the Companys stock transfer book.
If after the effective time, any certificate representing our shares of
common stock is presented to the Company for transfer, it shall be canceled
against payment of the merger consideration.
As soon as is reasonably practicable after the
effective time of the merger, Parent will cause the paying agent to mail to
each holder of record of a certificate representing shares of our common stock
a letter of transmittal and instructions advising you how to exchange such
certificates for the merger consideration. The paying agent will pay your
merger consideration, without interest, and less any required tax withholdings,
after you have (a) surrendered your certificates or book-entry shares to
the paying agent and (b) provided to the paying agent your signed letter
of transmittal and any other items specified by the letter of transmittal.
Interest will not be paid or accrue in respect of the merger consideration.
YOU SHOULD NOT FORWARD YOUR STOCK CERTIFICATES TO THE PAYING AGENT
WITHOUT A LETTER OF TRANSMITTAL, AND YOU SHOULD NOT RETURN YOUR STOCK
CERTIFICATES WITH THE ENCLOSED PROXY.
If any cash deposited with the paying agent is not
claimed within twelve months following the effective time of the merger, such
cash will be delivered to the surviving corporation upon demand. Subject to any
applicable unclaimed property laws, after that point, holders of our common
stock will be entitled to look only to the surviving corporation with respect
to payment of any claim for merger consideration that may be payable upon the
surrender of any of our shares of common stock.
If the paying agent is to pay some or all of your
merger consideration to a person other than you, as the registered owner of
shares of stock, in the case of a stock certificate, you must have your
certificate properly endorsed or otherwise in proper form for transfer, and the
person requesting payment must pay any transfer or other taxes payable by
reason of the payment of the merger consideration to such person instead of the
registered holder of such certificate.
If you have lost your certificate, or if it has been
stolen or destroyed, you will be required to provide an affidavit to that fact.
You may also be required to enter into an indemnity or post a bond as indemnity
with respect to such certificate. The letter of transmittal instructions will
tell you what to do in these circumstances.
Treatment of Stock Options
The merger agreement provides that, prior to the effective
time of the merger, the Company will take appropriate action to cause any
unvested stock options to purchase shares of our common stock to become vested
before the merger. The merger agreement
further provides that the Company will take appropriate action to cancel,
immediately prior to the effective time of the merger, each then outstanding
stock option to acquire any of our shares of common stock, provided, that the
Company shall have obtained a consent from the holder thereof, if required by the
Company stock option plan pursuant to which such stock option was issued. In exchange for
such cancelled stock options the former holder thereof
shall receive an amount in cash, less any applicable withholding required by
law, equal to the product of (A) the total number of shares of our common
stock underlying such stock option, and (B) the amount, if any, by which
the
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merger consideration exceeds the per share exercise
price of such stock option. Such cash amount will be payable at or as soon as
practicable after the effective time of the merger, and the Company agreed that
it would make any necessary amendments to its stock option plans that may be
necessary to implement the foregoing cancellation of the stock options and
payment therefor.
Representations and
Warranties
The merger agreement contains various representations
and warranties made by the Company to Parent and Merger Sub on the one hand,
and by Parent and Merger Sub to the Company on the other. The assertions embodied in those
representations and warranties are subject to qualifications and limitations
agreed upon by the parties in connection with the negotiation of the terms of
the merger agreement. In addition, these representations and warranties (i) have
been made solely for the benefit of the parties to the merger agreement, (ii) may
be intended not as statements of fact, but rather as a way of allocating the
risk to one or more of the parties if those statements prove to be inaccurate, (iii) may
apply standards of materiality in a way that is different from what may be
viewed as material to you or other investors, and (iv) were made only as
of the date of the merger agreement or such other date or dates as may be
specified in the merger agreement and are subject to more recent
developments. Accordingly, these
representations and warranties may not describe the actual state of affairs as
of the date they were made or at any other time. However, if specific material facts exist
that contradict the representations or warranties in the merger agreement, we
have provided corrective disclosure.
Moreover, certain representations and warranties may
be subject to a contractual standard of materiality or material adverse effect
different from that generally applicable to public disclosures to stockholders.
The Company makes various representations and
warranties in the merger agreement that are subject, in some cases, to
exceptions and qualifications, including exceptions that would not reasonably
be expected to have, individually or in the aggregate, a Company material
adverse effect. See the definition of a Company material adverse effect in
Company Material Adverse Effect
below.
Our representations and warranties relate to, among other things:
·
valid existence, good
standing and qualification of, and other corporate matters with respect to, the
Company and our subsidiaries;
·
equity interests of and
owned by our subsidiaries;
·
our capital structure and
capitalization;
·
the necessary corporate
power and authorization to enter into and perform our obligations under the
merger agreement and to consummate the transactions contemplated thereby;
·
actions taken by our board
of directors, including pursuant to Section 11.7 of the Companys bylaws,
which requires the unaffiliated members of the board to approve transactions in
which an officer, director or certain affiliates have an interest in a
transaction with the Company;
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·
the absence of conflicts
with, or defaults under, our organizational documents, other contracts and
applicable laws;
·
required regulatory filings
and consents and approvals of governmental authorities;
·
documents filed with or
furnished to the SEC and the accuracy of the information in those documents,
including our financial statements;
·
the required stockholder
approval to adopt the merger agreement and approve the transactions
contemplated by the merger agreement;
·
our board of directors
action necessary to render inapplicable to the merger agreement and the merger,
certain restrictions on business combinations contained in the DGCL;
·
the absence of brokers and
finders fees, other than related to the opinion of our financial advisor;
·
the opinion of our financial
advisor; and
·
the accuracy of information
supplied by the Company with respect to itself to be included in the proxy
statement and the Rule 13e-3 transaction statement on Schedule 13E-3.
The merger agreement also contains various
representations and warranties made jointly and severally by Parent and Merger
Sub that are subject, in some cases, to exceptions and qualifications including
exceptions that would not reasonably be expected to have, individually or in
the aggregate, an effect that would reasonably be expected to prevent or
materially impede the consummation of the merger or the other transactions
contemplated by the merger agreement, excluding Parents ability to obtain the
debt financing under Parents debt commitment letter. The representations and
warranties of Parent and Merger Sub relate to, among other things:
·
valid existence, good
standing and qualification of, and other corporate matters with respect to,
Parent and Merger Sub;
·
the necessary corporate
power and authorization to enter into and perform their obligations under the
merger agreement and to consummate the transactions contemplated thereby;
·
the absence of conflicts
with, or defaults under, organizational documents, other contracts and
applicable law;
·
required regulatory filings
and consents and approvals of governmental authorities;
·
Parents and
Merger Subs capital structure and Parents ownership of the outstanding
capital stock of Merger Sub;
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·
the absence of any other
activities engaged in by Parent and Merger Sub, other than in connection with
the transactions contemplated by the merger agreement;
·
the debt commitment letter
to provide funds, a portion of which is to be used to consummate the merger and
the other transactions contemplated by the merger agreement;
·
the absence of brokers,
investment banker and financial advisor fees based upon arrangements made by or
on behalf of Parent or Merger Sub;
·
the accuracy of information
supplied by Parent or Merger Sub with respect to themselves to be included in
the proxy statement and the Rule 13e-3 transaction statement on Schedule
13E-3;
·
the absence of any
agreements between Parent, any of its affiliates or any stockholders of the
Company relating to the transactions contemplated by the merger agreement or
the operations of the surviving corporation after the effective time of the
merger
;
·
the access by Parent to our
books, records, facilities, equipment, contracts and other assets, and the
independent investigation and analysis of us by Parent; and
·
the solvency of the
surviving corporation in the merger.
The representations and warranties of the parties
will expire upon consummation of the merger.
Company Material Adverse
Effect
Some of the representations and warranties made by
the Company are qualified by a material adverse effect standard. As used in the
merger agreement, a material adverse effect with respect to the Company,
referred to herein as a Company material adverse effect, means, any fact,
circumstance, change, occurrence or effect that, individually or in the
aggregate with all other facts, circumstances, changes, occurrences or effects,
(1) is or would reasonably be expected to be materially adverse to the
business, condition (financial or otherwise), results of operations or
liabilities (contingent or otherwise) of the Company and its subsidiaries,
taken as a whole, or (2) that would reasonably be expected to prevent or
materially impede, interfere with, hinder or delay our ability to consummate
the merger, except for any such facts, circumstances, changes, occurrences or
effects arising out of or relating to (i) the announcement or the
existence of the merger agreement and the transactions contemplated thereby, or
actions by Parent or the Company required to be taken under the merger
agreement, (ii) changes in general economic or political conditions or the
financial markets (so long as the Company or its subsidiaries are not
disproportionately affected thereby), (iii) changes in applicable laws,
rules, regulations or orders of any governmental entity, or interpretations
thereof by any governmental entity, or changes in accounting rules or
principles (so long as the Company or its subsidiaries are not
disproportionately affected thereby), (iv) changes affecting generally the
industries in which we or our subsidiaries conduct business (so long as the
Company or its subsidiaries are not disproportionately affected thereby), or (v) any
outbreak or escalation of hostilities or war or any
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act of terrorism (so long as
the Company or its subsidiaries are not disproportionately affected thereby).
Conduct of Business Prior to
Closing
We have agreed in the merger agreement that, until
the earlier of the effective time of the merger or the termination of the
merger agreement in accordance with its terms, except as expressly contemplated
by the merger agreement or consented to in advance in writing by Parent, the
Company will, and will cause our subsidiaries to:
·
carry on our and their
respective businesses in all material respects in the ordinary course of
business; and
·
use commercially reasonable
efforts to preserve intact our and their present business organizations and to
keep available the services of its current officers, key employees and
consultants and to preserve its relationships with customers, suppliers,
licensors, licensees, distributors and other having business dealings with the
Company and our subsidiaries.
We have also agreed in the merger agreement that,
until the consummation of the merger or the termination of the merger agreement
in accordance with its terms, except as expressly contemplated by the merger
agreement or consented to in writing by Parent, the Company will not, and will
not permit our subsidiaries to:
·
declare, set aside or pay
any dividends on, or make any other distributions in respect of, any shares of
capital stock or other ownership interests, other than dividends or
distributions paid by a direct or indirect wholly-owned subsidiary of the
Company to the Company or another of its directly or indirectly wholly-owned
subsidiaries in the ordinary course of business consistent with past practice;
·
split, combine or reclassify
any of our capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of our
capital stock;
·
purchase, redeem or acquire
any shares of our capital stock or any other securities or any rights, warrants
or options to acquire any shares or other securities;
·
issue, deliver, sell, grant,
pledge or encumber or subject to any lien any shares of our capital stock, any
other voting securities or any securities convertible into, or any rights,
warrants or options to acquire, any such shares, voting securities or
convertible securities, or any phantom stock, phantom stock rights, stock
appreciation rights or stock based performance units, including pursuant to
contracts in effect as of the date of the merger agreement (other than the
issuance of shares of the Companys common stock upon the exercise of company
stock options in accordance with their terms on the date of the merger
agreement);
·
amend or waive any material
provision in our restated certificate of incorporation or bylaws or
organizational documents of our subsidiaries, except as may be
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required by law or the rules and
regulations of the SEC or the Nasdaq Stock Market, or enter into any agreement
with any of our stockholders in their capacity as such;
·
directly or indirectly
acquire, (A) by merging or consolidating with, by purchasing a substantial
portion of the assets of, by making an investment in or capital contribution
to, or by any other manner, any person or division, business or equity interest
of any person or (B) any material asset or assets, except for capital
expenditures;
·
incur, create, assume or
otherwise become liable for, any indebtedness for borrowed money or guarantee
any indebtedness of another person, issue or sell any debt securities or calls,
options, warrants or other rights to acquire any debt securities of the Company
or our subsidiaries, guarantee any debt securities of another person, enter
into any keep well or other contract to maintain any financial statement
condition of another person or enter into any similar arrangement (other than
borrowings under our existing loan facilities in the ordinary course of
business), or make any loans or advances to any other person, except for loans,
advances, capital contributions or investments between us and our subsidiaries,
or between our subsidiaries, in the ordinary course of business consistent with
past practice;
·
except as required by law or
any judgment, pay, discharge, settle or satisfy any material claims,
liabilities, obligations or litigation (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment, discharge,
settlement or satisfaction in the ordinary course of business or in accordance
with their terms, of liabilities disclosed, reflected or reserved against in
our most recent financial statements (or the notes thereto) included in our
documents publicly filed with the SEC (for amounts not in excess of such
reserves), or cancel any material indebtedness;
·
except as required to ensure
that any of our employee benefit plans is not out of compliance with applicable
law, or to comply with any of our employee benefit plans or contracts entered
into prior to the date of the merger agreement, (A) adopt, enter into,
terminate or amend (1) any collective bargaining contract or employee
benefit plan or (2) any other contract, plan or policy involving us or our
subsidiaries as applied to our directors, executive officers and sales
managers, or (B) increase in any manner the compensation, bonus or fringe
or other benefits of, or pay any discretionary bonus of any kind or amount to,
any current or former director, officer, employee or consultant, except in the
ordinary course of business consistent with past practice to our or our
subsidiaries employees other than our directors, executive officers and sales
managers;
·
adopt or enter
into a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of the
Company or any of our subsidiaries (other than among wholly-owned subsidiaries
of the Company); or
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·
authorize any of, or commit,
resolve, propose or agree to take any of, the foregoing actions.
Notwithstanding any other provision of the merger
agreement to the contrary, including the above, the Company will not be deemed
to be in breach of any agreement or obligation under the merger agreement if
the alleged breach is the result of action taken by the Company at the
direction of our Chief Executive Officer, Mr. Gallagher, without the
approval or direction of our board of directors (or an authorized committee
thereof).
Restrictions on
Solicitations of Other Offers
Until the close of business on July 22, 2008,
referred to in this proxy statement as the go-shop period, the Company
(acting under the direction of the special committee), our subsidiaries and our
and their respective representatives, are permitted to:
·
initiate, solicit and
encourage, whether publicly or otherwise, takeover proposals (as defined and
discussed below);
·
continue or otherwise
participate in any discussions or negotiations regarding any takeover proposal;
and
·
otherwise cooperate with or
take any other action to facilitate any proposal that constitutes, or could
reasonably be expected to lead to, a takeover proposal.
From the time of the expiration of the go-shop
period, until the effective time of the merger, or the date, if any, that the
merger agreement is earlier terminated, the Company and our subsidiaries are
required not to (and we and our subsidiaries are required to use our reasonable
best efforts to cause our and their respective officers, directors, employees
and other representatives not to), directly or indirectly:
·
initiate or solicit or knowingly
encourage (including by way of providing information) the submission of any
inquiries, proposals or offers or any other efforts or attempts that constitute
or may reasonably be expected to lead to, a takeover proposal;
·
engage in negotiations or discussions
with, or furnish access to our properties, books and records or provide any
information or data to, any person relating to any takeover proposal;
·
approve, endorse or
recommend, or propose publicly to approve, endorse or recommend, any takeover
proposal;
·
execute or enter into any
letter of intent, agreement in principle, merger agreement, acquisition
agreement or other similar agreement providing for or relating to any takeover
proposal;
·
enter into any
agreement or agreement in principle requiring us to abandon, terminate or fail
to consummate the transactions contemplated by the merger agreement or breach
our obligations under the merger agreement; or
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·
publicly propose or agree to
do any of the foregoing.
Notwithstanding the foregoing, the Company may
continue to take any of the actions described above from and after the
expiration of the go-shop period and prior to obtaining stockholder approval
with respect to any party that has made a takeover proposal prior to the
expiration of the go-shop period or with whom we are having ongoing discussions
or negotiations at the time of the expiration of the go-shop period regarding a
possible takeover proposal.
Furthermore, subject to our compliance in all
material respects with the provisions in the merger agreement regarding the
restrictions on our ability to solicit proposals or offers, if after the
expiration of the go-shop period and prior to obtaining the approval of our
stockholders of the merger agreement at the stockholders meeting: (a) we
receive a takeover proposal that the special committee determines in good faith
is a bona fide takeover proposal following disclosure to our full board of
directors; (b) the special committee determines in good faith, after
consultation with its financial advisors and outside counsel, that such
takeover proposal constitutes or could reasonably be expected to result in a superior
proposal (as defined and discussed below); and (c) the special committee
determines in good faith, after consultation with its counsel, that the failure
to take such action would be inconsistent with its fiduciary duties to our
stockholders under applicable laws, then we (acting under direction of the
special committee) may:
·
participate in discussions
or negotiations (including, as a part thereof, making any counterproposal)
regarding such takeover proposal with the person or persons making the takeover
proposal; and
·
furnish information with
respect to the Company and our subsidiaries to the person making the takeover
proposal; provided that we will not, and will not allow our representatives to,
disclose any non-public information concerning the Company or our subsidiaries
to such person without entering into a confidentiality agreement approved by
the special committee and we will promptly provide or make available to Parent
any non-public information concerning the Company or our subsidiaries provided
to such other person or group of persons which was not previously provided or
made available to Parent.
Within twenty-four hours of the expiration of the
go-shop period, the Company is required to notify Parent in writing of the
identity of each person that has made a takeover proposal prior to the
expiration of the go-shop period or with whom we are having ongoing discussions
or negotiations as of the expiration of the go-shop period regarding a possible
takeover proposal and the identity of each person to whom we have provided
non-public information concerning the Company and our subsidiaries, as well as
provide to Parent a copy of any takeover proposal which has been received by
the Company.
After the expiration of the go-shop period, we are
required to promptly (and in any event within one business day) notify Parent
of the receipt by the Company of any takeover proposal, which notice to Parent
will contain the material terms of and the identity of the person making such
takeover proposal. We are also required to keep Parent reasonably informed on a
current basis of the status or and details of any takeover proposal and of any
amendments or proposed
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amendments thereto and any
other developments, discussions and negotiations concerning such takeover
proposal, within 48 hours of such amendment, development, discussion or
negotiation. In addition, the Company shall promptly, after the expiration of
the go-shop period, notify Parent orally and in writing if we determine to
begin providing information or to engage in discussions or negotiations with a
person or group of persons in connection with any takeover proposal, other than
those from whom we received takeover proposals prior to the expiration of the
go-shop period or with whom we were involved in such discussions at the
expiration of the go-shop period.
Subject to compliance with certain rules of the
Exchange Act, neither our special committee nor board of directors may (i) approve,
endorse or recommend (or publicly propose to do the foregoing) any takeover
proposal or enter into a definitive agreement with respect to a takeover
proposal or (ii) modify or amend (or publicly propose to do the foregoing)
in a manner adverse to Parent or withdraw (or publicly propose to withdraw) the
recommendation of the board of directors concerning the merger contained in
this proxy statement ((i) or (ii) above, a change in recommendation),
except that the special committee and our board of directors may take any such
action at any time prior to obtaining stockholder approval for the merger if (a) the
special committee determines, in good faith (after consultation with its legal
counsel), that the failure to take such action would be inconsistent with its
fiduciary duties to our stockholders under applicable laws or (b) in
response to a superior proposal.
Notwithstanding the restrictions described above,
prior to obtaining the approval of the merger from our stockholders at the
stockholders meeting, if we receive a takeover proposal which the special
committee concludes in good faith constitutes a superior proposal after giving
effect to any adjustments that Parent may offer regarding the currently
proposed merger (as discussed below) our board of directors may change its
recommendation with respect to the merger and/or terminate the merger agreement
in accordance with its terms in order to enter into a definitive agreement with
respect to such superior proposal. However, any termination of the merger
agreement or change in recommendation of our board of directors may not be
effected unless:
·
we have provided prior
written notice to Parent at least three calendar days before our board of
directors intends to change its recommendation in response to a superior
proposal or terminate the merger agreement to enter into a definitive agreement
with respect to such superior proposal, which notice shall include the material
terms and conditions of any such superior proposal, including the identity of the
person or group of persons making such superior proposal, and have provided
along with such notice a copy of the relevant proposed transaction agreements
with the person or group of persons making such superior proposal and, in the
event of any revision to the superior proposal, we deliver a new written notice
to Parent complying with the foregoing requirements; and
·
prior to our board of
directors changing its recommendation or terminating the merger agreement to
enter into a definitive agreement with respect to such superior proposal and
during the three-day notice period, the Company, together with our legal and
financial advisors, shall have negotiated with Parent in good faith (to the
extent Parent desires to so negotiate) to adjust the terms and
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conditions of the merger
agreement such that the submitted takeover proposal ceases to be a superior
proposal.
In order to enter into an acquisition agreement with
respect to a superior proposal, we must terminate the merger agreement in
accordance with the terms of the merger agreement. In connection therewith, any
purported termination of the merger agreement shall be null and void unless,
concurrently with such termination, the Company pays the applicable termination
and expenses to Parent. See
Termination of
the Merger Agreement
and
Termination
Fee
below.
Nothing in the merger agreement prohibits or
restricts our board of directors, in circumstances involving a takeover
proposal, from amending, modifying or withdrawing their recommendation to the
extent that the special committee determines in good faith (after consultation
with its legal counsel) that such action is necessary under applicable laws in
order for the directors to comply with their fiduciary duties to our
stockholders. We are required to give
Parent written notice of any such action taken by our board of directors not
later than the business day after the date on which such action is taken, which
notice shall indicate in reasonable detail the action taken and the basis for
such action.
A takeover proposal means any inquiry, proposal or
offer from any person or group of persons (other than Parent and its
affiliates) relating to, or that is reasonably likely to lead to any:
·
direct or indirect
acquisition or purchase, in a single transaction or a series of related
transactions, of assets (including equity securities of our subsidiaries) or
businesses that constitute 25% or more of the revenues, net income or assets of
the Company and our subsidiaries, taken as a whole or 25% or more of any class
of our equity securities or those of any of our subsidiaries;
·
any tender offer or exchange
offer that, if consummated, would result in any person or group beneficially
owning 25% or more of any class of our equity securities or those of any of our
subsidiaries; or
·
any merger, consolidation,
business combination, recapitalization, liquidation, dissolution, joint
venture, binding share exchange or similar transaction involving the Company or
any of our subsidiaries that would result in any person or group of persons or
the stockholders of any person or group of persons beneficially owning 25% or
more of any class of our equity securities or those of our subsidiaries.
A superior proposal means any written takeover
proposal that, if consummated, would result in a person or group of persons (or
their equity holders) owning, directly or indirectly, more than 50% of the
shares of the Companys common stock then outstanding (or of the shares of the
surviving entity in a merger or the direct or indirect parent company of the
surviving entity in a merger) or a majority of the assets of the Company and
our subsidiaries (taken as a whole), which the special committee determines in
good faith (after consultation with its outside counsel and financial advisor)
would, if consummated, be more favorable to our stockholders from a financial
point of view than the transactions contemplated by the merger agreement,
taking into account all of the terms and conditions of such takeover proposal
and the merger agreement,
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including (i) the
likelihood and timing of consummation of such transaction on the terms set
forth therein, as compared to the terms of the merger agreement, (ii) all
appropriate legal, financial (including the financing terms of such takeover
proposal), regulatory and other aspects of such takeover proposal, and (iii) any
changes to the financial and other terms of the merger agreement proposed by
Parent in response to such takeover proposal or otherwise.
Agreement to Use Reasonable
Best Efforts
Upon to the terms and conditions set forth in the
merger agreement, the Company, Parent and Merger Sub have agreed to cooperate
with each other and to use their reasonable best efforts to:
·
take, or cause to be taken,
all actions, and assist and cooperate with the other parties in doing, all
things necessary, proper or advisable to consummate and make effective, as
promptly as practicable, the merger and the other transactions contemplated by
the merger agreement, including using reasonable best efforts to accomplish the
following: (i) cause the closing conditions to the merger to be satisfied;
(ii) obtaining all necessary actions or nonactions, waivers, consents,
clearances, and approvals from governmental entities and non-governmental third
parties and the making of all necessary registrations, notices and filings
(including filings with governmental entities) and (iii) obtaining all
necessary consents, approvals or waivers from third parties;
·
defend and contest any
lawsuits or other judicial proceedings, including seeking to have any stay,
temporary restraining order, or preliminary injunction entered by any
governmental entity vacated or reversed, subject to first using all reasonable
best efforts to negotiate a resolution of any objections underlying lawsuits or
other legal proceedings challenging the merger agreement or the consummation of
the merger or the other transactions contemplated by the merger agreement;
The Company and Parent have agreed to
cooperate and consult with each other in connection the making of all filings,
notifications and any other material actions required, subject to applicable
Law, by permitting counsel for the other party to review in advance, and
consider in good faith the views of the other party in connection with, any
proposed material written communication to any governmental entity and by
providing counsel for the other party with copies of all filings made by such
party and all correspondence between such party (and its advisors) with any
governmental entity and any other information supplied to a governmental entity
or received from a governmental entity in connection with the transactions
contemplated by the merger agreement; provided, however, that material may be
redacted in certain circumstances pursuant to the merger agreement. The parties
have agreed that neither the Company nor Parent will file any such document or
take such action if the other party has reasonably objected (and not withdrawn
its objection) to the filing of such document or the taking of such action on
the grounds that such filing or action would reasonably be expected to either (i) prevent,
materially delay or materially impede the consummation of the merger or the
other transactions contemplated by the merger agreement, or (ii) cause a
closing condition to the merger to not be satisfied in a timely manner, and
neither Parent nor the Company shall consent to any voluntary extension of any
statutory deadline or waiting period or to any voluntary delay
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of the consummation of the transactions
contemplated by the merger agreement at the behest of any governmental entity
without the consent of the other party.
Each of the Company and parent will promptly inform the other party upon
receipt of any material communication regarding the transactions contemplated
by the merger agreement received from any governmental entity. In addition, each party to the merger
agreement shall advise the other party promptly of any understandings or agreements
which the first party proposes to make or enter into with any governmental
entity in connection with the transactions contemplated by the merger
agreement.
In addition, the Company and our board of directors
shall (i) use reasonable best efforts to ensure that no state takeover law
or similar law is or becomes applicable to the merger agreement, the merger or
any of the other transactions contemplated by the merger agreement, and (ii) if
any state takeover law or similar law becomes applicable to the merger
agreement, the merger or any of the other transactions contemplated by the
merger agreement, use reasonable best efforts to ensure that the merger and the
other transactions contemplated by the merger agreement may be consummated as
promptly as practicable on the terms contemplated by the merger agreement and
otherwise to minimize the effect of such law on the merger agreement, the
merger and the other transactions contemplated by the merger agreement.
Financing
In the merger agreement, Parent has agreed to use
its commercially reasonable efforts to obtain the debt financing on the terms
and conditions described in the financing commitment letter (or on other terms
that would not adversely impact the ability of Parent to timely consummate the
transactions contemplated by the merger agreement) previously supplied by
Parent to the Company. In the event that any portion of such financing becomes
unavailable in the manner or from the sources contemplated in the financing
commitment letter:
·
Parent will promptly notify
the Company;
·
Parent will use its
commercially reasonable efforts to arrange to obtain any such portion of the
financing from alternative sources, on terms that are no less favorable to
Parent, as promptly as practicable following the occurrence of the
unavailability of such portion of the financing, including entering into
definitive agreements with respect thereto; and
·
Parent shall be permitted to
amend, modify or replace the financing commitment described in the financing
commitment letter with one or more new financing commitments; provided that
Parent is not permitted to replace, or amend or modify, or waive any material
provision or remedy under, the financing commitment that could reasonably be
expected to delay the effective time of the merger beyond October 30,
2009.
Parent is required to keep the Company reasonably
informed of the status of its efforts to arrange the financing. Parents receipt of the proceeds of the
contemplated debt financing is a condition to Parent and Merger Subs
obligation to effect the closing of the merger.
In addition, the Company has the right to terminate the merger agreement
if any portion of Parents financing as set forth in the financing commitment
letter becomes unavailable in the manner or from the
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sources contemplated in the
financing commitment letter; provided that the Company may not terminate for
this reason unless the Company complies with the procedural requirements
related to this right of termination as described in
Termination
of the Merger Agreement
.
Under the merger agreement, the Company has agreed
to, reasonably cooperate in connection with the arrangement of the financing as
may be reasonably requested by Parent, provided that such requested cooperation
does not unreasonably interfere with the ongoing operations of the Company and
its subsidiaries. Such cooperation shall
include, among other things:
·
agreeing to enter into such
agreements as are customary in financings of such type, including definitive
financing documents, lock-box, blocked account and similar agreements, and
agreeing to pledge, guarantee, grant security interests in, and otherwise grant
liens on, the Companys or its subsidiaries assets pursuant to such
agreements, as may be reasonably requested; provided, that no obligation of the
Company or any of its subsidiaries under any such agreement, pledge, guarantee
or grant shall be effective until the effective time of the merger;
·
using its commercially
reasonable efforts to cause the Companys independent registered public
accountants to deliver such comfort letters as are customary in the type of
financings contemplated by the financing commitment letter;
·
providing Parent and its
financing sources with financial and other pertinent information (including
monthly financial statements of the Company and its subsidiaries) as promptly
as practicable;
·
making the Companys
executive officers and other relevant employees reasonably available to assist
Parents lender; and
·
taking all corporate
actions, subject to the occurrence of the Closing, to permit consummation of
the debt financing and the direct borrowing or incurrence of all proceeds of
the debt financing by the surviving corporation immediately following the
effective time of the merger.
Indemnification and
Insurance
The merger agreement provides that from and after
the effective time of the merger, Parent acknowledges and agrees that the
surviving corporation will assume the obligations with respect to all rights to
indemnification and exculpation from liabilities, including advancement of
expenses, for acts or omissions occurring at or prior to the effective time of
the merger existing in favor of our current or former directors, officers,
employees or agents or those of our subsidiaries as provided in our or our
subsidiaries articles of incorporation, bylaws or any indemnification contract
between such directors, officers, employees or agents and us or our subsidiaries.
We have entered into indemnification agreements with each of the members of our
board of directors and with our executive officers, which agreements will
continue to be binding obligations of the surviving corporation after the
merger. Parent further agrees that such
obligations will survive the merger and continue in full force and effect for a
period of not less than six years from the effective time of the merger.
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Under the terms of the merger agreement, if the
surviving corporation consolidates with or merges into any other entity and is
not the surviving corporation of such consolidation or merger, or transfers or
conveys all or substantially all of its properties and assets to another person
or entity, then the surviving corporation will cause proper provision to be
made so that successors and assigns of the surviving corporation assume the
obligations to provide indemnification and exculpation and insurance for such
directors, officers, employees or agents for a period of not less than six
years from the effective time of the merger.
The merger agreement also provides that the
surviving corporation, for a period of six years after the consummation of the
merger, will maintain (directly or indirectly through our insurance programs)
in effect directors and officers liability insurance policies to cover acts
or omissions occurring at or prior to the effective time of the merger for
those individuals who are covered by our current directors and officers
liability insurance policy, on terms and scope with respect to such coverage,
and in amount, not less favorable to such individuals as our policy in effect
on the date of the merger agreement (or the surviving corporation may
substitute therefor policies, issued by reputable insurers, of at least the
same coverage with respect to matters occurring prior to the effective time of
the merger, including a tail policy); provided, however, that if the
aggregate annual premiums for such insurance exceeds 200% of the last annual
premium (or, in the case of a tail policy, an aggregate premium in excess of
an amount equal to 300% of such last annual premium) paid by the Company prior
to the date of the merger agreement, then the surviving corporation has agreed
to provide as much comparable insurance as possible for an annual premium (or
an aggregate premium, as the case may be) equal to such maximum amount. Any
replacement or substitution of insurance policies must not result in gaps of
coverage.
Other Covenants
The merger agreement contains additional agreements
between us and Merger Sub relating to, among other things:
·
the filing of this proxy
statement and the Rule 13e-3 transaction statement on Schedule 13E-3 with
the SEC (and cooperation in response to any comments from the SEC with respect
to either statement);
·
the stockholders meeting of
our stockholders, and the recommendation of our board of directors;
·
coordination of press
releases and other public announcements or filings relating to the merger;
·
Parent and its lenders
access to our personnel, properties, books, contracts, commitments, records and
other information between the date of the merger agreement and the closing
(subject to all applicable legal or contractual obligations and restrictions);
·
consultation on certain
public announcements regarding the merger and the other transactions
contemplated by the merger agreement; and
·
the payment of fees and
expenses.
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Actions at Direction of
Chief Executive Officer
Notwithstanding any other provision in the merger
agreement, the Company will not be deemed to be in breach of any agreement or
obligation under the merger agreement, if the alleged breach is the proximate
result of action taken by the Company at the direction of our Chief Executive
Officer, Mr. Gallagher, without the approval or direction of our board of
directors or authorized committee thereof.
Conditions to the Completion
of the Merger
The obligations of the Company, Parent and Merger
Sub to consummate the merger are subject to the satisfaction or, to the extent
permissible under applicable law, waiver by Parent and the Company of the
following conditions on or prior to the closing date of the merger:
·
the affirmative vote to
adopt the merger agreement by the holders of at least a majority of the
outstanding shares of the Companys common stock at the stockholders meeting
or any adjournment or postponement thereof; and
·
the absence of any statute,
regulation, order, decree or judgment of any governmental entity which makes
illegal or enjoins or prevents the consummation of the merger.
In addition to the conditions above, the obligations
of Parent and Merger Sub to complete the merger are subject to the satisfaction
or, to the extent permissible under applicable law, waiver of the following
conditions at or prior to the closing date of the merger:
·
the representations and
warranties of the Company contained in the merger agreement that are qualified
as to materiality or material adverse effect being true and correct, and the
representations and warranties of the Company contained in the merger agreement
that are not so qualified being true and correct in all material respects, in
each case as of the date of the merger agreement and as of the closing date of
the merger (as though made on such closing date, except to the extent such
representations and warranties expressly relate to an earlier date, in which
case only as of such earlier date), and Parent shall have received a
certificate signed on behalf of the Company to such effect dated as of the
closing date of the merger;
·
the Companys performance,
in all material respects, of all obligations required to be performed by the
Company in the merger agreement at or prior to the closing date and Parent will
have received a certificate signed on behalf of the Company to such effect
dated as of the closing date of the merger;
·
the aggregate number of
shares of our common stock at the effective time of the merger, the holders of
which have properly exercised appraisal rights under Section 262 of the
DGCL, does not equal 10% or more of the shares of our common stock outstanding
as of the record date for the stockholders meeting;
·
Parent having obtained the
financing on the terms and conditions set forth in the financing commitment
letter;
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·
no consents or approvals
required of any third parties in connection with or as a result of the
execution, delivery and performance of the merger agreement and the
consummation by the Company of the merger and each of the other transactions
contemplated under the merger agreement, under any contract that we or any of
our subsidiaries is a party to, or any of our or their respective properties or
other assets are subject or any law or order applicable to the Company or any
of our subsidiaries or our or their respective properties or other assets,
except (i) any such consent or approval as has been obtained and such
consents are in full force and effect and, (ii) any such consents or
approvals which would not have a material adverse effect; and
·
Burnham shall not have
withdrawn, amended or modified its opinion dated July 1, 2009 to the
effect that, as of such date, the merger consideration is fair, from a
financial point of view, to the holders of shares of our common stock, other
than Parent, Merger Sub and Mr. Gallagher.
In addition to the conditions first set forth above,
the Companys obligation to complete the merger is subject to the satisfaction
or, to the extent permissible under applicable law, waiver of the following
conditions at or prior to the closing date of the merger:
·
the representations and
warranties of Parent and Merger Sub contained in the merger agreement that are
qualified as to materiality shall be true and correct, and the representations
and warranties of Parent and Merger Sub contained in the merger agreement that
are not so qualified shall be true and correct in all material respects, in
each case as of the date of the merger agreement and as of the closing date of
the merger (as though made on the closing date of the merger, except to the
extent such representations and warranties expressly relate to an earlier date,
in which case as of such earlier date), and we shall have received a
certificate signed on behalf of Parent and Merger Sub, to such effect; and
·
Parent and Merger Subs
performance, in all material respects, of all obligations required to be
performed by them under the merger agreement at or prior to the closing date of
the merger, and the Company shall have received a certificate signed on behalf
of each of Parent and Merger Sub to such effect dated as of the closing date.
Although the parties have the right to waive
conditions to the merger (other than as required by law), we are not aware of
any circumstance in which Parent, Merger Sub or the Company would waive any of
the closing conditions described above. If, however, the Company waives any of
the closing conditions described above, we do not anticipate re-soliciting our
stockholders for approval unless such waiver would be material to our stockholders,
in which case we would re-solicit the vote of our stockholders.
Termination of the Merger
Agreement
The merger agreement may be terminated at any time
prior to the consummation of the merger, whether before or after stockholder
approval has been obtained:
·
by mutual
written consent of the Company and Parent;
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·
by either the
Company or Parent:
·
if the merger
has not been consummated on or before October 30, 2009, unless the
failure of the merger to be consummated by such date was, in whole or material
part, due to the party seeking to terminate failing to perform any of its
obligations under the merger agreement;
·
if we have not
obtained the affirmative vote of our holders of at least a majority of the
outstanding shares of our common stock at the stockholders meeting duly
convened therefor or at any adjournment or postponement thereof; or
·
if any
governmental entity of competent jurisdiction issues or enters an injunction or
similar legal restraint or order permanently enjoining or otherwise prohibiting
the consummation of the merger and such injunction, legal restraint or order
shall have become final and non-appealable; provided, however, that the party
seeking to terminate the merger agreement for this reason shall have used its
reasonable best efforts to prevent, oppose and remove such injunction;
·
by Parent:
·
if we have
materially breached or failed to perform any of our representations,
warranties, covenants or agreements contained in the merger agreement, which
breach or failure would cause certain conditions to the obligation of Parent
and Merger Sub to effect the merger set forth in
Conditions to the Completion of the Merger
not to be
satisfied and which can not be cured within the earlier of (i) thirty days
after receipt of written notice of such breach or failure to perform from
Parent, or (ii) October 30, 2009; provided that Parent will not have
the right to terminate the merger agreement for the foregoing reasons if it or
Merger Sub is then in material breach of any representation, warranty, covenant
or other agreement contained in the merger agreement that would cause the
conditions to the obligations of the Company to effect the merger to not be
satisfied;
·
if our board of
directors makes a change in recommendation;
·
if the Company
fails to comply in any material respect with provisions of the merger agreement
involving the solicitation of takeover proposals set forth in
Restrictions on Solicitations of
Other Offers
above;
or
·
we fail to
include in this proxy statement our board of directors recommendation to our
stockholders that they approve the merger and approve and adopt the merger
agreement and the other transactions contemplated thereby; or
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·
by the Company:
·
if Parent or
Merger Sub have materially breached or failed to perform any of their
representations, warranties, covenants or agreements contained in the merger
agreement, which breach or failure would cause certain conditions to the
obligation of the Company to effect the merger set forth in
Conditions to the Completion of the Merger
not to be
satisfied and which can not be cured within the earlier of (i) thirty days
after receipt of written notice of such breach or failure to perform from the
Company, or (ii) October 30, 2009; provided that we will not have the
right to terminate the merger agreement for the foregoing reasons if we are
then in material breach of any representation, warranty, covenant or other
agreement contained in the merger agreement that would cause the conditions to
the obligations of Parent or Merger Sub to effect the merger to not be
satisfied;
·
if prior to
obtaining our stockholders approval, the Company receives a takeover proposal
that the special committee concludes in good faith constitutes a superior
proposal and complies with the requirements of the merger agreement related
thereto as set forth in -
Restrictions
on Solicitations of Other Offers
above, provided prior to or concurrently with such termination,
we pay to Parent the termination fee and expenses that may be applicable as
described below in
Termination Fee
;
or
·
if any portion
of Parents financing as set forth in the financing commitment letter becomes
unavailable in the manner or from the sources contemplated in the financing
commitment letter; provided that we may not terminate for this reason unless we
have provided not less than five business days prior written notice of such
termination to Parent and Parent is unable to arrange a new source of financing
prior to the expiration of that five business day notice period.
Termination
Fee
We will be obligated to pay Parent a termination fee
by wire transfer of immediately available funds equal to the out-of-pocket
expenses actually incurred by Parent in connection with the merger, such amount
not to exceed $300,000 in the aggregate, if:
·
prior to obtaining the
stockholder approval of the merger agreement and the merger, the special
committee has concluded in good faith that a takeover proposal constitutes a
superior proposal and (a) our special committee or board of directors has
made a change in recommendation, and subsequently the merger agreement is
terminated by either the Company or Parent, or (b) the Company terminates
the merger agreement in accordance with its terms in order to enter into a
definitive agreement with respect to such superior proposal;
·
Parent terminates the merger
agreement upon the occurrence of (a) our board of directors making a
change in recommendation, (b) the Companys failure to
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comply in any material
respect with provisions of the merger agreement involving the solicitation of
takeover proposals set forth in
Restrictions
on Solicitations of Other Offers
above, or (c) the Company failed to include in this proxy
statement our board of directors recommendation to our stockholders that they
approve the merger agreement and the merger;
·
if our board of directors
fails to comply in any material respect with provisions of the merger agreement
involving the solicitation of takeover proposals set forth in
Restrictions on Solicitations of Other Offers
above; or
·
(A) a takeover proposal
shall have been made to our stockholders generally or shall have otherwise
become publicly known (whether or not conditional) and thereafter (B) the
merger agreement is terminated by the Company or Parent if (i) the merger
has not been consummated on or before October 30, 2009 (unless the failure
of the merger to be consummated by such date was due, in part or whole, to the
party seeking to terminate failing to perform any of its obligations under the
merger agreement, and provided that if Parent is the terminating party, it
shall have obtained the proceeds of the debt financing on the terms and
conditions set forth in the debt financing commitment letter) or (ii) the
approval of our stockholders described in
Conditions to the
Completion of the Merger
has not been obtained at the special
meeting convened therefor or any adjournment or postponement thereof, if
necessary, upon a vote taken on the merger agreement and (C) within twelve
months after such termination, we enter into, or submit to our stockholders for
adoption, a definitive agreement with respect to any takeover proposal, or
consummate a transaction contemplated by any takeover proposal, provided that
for purposes of this provision, the references to 25% in the definition of
takeover proposal shall be deemed to be references to 50%.
In addition, we will be obligated to pay Parent for
the out-of-pocket expenses actually incurred by Parent or Merger Sub in
connection with the merger by wire transfer of immediately available funds,
such amount not to exceed $250,000 in the aggregate, if:
·
the merger agreement is
terminated by us or Parent because the approval of our stockholders described
in -
Conditions to the Completion of the Merger
has not been obtained at the stockholders meeting convened therefor or any
adjournment or postponement thereof, if necessary, upon a vote taken on the
merger agreement, or for another reason if the merger agreement was terminable
at that time due to the foregoing reason;
·
the merger agreement is
terminated by Parent because the merger has not been consummated on or before October 30,
2009 (unless the failure of the merger to be consummated by such date was due,
in whole or material part, to the party seeking to terminate failing to perform
any of its obligations under the merger agreement), provided that a meeting of
our stockholders to vote upon the merger agreement has not been duly convened
prior to October 30, 2009, or for another reason if the merger agreement
was terminable because it has not been consummated on or before October 30,
2009; or
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·
the merger agreement is
terminated by Parent in the event we have breached or failed to perform any of
our representations, warranties, covenants or agreements set forth in the
merger agreement which would give rise to the failure of any condition to the
obligation to effect the merger by Parent or Merger Sub and is uncured or
incapable of being cured by us prior to the earlier of thirty days following
receipt of notice thereof from Parent or October 30, 2009, provided that
Parent may not terminate for the foregoing reasons if it or Merger Sub is then
in material breach of any representation, warranty, covenant or other agreement
contained in the merger agreement that would cause any of the conditions to the
obligation of the Company to effect the merger not to be satisfied.
However, we will not be obligated to pay the above
expenses of Parent in the event the merger agreement is terminated by Parent
for breach or failure to perform of the Company as outlined above if such
termination is based on the breach of any representation or warranty of the
Company or the breach or failure to perform a covenant or agreement, and such
breach or failure is the result of action taken by the Company at the direction
of our Chief Executive Officer, Mr. Gallagher, without the approval or
direction of our board of directors or an authorized committee thereof.
Amendment
At any time prior to the consummation of the merger,
the merger agreement may be amended or supplemented by written agreement of the
parties to the merger agreement, except that after receipt of stockholder
approval of the merger, the merger agreement requires that there be no
amendment that by law would require further approval by our stockholders
without such approval having been obtained.
Extension
of Time; Waiver
At any time prior to the closing of the merger, any
party may, subject to applicable law:
·
extend the time for the
performance of any of the obligations or acts of any other party to the merger
agreement;
·
waive any inaccuracies in
the representations and warranties of any other party to the merger agreement;
or
·
waive compliance by the
other party with any of the agreements contained in the merger agreement or,
except as otherwise provided in the merger agreement, waive any of such partys
conditions;
provided, however, that no failure or delay
by any party in exercising any right under the merger agreement will operate as
a waiver of that right, and no single or partial exercise of any right under
the merger agreement will preclude any other or further exercise of such right
or the exercise of any other right under the merger agreement. Any agreement on
the part of a party to the merger agreement to any such extension or waiver
will be valid only if in writing and signed on behalf of such party.
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APPRAISAL
RIGHTS
The following is intended
as a brief summary of the material provisions of the Delaware statutory
procedures required to be followed by a stockholder in order to dissent from
the merger and perfect appraisal rights.
We urge
stockholders considering exercising their appraisal rights to read the full
text of
Section 262 of the DGCL, which appears in Annex C to this proxy
statement.
Under the DGCL, you have the right to dissent from
the merger and to receive payment in cash for the fair value of your shares of
our common stock, as determined by the Court of Chancery of the State of
Delaware, which we refer to herein as the Court of Chancery, together with a
fair rate of interest, if any, as determined by the Court of Chancery, in lieu
of the merger consideration you would otherwise be entitled to receive pursuant
to the merger agreement. These rights are known as appraisal rights. Any
stockholders electing to exercise their appraisal rights must strictly comply
with the provisions of Section 262 of the DGCL, which we refer to herein
as Section 262, in order to demand and perfect their appraisal rights.
Failure to precisely follow any of the statutory procedures set forth in Section 262
may result in a loss of such appraisal rights under Delaware law.
Where a merger is to be submitted for approval at a
meeting of stockholders, such as the special meeting of our stockholders
discussed in this proxy statement, Section 262 requires that, not less
than twenty days before such stockholders meeting, stockholders for whom
appraisal rights are available be notified by the constituent corporation, such
as us, that appraisal rights are available. Such notice must include a copy of Section 262.
This proxy statement constitutes our notice to our stockholders of the
availability of appraisal rights in connection with the merger, and a copy of Section 262
is attached to this proxy statement as
Annex
C
, in compliance with the requirements of Section 262. If you
wish to consider exercising appraisal rights, you should carefully review the
text of Section 262 contained in
Annex
C
to this proxy statement because failure to timely and properly
comply with the requirements of Section 262 will result in the loss of
your appraisal rights under the DGCL. A stockholder of record wishing to assert
appraisal rights must hold the shares of our common stock on the date of making
a demand for appraisal rights with respect to such shares and must continuously
hold such shares through the effective time of the merger.
If you elect to demand appraisal with respect to
your shares of our common stock, you must satisfy each of the following
conditions:
·
You
must deliver to us a written demand for appraisal of your shares before the
vote on the adoption of the merger agreement is taken
. This written
demand for appraisal must be in addition to, and separate from, any proxy or
vote abstaining from or voting against the adoption of the merger agreement.
Voting against, abstaining from voting on, or failing to vote for the adoption
of the merger agreement by itself does not constitute a demand for appraisal
within the meaning of Section 262.
·
You
must not vote in favor of the adoption of the merger agreement
. A vote in
favor of the proposal to approve the adoption of the merger agreement, in
person or by proxy, will constitute a waiver of your appraisal rights in
respect of
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the shares so voted and will
nullify any previously filed written demands for appraisal. Stockholders
electing to exercise their appraisal rights must not vote FOR the adoption of
the merger agreement.
If you fail to comply with either of these
conditions and the merger is completed, you will be entitled to receive the cash
payment for your shares of common stock as provided for in the merger
agreement, but you will have no appraisal rights with respect to your shares of
our common stock.
A proxy which is signed but does not contain voting
instructions will, unless revoked, be voted in favor of the adoption of the
merger agreement and will constitute a waiver of your right of appraisal and
will nullify any previous demand for appraisal.
Therefore, a stockholder who votes by proxy and who wishes to exercise
appraisal rights must instruct the proxy to vote against the adoption of the
merger agreement or to abstain from voting on the adoption of the merger
agreement.
A stockholder who elects to exercise appraisal
rights should mail or deliver the required written demand to us at Hirsch
International Corp., 50 Engineers Road, Hauppauge, N.Y. 11788, Attention:
Corporate Secretary. Such written demand must be delivered before the vote on
the adoption of the merger agreement is taken at the special meeting, and
should be executed by, or on behalf of, the record holder of the shares of
common stock. The demand must reasonably inform us of the identity of the
stockholder and the intention of the stockholder to demand appraisal of his,
her or its shares. A stockholders failure to make the written demand prior to
the taking of the vote on the adoption of the merger agreement at the
stockholders meeting will constitute a waiver of his, her or its appraisal
rights.
To be effective, a demand for appraisal by a holder
of common stock must be made by, or in the name of, such registered
stockholder, fully and correctly, as the stockholders name appears on his, her
or its stock certificate(s).
Beneficial
owners who do not also hold the shares of record may not directly make
appraisal demands to us. The beneficial holder must, in such cases, have the
registered owner, such as a broker, bank or other nominee, submit the required
demand in respect of those shares.
If shares are owned of record in
a fiduciary capacity, such as by a trustee, guardian or custodian, execution of
a demand for appraisal should be made by or for the fiduciary; and if the
shares are owned of record by more than one person, as in a joint tenancy or
tenancy in common, the demand should be executed by or for all joint owners. An
authorized agent, including an authorized agent for two or more joint owners,
may execute the demand for appraisal for a stockholder of record; however, the
agent must identify the record owner or owners and expressly disclose the fact
that, in executing the demand, he or she is acting as agent for the record
owner. A record owner, such as a broker, who holds shares as a nominee for
others, may exercise his or her right of appraisal with respect to the shares
held for one or more beneficial owners, while not exercising this right for
other beneficial owners. In that case, the written demand should state the
number of shares as to which appraisal is sought. Where no number of shares is
expressly mentioned, the demand will be presumed to cover all shares held in
the name of the record owner.
If you hold your shares of our
common stock in a brokerage account or in other nominee form and you wish to
exercise appraisal rights, you should consult with your
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broker or
the other nominee to determine the appropriate procedures for the making of a demand
for appraisal by the broker or other nominee.
Within ten days after the effective time of the
merger, the surviving corporation must give written notice of the date the
merger has become effective to each stockholder who has properly filed a
written demand for appraisal and who did not vote in favor of the adoption of
the merger agreement. Within one hundred twenty days after the effective time
of the merger, but not thereafter, either the surviving corporation or any
stockholder who has complied with the requirements of, and is entitled to
appraisal rights under, Section 262 may commence an appraisal proceeding
by filing a petition in the Court of Chancery demanding a determination of the
fair value of the shares held by all stockholders entitled to appraisal. The
surviving corporation is under no obligation to file such a petition. We have
no present intention to file such a petition, and stockholders should not
assume that the surviving corporation will file a petition. Accordingly, it is
the obligation of the stockholders to initiate all necessary action to perfect
their appraisal rights within the time prescribed by Section 262.
Within one hundred twenty days after the effective
time of the merger, but not thereafter, any stockholder who has complied with Section 262
will, upon written request to the surviving corporation, be entitled to receive
a written statement setting forth the aggregate number of shares not voted in
favor of the merger agreement and with respect to which demands for appraisal
rights have been received and the aggregate number of holders of such shares.
Such written statement will be mailed to the requesting stockholder within ten
days after such written request is received by the surviving corporation or
within ten days after expiration of the period for delivery of demands for
appraisal, whichever is later. A person who is the beneficial owner of shares
of our common stock held either in a voting trust or by a nominee on behalf of
such person may, in such persons own name, file a petition or request from the
surviving corporation the written statement described in this paragraph.
Upon the filing of a petition for appraisal by a
stockholder, service of a copy of such petition will be made upon the surviving
corporation. If a petition for appraisal is duly filed by a stockholder and a
copy of the petition is delivered to the surviving corporation, the surviving
corporation will then be obligated, within twenty days after receiving service
of a copy of the petition, to file in the office of the Register in Chancery in
which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded an appraisal of their shares
and with whom agreements as to the value of their shares have not been reached
by the surviving corporation. After notice to dissenting stockholders who
demanded appraisal of their shares, the Court of Chancery is empowered to
conduct a hearing upon the petition, and to determine those stockholders who
have complied with Section 262 and who have become entitled to the
appraisal rights provided thereby. The Court of Chancery may require the
stockholders who have demanded appraisal for their shares (and who hold stock
represented by certificates) to submit their stock certificates to the Register
in Chancery for notation thereon of the pendency of the appraisal proceedings;
and if any stockholder fails to comply with that direction, the Court of
Chancery may dismiss the appraisal proceedings as to that stockholder.
After the Court of Chancery determines the
stockholders entitled to appraisal, the appraisal proceeding shall be conducted
in accordance with the rules of the Court of Chancery, including any rules specifically
governing appraisal proceedings. Through such proceeding, the Court of Chancery
shall determine the fair value of the shares of common stock, exclusive of
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any element of value arising
from the accomplishment or expectation of the merger, together with interest,
if any, to be paid on the amount determined to be the fair value. Unless the
Court of Chancery in its discretion determines otherwise for good cause shown,
interest from the effective time of the merger through the date of payment of
the judgment shall be compounded quarterly and shall accrue at a rate of 5%
over the Federal Reserve discount rate (including any surcharge) as established
from time to time during the period between the effective time of the merger
and the date of payment of the judgment.
In determining fair value, the Court of Chancery
will take into account all relevant factors. In
Weinberger v
.
UOP
,
Inc.
, the Delaware Supreme Court discussed the
factors that could be considered in determining fair value in an appraisal
proceeding, stating that proof of value by any techniques or methods which are
generally considered acceptable in the financial community and otherwise
admissible in court should be considered, and that [f]air price obviously
requires consideration of all relevant factors involving the value of a
company.
You should be aware that the fair
value of your shares as determined under Section 262 could be more than,
the same as, or less than the consideration that you would be entitled to
receive under the terms of the merger agreement if you did not seek appraisal
of your shares.
While statutory procedures
exist for courts to determine fair value should you contest the merger
consideration, there is little certainty of outcome in such proceedings, and
they may involve considerable time and expense.
You should also be aware that investment banking opinions as to the
fairness, from a financial point of view, of the consideration payable in a
merger are not opinions as to fair value under Section 262.
The c
osts of the
appraisal proceeding (which do not include attorneys fees and fees and
expenses of experts) may be determined by the Court of Chancery and taxed upon
the parties as the Court of Chancery deems equitable in the circumstances. Upon
the application of a stockholder, the Court of Chancery may order all or a
portion of the expenses incurred by any stockholder in connection with the
appraisal proceeding, including, without limitation, reasonable attorneys fees
and the fees and expenses of experts, to be charged pro rata against the value
of all shares entitled to appraisal. In the absence of a determination or
assessment, each party bears his, her or its own expenses. The exchange of shares for cash pursuant to
the exercise of appraisal rights generally will be a taxable transaction for
U.S. federal income tax purposes and possibly state, local and non-U.S. income
tax purposes as well.
Any stockholder who has duly demanded appraisal
rights in compliance with Section 262 will not, after the effective time
of the merger, be entitled to vote shares subject to that demand for any
purpose or to receive payments of dividends or any other distribution with
respect to those shares, other than with respect to payment as of a record date
prior to the effective time.
At any time within sixty days after the effective
time of the merger, any stockholder who has not commenced an appraisal
proceeding or joined that proceeding as a named party has the right to withdraw
his, her or its demand for appraisal and to accept the merger consideration
offered pursuant to the merger agreement for his, her or its shares of our
common stock by delivering to the surviving corporation a written withdrawal of
the demand for appraisal. However, any such attempt to withdraw the demand for
appraisal made more than sixty days after the effective time of the merger will
require written approval of the surviving corporation. No appraisal proceeding
in the Court of Chancery will be dismissed as to any stockholder
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without the approval of the
Court of Chancery, and such approval may be conditioned upon such terms as the
Court of Chancery deems just; provided, however, that any stockholder who has
not commenced an appraisal proceeding or joined that proceeding as a named
party may withdraw his, her or its demand for appraisal and accept the
consideration offered pursuant to the merger agreement within sixty days after
the effective time of the merger. If the surviving corporation does not approve
a request to withdraw a demand for appraisal when that approval is required,
or, except with respect to any stockholder who withdraws such stockholders
right to appraisal in accordance with the proviso in the immediately preceding
sentence, if the Court of Chancery does not approve the dismissal of an
appraisal proceeding, the stockholder will be entitled to receive only the
appraised value determined in any such appraisal proceeding, which value could
be less than, equal to or more than the consideration being offered pursuant to
the merger agreement. If no petition for appraisal is filed with the Court of
Chancery within one hundred twenty days after the effective time of the merger,
stockholders rights to appraisal (if available) will cease. As we have no obligation to file such a
petition, any stockholder who desires a petition to be filed is advised to file
it on a timely basis.
Failure by any stockholder to comply fully with the procedures of Section 262
(as set forth in
Annex C
to this proxy statement)
may result in termination of such stockholders appraisal rights. In view of
the complexity of Section 262, any of our stockholders who may wish to
dissent from the merger and pursue appraisal rights should consult their legal
advisors.
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OTHER
IMPORTANT INFORMATION REGARDING HIRSCH
Directors
and Executive Officers of Hirsch
The merger agreement provides that upon consummation
of the merger, the directors of Merger Sub will be the initial directors of the
surviving corporation and our officers will be the officers of the surviving
corporation. Mr. Gallagher is presently the sole director of Merger Sub.
All surviving corporation officers and directors will hold their positions in
accordance with and subject to the certificate of incorporation and bylaws of
the surviving corporation.
During the last five years, none of Hirschs
directors or executive officer has been (a) convicted in a criminal proceeding
(excluding traffic violations or similar misdemeanors) or (b) a party to
any judicial or administrative proceeding (except for matters that were
dismissed without sanction or settlement) that resulted in a judgment or decree
or final order enjoining the person from future violations of, or prohibiting
activities subject to, federal or state securities laws, or a finding of any
violation of federal or state securities laws.
Directors
Hirschs
board of directors consists of two members classified as Class A
directors, and three members classified as Class B directors. The holders of our shares of Class A
Common Stock elect the Class A directors, and the holder of our shares of Class B
Common Stock elects the Class B directors. Set forth below, for each of Hirschs
directors is such persons respective present principal occupation and
information regarding their employment history. Each person identified below is
a citizen of the United States of America and can be reached c/o Hirsch
International Corp., 50 Engineers Road, Hauppauge, New York 11788.
Name
|
|
Age
|
|
Business Experience
|
|
|
|
|
|
Henry
Arnberg
(Class B)
|
|
66
|
|
Henry
Arnberg, has held the position of Chairman 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. From December 1, 2004
through November 30, 2007 Mr. Arnberg was a consultant to the
Company. 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
(Class B)
|
|
59
|
|
Paul
Gallagher, joined the Company as its Chief Operating Officer in
September 2001. In early 2003, Mr. Gallagher was also appointed the
Companys 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
|
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Name
|
|
Age
|
|
Business Experience
|
|
|
|
|
|
|
|
|
|
University
of Cincinnati in 1976 and an MBA from Xavier University in 1978.
|
|
|
|
|
|
Marvin
Broitman
(Class A)
|
|
70
|
|
Marvin
Broitman has served as a director of the Company since April 1994, was
the President of Uniwave, Inc., a company engaged in the engineering and
manufacturing of automation accessory equipment for textile machinery from
1968 until his retirement in May 2008. Mr. Broitman received a
Bachelor of Electrical Engineering degree from City College in 1961 and an
MBA from the Harvard Business School in 1968.
|
|
|
|
|
|
Mary
Ann Domuracki
(Class A)
|
|
54
|
|
Mary
Ann Domuracki has served as a director of the Company since
September 2001, and is a Managing Director of Restructuring at
Financo, Inc. (an investment banking firm) 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 Certified Public Accountant and a
member of the American Institute of Certified Public Accountants (AICPA),
and has a Bachelor of Business Administration from Pennsylvania State
University with a concentration in Accounting.
|
98
Table
of Contents
Name
|
|
Age
|
|
Business Experience
|
|
|
|
|
|
Christopher
J. Davino
(Class B)
|
|
43
|
|
Christopher
J. Davino was appointed as the Interim President, Chief Executive Officer of
Premier Exhibitions, Inc. on February 9, 2009. Prior to that, he
was the business leader of XRoads Solutions Group (a corporate restructuring
management consulting company) in their corporate rescue practice. He has
served as a director of the Company since October 2004. Since early
2006, Mr. Davino has been President of Osprey Point Advisors, LLC, a
firm providing consulting and investment banking services to companies
including capital raising and mergers and acquisitions. From July 2004
through December 2005, Mr. Davino was President of E-Rail Logistics
Inc., a rail logistics company. Prior to that position, Mr. Davino
worked as a restructuring professional at Wasserstein and Perella and Zolfo
Cooper. 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. Mr. Davino received his Bachelor of Science in Finance from
Lehigh University.
|
Executive Officers
Paul Gallagher, our President, Chief Executive
Officer and Chief Operating Officer, is our sole executive officer. Information regarding Mr. Gallaghers
employment history is set forth above under
Directors.
Historical
Selected Financial Data
The following table includes
selected consolidated financial data for the last five years and the six months
ended
June 30,
2009. The following selected consolidated financial
data is qualified by reference to, and should be read in conjunction with, our
consolidated financial statements and notes thereto in our Annual Report on Form 10-K
for the year ended December 31, 2008, and our Quarterly Report on Form 10-Q
for the quarter ended
June 30,
2009, attached
as
Annex D
and
Annex E
to this proxy statement,
respectively. Historical results are not necessarily indicative of results to
be expected in the future.
99
Table
of Contents
(In
thousands,
except per share
amounts and ratios)
|
|
Year Ended
January 29,
2005
|
|
Year
Ended
January
28, 2006
|
|
Eleven
Months
Ended
December
31, 2006
|
|
Year Ended
December 31,
2007
|
|
Year Ended
December
31, 2008
|
|
Six Months
Ended
June 30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statement of Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
44,394
|
|
$
|
51,139
|
|
$
|
49,912
|
|
$
|
52,619
|
|
$
|
42,527
|
|
$
|
12,031
|
|
Income (loss) from continuing operations before
income taxes
|
|
(2,139
|
)
|
122
|
|
1,385
|
|
2,245
|
|
(6,911
|
)
|
(2,976
|
)
|
Net Income (loss)
|
|
(1,772
|
)
|
537
|
|
1,332
|
|
2,087
|
|
(6,909
|
)
|
(4,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss)
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.21
|
)
|
$
|
0.06
|
|
$
|
0.16
|
|
$
|
0.23
|
|
$
|
(0.73
|
)
|
$
|
(0.52
|
)
|
Diluted
|
|
$
|
(0.21
|
)
|
$
|
0.06
|
|
$
|
0.14
|
|
$
|
0.23
|
|
$
|
(0.73
|
)
|
$
|
(0.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in
computing earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
8,351
|
|
8,481
|
|
8,538
|
|
9,176
|
|
9,481
|
|
9,483
|
|
Diluted
|
|
8,351
|
|
9,617
|
|
9,724
|
|
9,511
|
|
9,481
|
|
9,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings to fixed charges (deficiency) (1)
|
|
(12.6
|
)
|
(0.3
|
)
|
21.7
|
|
186.1
|
|
(110.7
|
)
|
(157.6
|
)
|
Consolidated Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
26,626
|
|
$
|
26,354
|
|
$
|
27,188
|
|
$
|
29,300
|
|
$
|
21,030
|
|
$
|
13,992
|
|
(1) Ratio of earnings to fixed charges means the ratio
of income before fixed charges and income taxes to fixed charges, where fixed
charges are the aggregate of interest expense and rent expense.
Book
Value Per Share
Our net book value per share as of
June 30,
2009 was $
0.86.
100
Table
of Contents
Ratio
of Earnings to Fixed Charges
Hirschs ratio of
earnings to fixed charges for the last five completed fiscal years and the
quarter ended June 30, 2009 is included above in the table set forth in
Historical Selected Financial Data.
Ownership
of Common Stock by Certain Beneficial Owners and Directors and Executive
Officers
The following table sets
forth certain information with respect to beneficial ownership of shares of our
Class A Common Stock and Class B Common Stock as of
August 24,
2009, (a) for each
person who is known by us to own beneficially more than 5% of the shares of our
outstanding common stock, (b) for each director of Hirsch, (c) for
each of the current executive officers of the Company and each of the executive
officers of the Company for the Companys last completed fiscal year, as
disclosed in the Companys Annual Report on Form 10-K, which is included
as
Annex D
to this proxy
statement, (d) by all directors and executive officers of Hirsch as a
group.
Name and Address of Beneficial
Owner (1)
|
|
Title of Class (2)
|
|
Amount and Nature
of Beneficial
Ownership
|
|
Percent of
Class
|
|
|
|
|
|
|
|
|
|
Henry Arnberg
|
|
Class A
|
|
1,313,176
|
(3)
|
13.9
|
%
|
|
|
Class B
|
|
400,018
|
(4)
|
100
|
%
|
|
|
|
|
|
|
|
|
Paul Gallagher
|
|
Class A
|
|
1,381,233
|
(9)
|
14.1
|
%
|
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marvin Broitman
|
|
Class A
|
|
61,667
|
(6)
|
*
|
|
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mary Ann
Domuracki
|
|
Class A
|
|
36,667
|
(7)
|
*
|
|
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher
Davino
|
|
Class A
|
|
36,667
|
(8)
|
*
|
|
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Executive
Officers and Directors as a group (5 persons)
|
|
Class A
|
|
2,829,410
|
|
27.5
|
%
|
|
|
Class B
|
|
400,018
|
|
100
|
%
|
|
|
|
|
|
|
|
|
Beverly Eichel
|
|
Class A
|
|
248,000
|
|
2.7
|
%
|
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul Levine
|
|
Class A
|
|
1,099,621
|
(5)
|
12.1
|
%
|
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adam Gross
|
|
Class A
|
|
588,235
|
(10)
|
6.5
|
%
|
APG Capital, LP
|
|
Class B
|
|
|
|
|
|
APG Capital Partners, LP
|
|
|
|
|
|
|
|
APG Capital Management, LLC
|
|
|
|
|
|
|
|
12 Greenway Plaza, Suite 1100
|
|
|
|
|
|
|
|
Houston, Texas 77046
|
|
|
|
|
|
|
|
101
Table of Contents
Name and
Address of Beneficial
Owner (1)
|
|
Title of Class (2)
|
|
Amount and Nature
of Beneficial
Ownership
|
|
Percent of
Class
|
|
Lloyd I.
Miller, III
|
|
Class A
|
|
656,861
|
(11)
|
7.2
|
%
|
4550 Gordon Drive
|
|
Class B
|
|
|
|
|
|
Naples, FL 34102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The PNC Financial
Services Group, Inc.
|
|
Class A
|
|
493,702
|
(12)
|
5.4
|
%
|
PNC Bank, National
Association
|
|
Class B
|
|
|
|
|
|
One PNC Plaza
|
|
|
|
|
|
|
|
249 Fifth Avenue
|
|
|
|
|
|
|
|
Pittsburg, PA
15222-2707
|
|
|
|
|
|
|
|
PNC Bankcorp, Inc.
|
|
|
|
|
|
|
|
300 Delaware Avenue,
Suite 304
|
|
|
|
|
|
|
|
Wilmington, DE 19801
|
|
|
|
|
|
|
|
*
Less than one percent
(1)
Unless
otherwise provided, addresses for each party indicated are c/o Hirsch
International Corp., 50 Engineers Road, Hauppauge, New York 11788.
(2)
The Companys
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. Shares of Class A or Class B
Common Stock that an individual or group has a right to acquire within 60 days
after March 10, 2008 pursuant to the exercise of options, warrants or
other rights are deemed to be outstanding for the purpose of computing the
beneficial ownership of shares and the percentage of such individual or group,
but are not deemed to be outstanding for the purpose of computing the
beneficial ownership of shares and percentage of any other person or group
shown in the table.
(3)
Includes the
400,018 shares of Class B Common Stock beneficially owned by Mr. Arnberg
(as described in footnote 4), which may be converted at any time to shares of Class A
Common Stock by Mr. Arnberg on a one-for-one basis.
(4)
These shares of
Class B Common Stock are held by an estate planning entity for the benefit
of Mr. Arnbergs children. Mr. Arnberg exercises voting control over
these shares. These shares may be converted into the same number of Class A
Common Stock.
(5)
Includes
100,000 shares of Class A Common Stock owned by trusts created for the
benefit of Mr. Levines children as to which he disclaims beneficial
ownership. Mr. Levines address is 2424 N. Federal Highway, Boca Raton, FL
33431.
(6)
Includes
options to purchase 10,000, 10,000,
6,667, 6,667
and 3,333 shares of Class A
Common Stock at an exercise price of $1.02, $1.33,
$2.35, $2.29
and $0.97 per share,
respectively.
102
Table of Contents
(7)
Includes
options to purchase 10,000, 10,000, 6,667
, 6,667
and 3,333 shares of Class A
Common Stock at an exercise price of $1.02, $1.33, $2.35, $2.29 and $0.97 per
share, respectively.
(8)
Includes
options to purchase 10,000, 10,000, 6,667
, 6,667
and 3,333 shares of Class A
Common Stock at an exercise price of $1.01, $1.33, $
2.35, $2.29
and $0.97 per share,
respectively.
(9)
Includes
options to purchase 150,000, 100,000, 133,334, 175,000, 75,000 and 50,000
shares of Class A Common Stock at an exercise price of $1.12, $1.34,
$1.20, $2.12, $2.34 and $1.19 per share respectively.
(10)
Based solely
upon a Schedule 13-G filed with the SEC by the referenced parties on February 12,
2009.
(11)
Based solely
upon a Schedule 13-G filed with the SEC by the referenced party on February 5,
2009.
(12)
Based solely
upon a Schedule 13-G filed with the SEC by the referenced parties on February 12,
2009. PNC Bank, National Association is the trustee for trust accounts, holding
the referenced shares. In connection with the trust accounts, PNC Bank,
National Association in its capacity as trustee, entered into an Investment
Advisory Agreement with Lloyd I. Miller III. The Investment Advisor Agreement
may be terminated upon thirty days prior written notice.
Other than with respect to the merger agreement, we
are not aware of any arrangements, which may, at a subsequent date, result in a
change in control of Hirsch.
There have been no transactions in shares of the
Companys common stock during the past sixty days by the Company, any of the
Companys officers or directors, or Parent or Merger Sub.
Ownership of Common Stock by Parent and Merger Sub
As of August 26, 2009,
neither Parent nor Merger Sub may be deemed to beneficially own any shares of
Hirschs common stock.
Market Price of the Company Common Stock and Dividend Information
Our common stock is traded on the Nasdaq Capital
Market under the ticker symbol HRSH. The following table sets forth, for the
indicated calendar periods, the reported intraday high and low trading prices
per share of our common stock on the Nasdaq Capital Market, as reported by
Nasdaq.
103
Table of
Contents
|
|
High
|
|
Low
|
|
Year Ending December 31, 2009
|
|
|
|
|
|
Third Quarter (through August 25, 2009)
|
|
$
|
0.3301
|
|
$
|
0.23
|
|
Second Quarter
|
|
0.3168
|
|
0.15
|
|
First Quarter
|
|
0.35
|
|
0.17
|
|
|
|
|
|
|
|
Year
Ended December 31, 2008
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
1.02
|
|
$
|
0.201
|
|
Third Quarter
|
|
1.61
|
|
0.95
|
|
Second Quarter
|
|
2.33
|
|
1.21
|
|
First Quarter
|
|
2.34
|
|
1.30
|
|
|
|
|
|
|
|
Year
Ended December 31, 2007
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
2.67
|
|
$
|
1.69
|
|
Third Quarter
|
|
4.70
|
|
2.15
|
|
Second Quarter
|
|
5.25
|
|
3.20
|
|
First Quarter
|
|
4.12
|
|
2.08
|
|
The Company did not pay any dividends during any of
the periods set forth in the table above.
Under the terms of the merger agreement, until the
earlier of the effective time of the merger, or the termination of the merger
agreement in accordance with its terms, the Company is prohibited from paying
any dividends with respect to its shares of common stock.
On June 12, 2009, the last completed trading
day prior to our announcement of Mr. Gallaghers offer to acquire all of
our shares of common stock, the high and low reported trading prices of our Class A
Common Stock were $0.22 and $0.20, respectively. The merger consideration of $0.31 per share
represents a premium of approximately 47.6% over the closing trading price of
$0.21 per share on June 12, 2009.
On July 1, 2009, the last completed trading day prior to the public
announcement of the execution of the merger agreement, the high and low
reported trading prices of our Class A Common Stock were $0.25 and $0.24
respectively. The merger consideration
of $0.31 per share represents a premium of approximately 24% over the closing
trading price of $0.25 per share on July 1, 2009. On ,
2009, which is the most recent practicable trading date prior to the printing
of this proxy statement, the high and low reported trading prices of our Class A
Common Stock were $ and $
respectively. You are encouraged to
obtain current market quotations for our shares of Class A Common Stock.
104
Table of Contents
OTHER
MATTERS
Future
Stockholder Proposals
If we obtain the affirmative vote of a majority of
our outstanding shares of common stock at the special meeting, we do not expect
to hold a 2009 Annual Meeting of Stockholders. If the merger is consummated, we
will not have public stockholders and there will be no public participation in
any future meeting of stockholders.
Householding
of Special Meeting Materials
Some banks, brokers and other nominee recordholders
may be participating in the practice of householding proxy statements and
annual reports. This means that only one copy of this notice and proxy
statement may have been sent to multiple stockholders in your household, unless
we have received contrary instructions from any such stockholders. If you would
prefer to receive separate copies of a proxy statement or annual report either
now or in the future, please contact your bank, broker or other nominee. Upon
written or oral request to our office at 50 Engineers Road, Hauppauge, New
York, 11788, telephone:
(631) 701-2112, we will promptly deliver a separate copy of the
annual reports and proxy statements, as applicable, to any stockholder at a
shared address to which a single copy of documents was delivered. In addition,
stockholders sharing an address can request delivery of a single copy of annual
reports or proxy statements, as applicable, if receiving multiple copies upon
written or oral request to our office at the address and telephone number
stated above.
If you own your shares through a broker or other
nominee, you can request to participate in householding, or alternatively can
request separate copies of our annual reports and proxy statement, by
contacting your broker or nominee.
Other
Information
See
Annex D
and
Annex E
to this proxy
statement for a description of the Companys business, a description of the
Companys property, and information concerning certain supplementary financial
information, managements discussion and analysis of the Companys financial
condition and results of operations, changes in and disagreements with
accountants on accounting and financial disclosure.
The Company is involved in lawsuits, claims and proceedings which arise
in the ordinary course of business.
Other than as set forth in the following paragraphs, the Company is not
presently involved in any material litigation.
On June 30, 2009, Graphic Arts Acquisition Corporation (Graphic
Arts), a wholly-owned subsidiary of the Company, filed a lawsuit in the United
States District Court for the Eastern District of New York, against Lowery
Machine & Supply, LLC (LMS) and Robert Barnes (Barnes). The lawsuit stems from a business and
contractual relationship between Graphic Arts and LMS by which LMS agreed to
serve as Graphic Arts agent in the extractment, movement, management,
marketing and sale of certain intellectual and real property belonging to
Graphic Arts. The lawsuit seeks judgment
against LMS for breach of contract, breach of fiduciary duty, and conversion
and judgment against both LMS and Barnes for domain name infringement.
105
Table of Contents
The Company has been served
with a stockholder lawsuit, dated July 14,
2009, filed in connection with the
merger against the Company and its directors, Parent and Merger Sub, by Anthony
Chiarenza, an individual who claims to be a stockholder of the Company, in the
Supreme Court of the State of New York, County of Suffolk (Index No. 09-26487). The complaint contends that the proposed merger
consideration of $0.31 per share is an unfair price in light of the value of
the Company. It further alleges terms of
the merger agreement are unfair because (a) the Company is required to
notify Parent and Merger Sub before a recommendation to accept a superior
proposal, (b) the merger agreement defines a superior proposal solely as one
that is more favorable from a financial point of view and (c) the merger
agreement includes a $300,000 termination fee.
The complaint asserts claims of breach of fiduciary duty against the
individual defendants, and claims of aiding and abetting breach of fiduciary
duty against the Company, Parent and Merger Sub. It seeks as relief, among
other things, an order enjoining the proposed transaction as well as damages
and fees and expenses, including the plaintiffs attorneys fees. We believe these allegations are without
merit.
106
Table of Contents
WHERE
YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and copy any
document we file at the SECs public reference room located at 100 F Street,
N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. Our SEC
filings are also available to the public at the SECs website at
http://www.sec.gov.
Any person, including any beneficial owner, to whom
this proxy statement is delivered may request copies of proxy statements and
any of the documents incorporated by reference in this document or other
information concerning us, without charge, by written or telephonic request
directed to Hirsch International Corp., 50 Engineers Road Hauppague, New York
11788, attn: Investor Relations, telephone (631) 701-2112 or from the SEC
through the SECs website at http://www.sec.gov. Documents incorporated by
reference are available without charge, excluding any exhibits to those
documents unless the exhibit is specifically incorporated by reference into
those documents.
Because the merger is a going private transaction,
Hirsch has filed with the SEC a Transaction Statement on Schedule 13E-3 with
respect to the proposed merger. The Schedule 13E-3, including any amendments
and exhibits filed or incorporated by reference as a part of it, is available
for inspection as set forth above. The
Schedule 13E-3 will be amended to report promptly any material changes in the
information set forth in the most recent Schedule 13E-3 filed with the SEC.
Parent has supplied all information in this proxy
statement pertaining to Parent and Merger Sub and we have supplied all
information in this proxy statement pertaining to us.
THIS PROXY STATEMENT DOES NOT CONSTITUTE THE
SOLICITATION OF A PROXY IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM OR
FROM WHOM IT IS UNLAWFUL TO MAKE SUCH PROXY SOLICITATION IN THAT JURISDICTION.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROXY STATEMENT TO VOTE YOUR SHARES AT THE SPECIAL MEETING. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT
IS CONTAINED IN THIS PROXY STATEMENT.
THIS PROXY STATEMENT IS DATED ,
2009. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE, AND THE MAILING OF
THIS PROXY STATEMENT TO STOCKHOLDERS DOES NOT CREATE ANY IMPLICATION TO THE
CONTRARY.
107
Table of Contents
Annex A
Execution
Copy
AGREEMENT
AND PLAN OF MERGER
by and among
Hirsch
International Corp.
a Delaware
corporation
,
HIC
Acquisition Company
a Delaware corporation,
and
Hirsch
Holdings, Inc.
a Delaware
corporation
July 2,
2009
Table of Contents
INDEX
OF DEFINED TERMS
Term
|
|
Section
|
|
|
|
Acceptable
Confidentiality Agreement
|
|
5.02(a)
|
Affiliate
|
|
1.01
|
Agreement
|
|
Preamble
|
Appraisal Shares
|
|
3.01(d)
|
Benefit Plans
|
|
1.01
|
Business Day
|
|
1.01
|
Cancelled Shares
|
|
3.01(b)
|
Capitalization Date
|
|
4.01(c)
|
Certificate
|
|
3.01(c)
|
Certificate of Merger
|
|
2.03
|
Change in
Recommendation
|
|
5.02(e)
|
Class A Stock
|
|
Recitals
|
Class B Stock
|
|
Recitals
|
Closing
|
|
2.02
|
Closing Date
|
|
2.02
|
Code
|
|
3.02(h)
|
Company
|
|
Preamble
|
Company Board
|
|
4.01(d)(ii)
|
Company Board
Recommendation
|
|
4.01(d)(ii)
|
Company Bylaws
|
|
4.01(a)
|
Company Charter
|
|
4.01(a)
|
Company Stock
|
|
Recitals
|
Company Information
|
|
4.01(j)
|
Company SEC Documents
|
|
4.01(e)(i)
|
Company Stock Option
|
|
3.03(b)
|
Company Stock Plan
|
|
3.03(b)
|
Company Stock-Based
Awards
|
|
4.01(c)
|
Company Termination Fee
|
|
6.05(b)(ii)
|
Contract
|
|
4.01(d)(iii)
|
Converted Shares
|
|
3.01(c)
|
DGCL
|
|
2.01
|
Effective Time
|
|
2.03
|
Exchange Act
|
|
4.01(d)(iii)
|
Exchange Fund
|
|
3.02(a)
|
Excluded Party
|
|
5.02(b)
|
Expenses
|
|
6.05(c)
|
Filed Company SEC
Documents
|
|
4.01
|
Financing
|
|
4.02(d)
|
Financing Agreements
|
|
6.07(a)
|
Financing Commitment
|
|
4.02(d)
|
GAAP
|
|
4.01(e)(i)
|
Go-Shop Period
|
|
5.02(b)
|
Governmental Entity
|
|
4.01(d)(iii)
|
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of Contents
Interim Period
|
|
5.01(a)
|
Key Persons
|
|
5.01(a)(vii)
|
Knowledge
|
|
1.01
|
Law
|
|
4.01(d)(iii)
|
Liens
|
|
4.01(b)
|
Material Adverse Effect
|
|
1.01
|
Merger
|
|
Recitals
|
Merger Consideration
|
|
Recitals
|
Merger Sub
|
|
Preamble
|
New Financing
Commitment
|
|
6.07(a)
|
Notice Period
|
|
5.02(f)(i)
|
Order
|
|
4.01(d)(iii)
|
Outside Date
|
|
8.01(b)(i)
|
Parent
|
|
Preamble
|
Parent Information
|
|
4.02(f)
|
Parent Material Adverse
Effect
|
|
1.01
|
Paying Agent
|
|
3.02(a)
|
Person
|
|
1.01
|
Preferred Stock
|
|
4.01(c)
|
Proxy Statement
|
|
4.01(d)(iii)
|
Representative
|
|
1.01
|
Schedule 13E-3
|
|
4.01(d)(iii)
|
SEC
|
|
4.01(d)(iii)
|
Section 262
|
|
3.01(d)
|
Securities Act
|
|
4.01(e)(i)
|
Stockholder Approval
|
|
4.01(f)
|
Stockholders
|
|
3.01
|
Stockholders Meeting
|
|
6.01(c)
|
SOX
|
|
4.01(e)(i)
|
Special Committee
|
|
Recitals
|
Solvent
|
|
4.02(i)
|
Subsidiary
|
|
1.01
|
Superior Proposal
|
|
5.02(a)
|
Surviving Corporation
|
|
2.01
|
Tajima
|
|
4.01(d)(iii)
|
Takeover Proposal
|
|
5.02(a)
|
Tax
|
|
1.01
|
Taxing authority
|
|
1.01
|
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Table of Contents
AGREEMENT AND PLAN OF MERGER
This
AGREEMENT AND PLAN OF MERGER (this
Agreement
) is made and entered into
as of July 2, 2009 among Hirsch Holdings, Inc., a Delaware
corporation (
Parent
), HIC Acquisition Company, a Delaware corporation
(
Merger Sub
), and Hirsch International Corp., a Delaware corporation
(the
Company
).
RECITALS
WHEREAS,
the board of directors of each of the Company and Merger Sub, a special
committee of the board of directors of the Company (the
Special Committee
)
has approved and declared advisable, and the board of directors of Parent has
approved, this Agreement and the merger of Merger Sub with and into the
Company, with the Company continuing as the surviving corporation in the merger
(the
Merger
), upon the terms and subject to the conditions set forth
in this Agreement, whereby each issued and outstanding share of class A common
stock, par value $0.01 per share, of the Company (
Class A Stock
),
and each issued and outstanding share of class B common stock, par value $0.01
per share, of the Company (
Class B Stock
and, together with the Class A
Stock,
Company Stock
) other than any Appraisal Shares or Cancelled
Shares (as defined below), will be converted into the right to receive $0.31 in
cash, per share, without interest (the
Merger Consideration
); and
WHEREAS,
Parent, Merger Sub and the Company desire to make certain representations,
warranties, covenants and agreements in connection with the Merger, and also to
prescribe various conditions to the Merger.
AGREEMENT
NOW,
THEREFORE, in consideration of the representations, warranties, covenants and
agreements contained in this Agreement, and subject to the conditions set forth
herein, the parties hereto, intending to be legally bound hereby, agree as
follows:
ARTICLE
I
DEFINITIONS
Section 1.01
Definitions
.
For purposes of this Agreement:
(a)
Affiliate
of any Person means another Person that directly or indirectly, through one or
more intermediaries, controls, is controlled by, or is under common control
with, such first Person. For purposes
hereof, control means the possession directly or indirectly, of the power to
direct or cause the direction of the management or policies of a Person by
virtue of ownership of voting securities, by contract or otherwise.
(b)
Benefit
Plans
means all employee benefit plans (as defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended) and all
employment benefit, compensation, stock option, stock purchase, restricted
stock, deferred compensation, retiree medical or life insurance, split dollar
insurance, supplemental retirement, severance, change of control, fringe
benefit, bonus, incentive, employee loan or other employee benefit,
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arrangements, plans, policies or programs, in each case, which are
provided, maintained, contributed to or sponsored by the Company or any of its
Subsidiaries on behalf of current or former directors, officers, employees, or
consultants or for which the Company or any of its Subsidiaries has any
liability, contingent or otherwise.
(c)
Business
Day
shall mean any day other than a Saturday, Sunday or a day on which the
banks in New York, New York are authorized by Law or executive order to be
closed.
(d)
Knowledge
of the Company or Parent means, with respect to any matter in question, the
actual knowledge of the Companys or Parents respective executive officers
after making due inquiry regarding such matter of the other executives and
managers having primary responsibility for such matter, as well as that
knowledge that a reasonably prudent executive officer would have pertaining to
such matter in the course of duly performed duties as an officer of such party.
(e)
Material
Adverse Effect
means any fact, circumstance, change, occurrence or effect
that, individually or in the aggregate with all other facts, circumstances,
changes, occurrences or effects, (1) is, or would reasonably be expected
to be, materially adverse to the business, condition (financial or otherwise),
results of operations or liabilities (contingent or otherwise) of the Company
and its Subsidiaries, taken as a whole, or (2) that would reasonably be
expected to prevent or materially impede, interfere with, hinder or delay the
ability of the Company to consummate the Merger, except for any such facts,
circumstances, changes, occurrences or effects arising out of or relating to (i) the
announcement or the existence of this Agreement and the transactions
contemplated hereby, or actions by Parent or the Company required to be taken
pursuant to this Agreement, (ii) changes in general economic or political
conditions or the financial markets (so long as the Company or its Subsidiaries
are not disproportionately affected thereby), (iii) changes in applicable
Laws, rules, regulations or orders of any Governmental Entity or
interpretations thereof by any Governmental Entity or changes in accounting rules or
principles (so long as the Company or its Subsidiaries are not
disproportionately affected thereby), (iv) changes affecting generally the
industries in which the Company or its Subsidiaries conduct business (so long
as the Company or its Subsidiaries are not disproportionately affected
thereby), or (v) any outbreak or escalation of hostilities or war or any
act of terrorism (so long as the Company or its Subsidiaries are not
disproportionately affected thereby).
(f)
Parent
Material Adverse Effect
means any fact, circumstance, change, occurrence,
or effect that, individually or in the aggregate, that would reasonably be
expected to prevent or materially impede, interfere with, hinder or delay the
consummation of the Merger or the other transactions contemplated by this
Agreement (other than if any portion of the Financing becomes unavailable in
the manner or from the sources contemplated in the Financing Commitment).
(g)
Person
means an individual, corporation, partnership, limited liability company, joint
venture, association, trust, unincorporated organization, or other entity.
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(h)
Representative
means any officer, employee, counsel, investment banker, accountant,
consultant, debt financing source, or other authorized representative of any
Person.
(i)
Subsidiary
of any Person means another Person of which such first Person directly or
indirectly owns an amount of the voting securities, other voting rights or
voting partnership interests sufficient to elect at least a majority of its
board of directors or other governing body (or, if there are no such voting
interests, 50% or more of the equity interests thereof).
(j)
Tax
means any federal, state, local or foreign income, gross receipts, property,
sales, use license, excise, franchise employment, payroll, withholding,
alternative or add on minimum, ad valorem, transfer or excise tax, or any other
tax, custom, duty, governmental fee or other like assessment or charge of any
kind whatsoever (including withholding on amounts paid to or by any Person),
together with any related interest, penalty, addition to tax or additional
amount.
(k)
Taxing
Authority
means any federal, state, local or foreign government, any
subdivision, agency, commission or authority thereof, or any quasi-governmental
body exercising tax regulatory authority.
Section 1.02
Interpretation
. When a reference is made in this Agreement to
an Article, or a Section, such reference shall be to an Article or a Section
of this Agreement unless otherwise indicated.
The table of contents and headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Whenever the words include, includes or including are used in this
Agreement, they shall be deemed to be followed by the words without
limitation. The words hereof, herein
and hereunder and words of similar import when used in this Agreement shall
refer to this Agreement as a whole and not to any particular provision of this
Agreement. All terms defined in this
Agreement shall have the defined meanings when used in any certificate or other
document made or delivered pursuant hereto unless otherwise defined
therein. The definitions contained in
this Agreement are applicable to the singular as well as the plural forms of
such terms and to the masculine as well as to the feminine and neuter genders
of such term. Any Contract, instrument
or Law defined or referred to herein or in any Contract or instrument that is
referred to herein means such Contract, instrument or Law as from time to time
amended, modified or supplemented, including (in the case of Contracts or
instruments) by waiver or consent and (in the case of Laws) by succession of
comparable successor Laws and references to all attachments thereto and
instruments incorporated therein.
References to a Person are also to its permitted successors and
assigns. The parties have participated
jointly in the negotiation and drafting of this Agreement; consequently, in the
event of an ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties hereto, and
no presumption or burden of proof shall arise favoring or disfavoring any party
by virtue of the authorship of any provision of this Agreement.
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ARTICLE
II
THE MERGER
Section 2.01
The Merger
. Upon the
terms and subject to the conditions set forth in this Agreement, and in
accordance with the General Corporation Law of the State of Delaware (the
DGCL
),
Merger Sub shall be merged with and into the Company at the Effective Time. At
the Effective Time, as defined below, the separate corporate existence of
Merger Sub shall cease and the Company shall continue as the surviving
corporation in the Merger (the
Surviving Corporation
) and shall
succeed to and assume all of the rights and obligations of Merger Sub and the
Company in accordance with the DGCL.
Section 2.02
Closing
. The closing
of the Merger (the
Closing
) will take place at 10:00 a.m. on a
date to be specified by the parties, which shall be no later than the third
Business Day after satisfaction or (to the extent permitted by applicable Law)
waiver of the conditions set forth in Article VII (other than those
conditions that by their terms are to be satisfied at the Closing, but subject
to the satisfaction or (to the extent permitted by applicable Law) waiver of
those conditions), at the offices of Baker & McKenzie, LLP, 1114
Avenue of the Americas, New York, New York 10036, unless another time, date or
place is agreed to in writing by Parent and the Company;
provided
,
however
,
that if all the conditions set forth in Article VII shall no longer be
satisfied or (to the extent permitted by applicable Law) waived on such third
Business Day, then the Closing shall take place on the first Business Day on
which all such conditions shall again have been satisfied or (to the extent
permitted by applicable Law) waived unless another time is agreed to in writing
by Parent and the Company. The date on
which the Closing occurs is referred to as the
Closing Date
.
Section 2.03
Effective Time
.
Subject to the provisions of this Agreement, as soon as practicable on
the Closing Date, the parties shall file with the Secretary of State of the
State of Delaware a certificate of merger regarding the Merger (the
Certificate
of Merger
) in accordance with the relevant provisions of the DGCL and, as
soon as practicable on or after the Closing Date, shall make or cause to be
made all other filings or recordings required under the DGCL in connection with
the Merger. The Merger shall become effective upon the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware, or
at such later time as Parent and the Company shall agree in writing and specify
in the Certificate of Merger (the time the Merger becomes effective being the
Effective
Time
).
Section 2.04
Effect of the Merger
.
The Merger shall have the effects set forth in this Agreement and in the
DGCL. Without limiting the generality of the foregoing and subject thereto, at
the Effective Time, all of the properties, rights, privileges, powers and
franchises of the Company and Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Company and Merger
Sub shall become the debts, liabilities and duties of the Surviving
Corporation.
Section 2.05
Certificate of Incorporation and Bylaws
of the Surviving Corporation
.
(a) The
certificate of incorporation of the Company in effect immediately prior to the
Effective Time shall be amended and restated as of the Effective Time as a
result of
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the Merger so as to read in its entirety as the form of amended and
restated certificate of incorporation set forth in Exhibit A hereto and,
as so amended and restated, shall be the Surviving Corporations certificate of
incorporation until thereafter changed or amended as provided therein or by
applicable Law.
(b)
The bylaws of the Company, as in effect
as of immediately prior to the Effective Time, shall be amended and restated as
of the Effective Time so as to read in their entirety as the bylaws of Merger
Sub as in effect immediately prior to the Effective Time (except the references
to Merger Subs name shall be replaced by references to Hirsch International
Corp.) and, as so amended and restated, shall be the Surviving Corporations
bylaws until thereafter changed or amended as provided therein or by applicable
Law.
Section 2.06
Directors and Officers of the Surviving
Corporation
. From and after the Effective Time, the directors
of Merger Sub immediately prior to the Effective Time shall be the directors of
the Surviving Corporation until the earlier of their resignation or removal or
until their respective successors are duly elected and qualified, as the case
may be. From and after the Effective
Time, the officers of the Company immediately prior to the Effective Time shall
be the officers of the Surviving Corporation until the earlier of their
resignation or removal or until their respective successors are duly elected
and qualified, as the case may be.
Section 2.07
Further Assurances
.
If at any time after the Effective Time the Surviving Corporation shall
consider or be advised that any deeds, bills of sale, assignments or assurances
or any other acts or things are necessary, desirable or proper (a) to
vest, perfect or confirm, of record or otherwise, in the Surviving Corporation
its right, title or interest in, to or under any of the rights, privileges,
powers, franchises, properties or assets of either Merger Sub or the Company or
both, or (b) otherwise to carry out the purposes of this Agreement, the
Surviving Corporation and its proper officers and directors or their designees
shall be authorized to execute and deliver, in the name and on behalf of either
Merger Sub or the Company or both, all such deeds, bills of sale, assignments
and assurances and to do, in the name and on behalf of either Merger Sub or the
Company, all such other acts and things as may be necessary, desirable or
proper to vest, perfect or confirm the Surviving Corporations right, title or
interest in, to, or under any of the rights, privileges, powers, franchises,
properties or assets of Merger Sub and the Company, and otherwise to carry out
the purposes of this Agreement.
ARTICLE
III
EFFECT
OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; EXCHANGE OF
CERTIFICATES
Section 3.01
Effect on Capital Stock
.
At the Effective Time, by virtue of the Merger and without any action on
the part of the Parent, Merger Sub, or the Company, or the holder of any shares
of Company Stock (collectively, the
Stockholders
):
(a)
Capital Stock of Merger Sub
.
Each share of common stock, par value $0.01 per share, of Merger Sub
that is issued and outstanding immediately prior to the Effective Time shall be
converted into one (1) share of common stock of the Surviving Corporation.
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(b)
Cancellation of Certain Stock
. Each share of Company Stock
that is (i) owned, directly or indirectly, by Parent, Merger Sub or Paul
Gallagher immediately prior to the Effective Time, or (ii) held in the
treasury of the Company (together, the
Cancelled Shares
) shall be automatically
canceled and shall cease to exist, and no consideration shall be delivered in
exchange therefore.
(c)
Conversion of Company Stock
.
Subject to Section 3.01(d), each share of Company Stock issued and
outstanding immediately prior to the Effective Time other than the Cancelled
Shares or Appraisal Shares, shall be converted into the right to receive the
Merger Consideration on the terms set forth in this Agreement (the
Converted
Shares
). As of the Effective Time,
subject to Section 3.01(d), all of the Converted Shares shall no longer be
outstanding and shall automatically be canceled and shall cease to exist, and
each holder of a certificate or uncertificated shares representing Company
Stock which immediately prior to the Effective Time represented any such
Converted Shares (each, a
Certificate
) shall cease to have any rights
with respect thereto, except the right to receive the Merger Consideration to
be issued or paid in consideration therefor upon surrender of such Certificate
and other required documentation in accordance with Section 3.02(c). The right of any holder of a Certificate to
receive the Merger Consideration shall be subject to and reduced by the amount
of any withholding that is required under applicable tax Law.
(d)
Appraisal Rights
.
Notwithstanding anything in this Agreement to the contrary, shares (the
Appraisal
Shares
) of Company Stock issued and outstanding immediately prior to the
Effective Time that are held by any holder who is entitled to demand and
properly demands appraisal of such Appraisal Shares pursuant to, and who
complies in all respects with, the provisions of Section 262 of the DGCL (
Section 262
)
shall not become Converted Shares as provided in Section 3.01(c), but
instead such holder shall be entitled to payment of the fair value of such
Appraisal Shares in accordance with the provisions of Section 262. At the Effective Time, all Appraisal Shares
shall no longer be outstanding, shall automatically be canceled and shall cease
to exist, and each holder of Appraisal Shares shall cease to have any rights
with respect thereto, except the right to receive the fair value of such
Appraisal Shares in accordance with the provisions of Section 262. Notwithstanding the foregoing, if any such
holder shall fail to perfect or otherwise shall waive, withdraw or lose the
right to appraisal under Section 262, or a court of competent jurisdiction
shall determine that such holder is not entitled to the relief provided by Section 262,
then the right of such holder to be paid the fair value of such holders
Appraisal Shares under Section 262 shall cease and such Appraisal Shares
shall be deemed to be Converted Shares under Section 3.01(c). The Company shall serve prompt notice to
Parent of any demands for appraisal of any shares of Company Stock, and Parent
shall have the right to participate in and direct all negotiations and
proceedings with respect to such demands.
Prior to the Effective Time, the Company shall not, without the prior written
consent of Parent, voluntarily make any payment with respect to, or settle or
offer to settle, any such demands, or agree to do any of the foregoing.
(e)
Certain Adjustments
.
Notwithstanding anything herein to the contrary, if between the date of
this Agreement and the Effective Time, (i) the outstanding shares of
Company Stock shall have been changed into a different number of shares or a
different class, by reason of the occurrence or record date of any stock
dividend, subdivision, reclassification, recapitalization, split, combination,
exchange of shares or similar transaction, (ii) a stock
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dividend or dividend payable in any other securities of the Company
shall be declared with a record date within such period, or (iii) any
similar event shall have occurred, then in any such case the Merger
Consideration shall be appropriately adjusted to reflect such action; provided,
however that nothing in this Section 3.01(e) shall be construed to permit
the Company to take any action with respect to its securities that is
prohibited by the terms of this Agreement.
Section 3.02
Exchange of Certificates
.
(a)
Paying Agent
. Prior
to the Effective Time, Parent shall designate and enter into an agreement with
a bank or trust company that is reasonably satisfactory to the Company to act
as paying agent (the
Paying Agent
) for the payment of the Merger
Consideration. Prior to the Effective Time, Parent shall deposit, or cause the
Surviving Corporation to deposit, with the Paying Agent, for the benefit (from
and after the Effective Time) of the holders of Certificates, cash in an amount
sufficient to pay the aggregate Merger Consideration required to be paid pursuant
to Section 3.01(c). All cash deposited with the Paying Agent pursuant to
this Section 3.02(a) shall hereinafter be referred to as the
Exchange
Fund
.
(b)
Exchange Procedures
. As soon as reasonably practicable after
the Effective Time, Parent shall cause the Paying Agent to mail to each holder
of record of a Certificate (i) a form of letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to
the Certificates shall pass, only upon proper delivery of the Certificates to
the Paying Agent, and which shall be in customary form and have such other
provisions as Parent may reasonably specify), and (ii) instructions for
effecting the surrender of the Certificates in exchange for the Merger
Consideration. Each holder of record of
one or more Certificates shall, upon surrender to the Paying Agent of such
Certificate or Certificates, together with such letter of transmittal, duly
executed, and such other documents as may reasonably be required by the Paying
Agent, be entitled to receive in exchange therefor the amount of cash to which
such holder is entitled pursuant to Section 3.01(c), and the Certificates
so surrendered shall forthwith be canceled. In the event of a transfer of
ownership of Company Stock which is not registered in the transfer records of
the Company, payment of the Merger Consideration in accordance with this Section 3.02(b)
may be made to a Person other than the Person in whose name the Certificate so
surrendered is registered if such Certificate shall be properly endorsed or
otherwise be in proper form for transfer (and accompanied by all documents
required to evidence and effect such transfer) and the Person requesting such
payment shall pay any transfer or other taxes required by reason of the payment
of the Merger Consideration to a Person other than the registered holder of
such Certificate. No payment of Merger
Consideration shall be paid to any holder of a Certificate with respect to the
Converted Shares represented by such Certificate until the holder of such
Certificate shall have surrendered such Certificate in accordance with this Article III. Until surrendered as contemplated by this Section 3.02(b),
each Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive the Merger Consideration to which such
holder is entitled to receive in respect of such Certificate pursuant to this Article III. Following the surrender of any Certificate,
there shall be paid to the record holder of the Certificate representing whole
shares of Company Stock issued in exchange therefor, without interest, at the
time of such surrender, the Merger Consideration payable in respect therefor in
accordance with this Article III.
No interest shall be paid or will accrue on any payment to holders of
Certificates pursuant to the provisions of this Article III.
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(c)
No Further Ownership Rights in Company Stock
. The Merger Consideration paid upon the
surrender of Certificates in accordance with the terms of this Article III
shall be deemed to have been paid in full satisfaction of all rights pertaining
to the shares of Company Stock formerly represented by such Certificates. At the close of business on the day on which
the Effective Time occurs, the share transfer books of the Company shall be
closed, and there shall be no further registration of transfers on the share
transfer books of the Surviving Corporation of the Company Stock. If, after the Effective Time, any Certificate
is presented to the Surviving Corporation or Parent for transfer, it shall be
canceled against delivery of the Merger Consideration as provided in this Article III.
(d)
Termination of the Exchange Fund
. Any portion of the Exchange Fund which
remains undistributed to the holders of the Certificates for twelve (12) months
after the Effective Time shall be delivered to the Surviving Corporation, upon
demand, and any holders of the Certificates who have not theretofore complied
with this Article III shall thereafter look only to the Surviving
Corporation for payment of their claim for the Merger Consideration in
accordance with this Article III.
(e)
No Liability
. None of
Parent, the Company, the Surviving Corporation or the Paying Agent or any of
their respective Affiliates shall be liable to any Person in respect of any
Merger Consideration properly delivered to a public official pursuant to any
applicable abandoned property, escheat or similar Law. If any Certificate shall not have been
surrendered immediately prior to the date on which any Merger Consideration
would otherwise escheat to or become the property of any Governmental Entity,
any such Merger Consideration shall, to the extent permitted by applicable Law,
become the property of the Surviving Corporation, free and clear of all claims
or interest of any Person previously entitled thereto.
(f)
Investment of Exchange Fund
.
The Paying Agent shall invest the cash included in the Exchange Fund as
directed by Parent prior to the Effective Time and by the Surviving Corporation
after the Effective Time. If for any
reason (including losses) the cash in the Exchange Fund shall be insufficient
to fully satisfy all of the payment obligations to be made in cash by the
Paying Agent hereunder, the Surviving Corporation shall promptly deposit or
cause to be deposited into the Exchange Fund an amount in cash which is equal
to such deficiency in order to fully satisfy such cash payment
obligations. Any interest and other
income resulting from such investments shall be payable to Parent prior to the
Effective Time and to the Surviving Corporation after the Effective Time.
(g)
Lost Certificates
. If
any Certificate has been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the Person claiming such Certificate to be lost,
stolen or destroyed and, if required by the Surviving Corporation or the Paying
Agent, the entering into of an indemnity or the posting of a bond as indemnity
against any claim that may be made against it with respect to such Certificate,
the Paying Agent shall deliver in exchange for such lost, stolen or destroyed
Certificate the Merger Consideration pursuant to this Article III.
(h)
Withholding Rights
.
The Surviving Corporation or the Paying Agent shall be entitled to
deduct and withhold from the consideration otherwise payable pursuant to this
Agreement to any holder of Certificates such amounts as the Surviving
Corporation or the Paying Agent is required to deduct and withhold with respect
to the making of such payment
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under the Internal Revenue Code of 1986, as amended (the
Code
),
or any provision of state, local or foreign tax Law. To the extent that amounts are so withheld
and paid over to the appropriate Taxing Authority by the Surviving Corporation
or the Paying Agent, such withheld amounts shall be treated for all purposes of
this Agreement as having been paid to the holder of Certificates in respect of
which such deduction and withholding was made by the Surviving Corporation or
the Paying Agent.
Section 3.03
Stock Options
.
(a) Prior
to the Effective Time, the Company shall take such action as is necessary to
cause each unvested Company Stock Option that is outstanding immediately prior
to the Effective Time to become fully vested and exercisable. Prior to the Closing Date, the Company shall (i) cancel,
immediately prior to the Effective Time, each then-outstanding Company Stock
Option (provided that, if required under the Company Stock Plan and/or any
Company Stock Option, the Company shall obtain from the holder of such Company
Stock Option any consent, in writing, required to effect such cancellation) in
exchange for an amount in cash (less any applicable withholding required by
Law) payable at or as soon as practicable after the Effective Time, equal to
the product of (A) the total number of shares of Company Stock underlying
such Company Stock Option and (B) the excess, if any, of the Merger
Consideration over the per share exercise price of such Company Stock Option,
and (ii) make any amendments to the Company Stock Plans that may be
necessary or desirable to implement the foregoing.
(b) For
purposes of this Agreement,
Company Stock Option
means any option or
right to purchase Company Stock granted under one or more of the Company Stock
Plans.
Company Stock Plans
mean the Company 1993 Stock Option Plan, as
amended; the Company 1994 Non-Employee Director Stock Option Plan, as amended;
the 2003 Stock Option Plan, as amended; and the 2004 Non-Employee Director
Stock Option Plan.
ARTICLE
IV
REPRESENTATIONS
AND WARRANTIES
Section 4.01
Representations and Warranties of
the Company
. Except (i) as
disclosed in, and clearly apparent from, the Company SEC Documents filed by the
Company and publicly available prior to the date of this Agreement (
Filed
Company SEC Documents
) and only as and to the extent disclosed therein
(other than any forward-looking disclosures set forth in any risk factor
section, any disclosures in any section relating to forward-looking statements
and any other disclosures included therein to the extent they are primarily
predictive, cautionary or forward-looking in nature, and provided that, in no
event shall any disclosure in any Filed Company SEC Documents qualify or limit
the representations and warranties of the Company set forth in Sections 4.01(c)
or (d)), or (ii) as to any other information set forth in Section 4.01
that the Chief Executive Officer of the Company knows, or reasonably should
know in the performance of his duties as the Chief Executive Officer of the
Company, is not true, complete or correct, the Company represents and warrants
to Parent and Merger Sub as follows:
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(a)
Organization, Standing and Corporate Power
. The Company and each of its Subsidiaries is
validly existing under the Laws of the jurisdiction of its incorporation or
formation, as the case may be. The
Company and each of its Subsidiaries has all requisite corporate, partnership,
limited liability company or similar power and authority and possesses all
governmental licenses, permits, authorizations and approvals necessary to
enable it to use its corporate or other name and to own, lease or otherwise
hold and operate its properties and other assets and to carry on its business
as currently conducted, except where the failure to have such power, authority,
licenses, permits, authorizations and approvals would not have a Material
Adverse Effect. The Company and each of
its Subsidiaries is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the nature of its business or the
ownership, leasing or operation of its properties makes such qualification,
licensing or good standing necessary, other than in such other jurisdictions
where the failure to be so qualified, licensed or in good standing has not had
and would not have a Material Adverse Effect.
The Company has made available to Parent, prior to the execution of this
Agreement, true, complete and accurate copies of the Companys certificate of
incorporation (as amended, the
Company Charter
) and bylaws (as
amended, the
Company Bylaws
), and the comparable organizational
documents of each of its Subsidiaries, in each case as amended to, and in
effect on, the date of this Agreement.
(b)
Subsidiaries
. All of
the issued and outstanding capital stock of, or other equity interests in, each
Subsidiary of the Company have been duly authorized, validly issued and are
fully paid and nonassessable and are directly or indirectly owned by the
Company, free and clear of all pledges, liens, charges, encumbrances or
security interests of any kind or nature whatsoever (collectively,
Liens
),
other than Liens imposed by or arising under applicable Law or which are not
material, and free of any restriction on the right to vote, sell or otherwise
dispose of such capital stock or other equity interests. Except as set forth in the Filed Company SEC
Documents and except for the capital stock of, or voting securities or equity
interests in, its Subsidiaries, the Company does not own, directly or indirectly,
as of the date of this Agreement, any capital stock of, or other voting
securities or equity interests in, any corporation, partnership, joint venture,
association or other entity, or any options, warrants, rights or securities
convertible, exchangeable or exercisable therefor. There are no bonds, debentures, notes or
other indebtedness of any of the Companys Subsidiaries having the right to
vote (or convertible into, or exchangeable for, securities having the right to
vote) on any matters upon which such Subsidiaries equityholders may vote. Except as set forth in the Filed Company SEC
Documents and except for capital stock held by the Company or a wholly-owned
Subsidiary of the Company, (i) there are not issued, reserved for issuance
or outstanding (A) any shares of capital stock or other voting securities
or equity interests of any Subsidiary of the Company, (B) any securities
of any Subsidiary of the Company convertible into or exchangeable or
exercisable for shares of capital stock or other voting securities or equity
interests of such Subsidiary, or (C) any warrants, calls, options or other
rights to acquire, and no obligation to issue, any capital stock, voting
securities, equity interests or securities convertible into or exchangeable or
exercisable for capital stock or voting securities of any Subsidiary of the
Company, and (ii) there are not any outstanding obligations to repurchase,
redeem or otherwise acquire any such securities or to issue, deliver or sell,
or cause to be issued, delivered or sold, any such securities. Neither the Company
nor any of its Subsidiaries is a party to any voting Contract with respect to
the voting of such securities. There are
no outstanding obligations to repurchase, redeem or otherwise
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acquire any such outstanding securities or to issue, deliver or sell,
or cause to be issued, delivered or sold, any such securities.
(c)
Capital Structure
.
The authorized capital stock of the Company consists of 20,000,000
shares of Class A Stock, par value $0.01 per share, 3,000,000 shares of Class B
Stock, par value $.01 per share, and 1,000,000 shares of preferred stock, par
value $.01 per share (the
Preferred Stock
). At the close of business on June 15,
2009 (the
Capitalization Date
), (i) 9,083,065 shares of Class A
Stock were issued and outstanding, (ii) 400,018 shares of Class B
Stock were issued and outstanding, (iii) 1,683,000 shares of Class A
Stock were subject to outstanding Company Stock Options with a weighted average
exercise price of $1.62 per share, and (iv) no shares of Preferred Stock
were issued or outstanding. Except as
set forth above, at the close of business on the Capitalization Date, no shares
of capital stock or other voting securities or equity interests of the Company
were issued, reserved for issuance (other than with respect to such shares
reserved for issuance upon the exercise of Company Stock Options) or
outstanding. There are no outstanding
stock appreciation rights, phantom stock rights, restricted stock units,
performance units, rights to receive shares of Company Stock on a deferred
basis or other rights (other than Company Stock Options) that are linked to the
value of Company Stock (collectively,
Company Stock-Based Awards
). The Company has provided or made available to
Parent a true and complete list, as of the date of this Agreement, of each
outstanding Company Stock Option and the exercise price thereof. All Company
Stock Options are issued under the Company Stock Plans or other award
agreements, true and correct copies of which were provided or made available to
Parent prior to the date of this Agreement.
All outstanding shares of capital stock of the Company are, and all
shares which may be issued pursuant to the Company Stock Options will be, when
issued in accordance with the terms thereof, duly authorized, validly issued,
fully paid and nonassessable and not subject to preemptive rights. There are no bonds, debentures, notes or
other indebtedness of the Company having the right to vote (or convertible
into, or exchangeable for, securities having the right to vote) on any matters
on which stockholders of the Company may vote.
Except as set forth above in this Section 4.01(c) and except for
issuances of shares of Company Stock pursuant to the exercise of Company Stock
Options, (A) there are not issued, reserved for issuance or outstanding (1) any
shares of capital stock or other voting securities or equity interests of the
Company, (2) any securities of the Company convertible into or
exchangeable or exercisable for shares of capital stock or other voting
securities or equity interests of the Company, with the exception of the Class B
Stock that can be converted into Class A Stock on the holders request at
any time, (3) any warrants, calls, options or other rights to acquire from
the Company, and no obligation of the Company to issue, any capital stock,
voting securities, equity interests or securities convertible into or
exchangeable or exercisable for capital stock or voting securities of the
Company, or (4) any Company Stock-Based Awards, and (B) there are not
any outstanding obligations of the Company to repurchase, redeem or otherwise
acquire any such shares of capital stock, equity interests or other securities
or to register, issue, deliver or sell, or cause to be issued, delivered or
sold, any such shares of capital stock, equity interests or other
securities. Neither the Company nor any
of its Subsidiaries is a party to any voting Contract with respect to the
voting of any such securities.
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(d)
Authority; Noncontravention
.
(i) The
Company has all requisite corporate power and authority to execute and deliver
this Agreement and, subject to receipt of the Stockholder Approval and the
governmental filings and other matters referred to in the last sentence of this
Section 4.01(d), to perform its obligations under this Agreement and to
consummate the Merger and the other transactions contemplated by this
Agreement. The execution, delivery and
performance of this Agreement by the Company and the consummation by the
Company of the Merger and the other transactions contemplated by this Agreement
have been duly authorized by all necessary corporate action on the part of the
Company and no other corporate proceedings on the part of the Company are
necessary to authorize this Agreement or to consummate the Merger and the other
transactions contemplated by this Agreement, subject, in the case of the
consummation of the Merger, to the obtaining of the Stockholder Approval. This Agreement has been duly executed and
delivered by the Company and, assuming the due authorization, execution and
delivery by Parent and Merger Sub, constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except that such enforceability (A) may be limited by
bankruptcy, insolvency, moratorium or other similar laws affecting or relating
to the enforcement of creditors rights generally, and (B) is subject to
general principles of equity.
(ii) Upon
the recommendation of the Special Committee, the board of directors of the
Company (the
Company Board
), at a meeting duly called and held, duly
adopted resolutions (A) approving and declaring advisable this Agreement,
the Merger and the other transactions contemplated by this Agreement, and (B) recommending
that the Stockholders adopt this Agreement and approve the Merger, which
resolutions, as of the date of this Agreement, have not been subsequently
rescinded, modified or withdrawn in any way (the
Company Board
Recommendation
). The unaffiliated
members of the Company Board unanimously approved the Merger as contemplated by
Section 11.7 of the Company By-Laws.
(iii) The
execution, delivery and performance of this Agreement by the Company do not,
and the consummation by the Company of the Merger and the other transactions
contemplated by this Agreement and compliance by the Company with the
provisions of this Agreement will not, conflict with, or result in any
violation or breach of, or default (with or without notice or lapse of time, or
both) under, require consent under, or give rise to a right of, or result in,
termination, cancellation, modification or acceleration of any obligation or to
the loss of a benefit under, or result in the creation of any Lien in or upon
any of the properties or other assets of the Company or any of its Subsidiaries
under, (A) subject to the obtaining of the Stockholder Approval, the
Company Charter or the Company Bylaws or the comparable organizational
documents of any of the Companys Subsidiaries, (B) subject to obtaining
the consent of Tajima Industries, Ltd. (
Tajima
) to the change of
control that would result from the Merger, any loan or credit agreement, bond,
debenture, note, mortgage, indenture, lease, supply agreement, license
agreement, development agreement or other contract, agreement, obligation,
commitment or instrument, whether written or oral, that is intended by the
Company or any of its Subsidiaries to be legally binding (each, including all
amendments thereto, a
Contract
) to which the Company or any of its
Subsidiaries is a party or any of their respective properties or other assets
are subject, or (C) subject to the obtaining of the Stockholder Approval
and the governmental filings and other matters referred to in the following
sentence, any (1) federal, state, local, provincial or foreign statute,
law, ordinance, rule or regulation of a Governmental Entity (each, a
Law
)
applicable to the Company or any of its Subsidiaries or
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their respective properties or other assets, or (2) order, writ,
injunction, decree, judgment or stipulation (each, an
Order
)
applicable to the Company or any of its Subsidiaries or their respective
properties or other assets, other than, in the case of clauses (B) and (C) above,
any such conflicts, violations, breaches, defaults, consents, rights of
termination, cancellation, modification or acceleration, losses or Liens that
would not have a Material Adverse Effect.
No consent, approval, order or authorization of, action by or in respect
of, or registration, declaration, notice to or filing with, any federal, state,
local or foreign government, any court, administrative, regulatory or other
governmental agency, commission or authority or any organized securities
exchange (each, a
Governmental Entity
) is required by or with respect
to the Company or any of its Subsidiaries in connection with the execution and
delivery of this Agreement by the Company or the consummation of the Merger or
the other transactions contemplated by this Agreement, except for (w) the
filing with the Securities and Exchange Commission (the
SEC
) of (1) a
proxy statement relating to the adoption by the Stockholders of this Agreement
(as amended or supplemented from time to time, the
Proxy Statement
)
and a transaction statement on Schedule 13E-3 (as amended or supplemented from
time to time, the
Schedule 13E-3
), and (2) such other filings or
reports under the Securities Exchange Act of 1934, as amended (including the rules and
regulations promulgated thereunder, the
Exchange Act
), as may be
required in connection with this Agreement and the Merger and the other
transactions contemplated by this Agreement, (x) the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware and
appropriate documents with the relevant authorities of other states in which
the Company or any of its Subsidiaries is qualified to do business, (y) any
filings with and approvals of the Nasdaq Stock Market, and (z) such other
consents, approvals, orders, authorizations, actions, registrations,
declarations, notices and filings the failure of which to be obtained or made,
would not have a Material Adverse Effect.
(e)
Company SEC Documents.
(i) The
Company has filed with or furnished to the SEC, on a timely basis, all reports,
schedules, forms, statements and other documents (including exhibits and other
information incorporated therein) required to be filed or furnished by the
Company since January 1, 2007 (such documents, together with any documents
filed during such period by the Company with the SEC on a voluntary basis on
Current Reports on Form 8-K, the
Company SEC Documents
). As of their respective filing dates, or, if
revised, amended, supplemented or superseded by a later-filed Company SEC
Document filed prior to the date of this Agreement, as of the date of filing of
the last such revision, amendment, supplement or superseding filing, the
Company SEC Documents complied in all material respects with, to the extent in
effect at the time of filing, the requirements of the Securities Act of 1933,
as amended (including the rules and regulations promulgated thereunder,
the
Securities Act
), the Exchange Act and the Sarbanes-Oxley Act of
2002 (including the rules and regulations promulgated thereunder,
SOX
)
applicable to such Company SEC Documents, and none of the Company SEC Documents
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. None of the Company SEC Documents (as revised, amended,
supplemented or superseded by a later-filed Company SEC Document) contains any
untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, which individually or in the
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aggregate would require an amendment, supplement or corrective filing
to such Company SEC Documents. Each of the financial statements (including the
related notes) of the Company included in the Company SEC Documents complied at
the time it was filed in all material respects with the applicable accounting
requirements and the published rules and regulations of the SEC with
respect thereto in effect at the time of filing, had been prepared in
accordance with generally accepted accounting principles in the United States (
GAAP
)
(except as otherwise noted therein and, in the case of unaudited statements, as
permitted by the rules and regulations of the SEC) applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto) and fairly presented in all material respects the consolidated
financial position of the Company and its consolidated Subsidiaries as of the
dates thereof and the consolidated results of their operations and cash flows
for the periods then ended (subject, in the case of unaudited statements, to
normal year-end audit adjustments). Neither the Company nor any of its
Subsidiaries has any liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) other than (A) liabilities or
obligations reflected or reserved against on the balance sheet of the Company
and its Subsidiaries as of March 31, 2009 included in the Filed Company
SEC Documents (including the notes thereto), (B) liabilities or
obligations incurred after March 31, 2009 in the ordinary course of
business, or (C) liabilities or obligations which would not have a
Material Adverse Effect. None of the Subsidiaries of the Company are, or have
at any time been, subject to the reporting requirements of Section 13(a) or
15(d) of the Exchange Act.
(ii) As
of the date of this Agreement, (A) there are no outstanding or unresolved
comments in comment letters received from the SEC staff with respect to the
Company SEC Documents, and (B) to the Knowledge of the Company, none of
the Company SEC Documents is the subject of ongoing SEC review, outstanding SEC
comment or outstanding SEC investigation.
(f)
Voting Requirements
. Assuming the accuracy of the
representations and warranties of the Parent and Merger Sub in Section 4.02,
the only vote of Stockholders required to approve this Agreement and the Merger
is the affirmative vote of holders of at least a majority of the outstanding
shares of Company Stock at the Stockholders Meeting or any adjournment or
postponement thereof (the
Stockholder Approval
).
(g)
State Takeover Laws
. The Company Board, upon the
recommendation of the Special Committee, has approved this Agreement, the terms
of this Agreement and the consummation of the Merger and the other transactions
contemplated by this Agreement, and such approval represents all the actions
necessary to render inapplicable to this Agreement and the Merger and the other
transactions contemplated by this Agreement, the restrictions on business
combinations set forth in Section 203 of the DGCL, to the extent such
restrictions would otherwise be applicable to this Agreement or the Merger and
the other transactions contemplated by this Agreement. No other state takeover
statute or similar statute or regulation applies to this Agreement or the
Merger or the other transactions contemplated by this Agreement.
(h)
Brokers and Other Advisors
. No broker, investment banker,
financial advisor or other Person (other than Burnham Securities, Inc. for
its opinion referenced in Section 4.01(i) below, the fees and expenses of
which will be paid by the Company), is entitled to any
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brokers, finders or financial advisors fees or commissions in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of the Company. The
Company has delivered to Parent true, complete and accurate copies of all
written agreements entered into on or prior to the date of this Agreement under
which any such fees or expenses are payable and all indemnification and
contribution related to the engagement of the Persons to whom such fees are
payable.
(i)
Opinion of Financial Advisors
. On July 1, 2009, the Special
Committee received the opinion of Burnham Securities, Inc. to the effect
that, as of such date, the Merger Consideration is fair, from a financial point
of view, to the holders of shares of Company Stock, other than Parent, Merger
Sub and Paul Gallagher.
(j)
Schedule 13E-3/Proxy Statement;
Other Information
.
None of the information provided by the Company for inclusion in the Schedule
13E-3 or the Proxy Statement (the
Company Information
) will, in the
case of the Schedule 13E-3, as of the date of its filing and of each amendment
or supplement thereto and, in the case of the Proxy Statement, (i) at the
time of the mailing of the Proxy Statement or any amendments or supplements
thereto, and (ii) at the time of the Stockholders Meeting, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
Notwithstanding the foregoing, the Company makes no representation or warranty
with respect to any information that is contained or incorporated by reference
in the Schedule 13E-3 or the Proxy Statement other than with respect to the
Company Information as forth in this Section 4.01(j). The Proxy Statement
will comply in all material respects with the requirements of the Exchange Act.
Section 4.02
Representations and Warranties of Parent
and Merger Sub
. Parent and Merger Sub represent and warrant
to the Company as follows:
(a)
Organization, Standing and
Corporate Power.
Each of Parent and Merger Sub is validly existing under the laws of the State
of Delaware. Each of Parent and Merger
Sub has made available to the Company true, complete and accurate copies of its
respective certificate of incorporation and bylaws. Each of Parent and Merger Sub has the
requisite corporate power and authority to own, operate or lease its respective
properties and to carry on its respective business as it is now being conducted,
and is duly qualified or licensed to do business, and is in good standing, in
each jurisdiction in which the nature of its respective business or the
properties owned, operated or leased by it makes such qualification, licensing
or good standing necessary, except where the failure to have such power,
authority or to be so qualified, licensed or in good standing, would not have a
Parent Material Adverse Effect.
(b)
Authority; Noncontravention.
(i) Each
of Parent and Merger Sub has all requisite power and authority to execute and
deliver this Agreement, to perform its obligations under this Agreement and to
consummate the transactions contemplated by this Agreement. The execution, delivery and performance of
this Agreement by Parent and Merger Sub and the consummation by Parent and
Merger Sub of the transactions contemplated by this Agreement have been duly
authorized
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by all necessary entity action on the part of Parent and Merger Sub and
no other proceedings on the part of Parent or Merger Sub (other than approval
by Parent as the sole stockholder of Merger Sub, such approval to occur
immediately after the execution of this Agreement) are necessary to authorize
this Agreement or to consummate the Merger and the other transactions
contemplated by this Agreement. This
Agreement has been duly executed and delivered by Parent and Merger Sub and,
assuming the due authorization, execution and delivery of this Agreement by the
Company, constitutes the legal, valid and binding obligation of Parent and
Merger Sub, enforceable against Parent and Merger Sub in accordance with its
terms, except that such enforceability (A) may be limited by bankruptcy,
insolvency, moratorium or other similar Laws affecting or relating to the
enforcement of creditors rights generally, and (B) is subject to general
principles of equity.
(ii) The
execution, delivery and performance of this Agreement by Parent and Merger Sub
do not, and the consummation by Parent and Merger Sub of transactions
contemplated by this Agreement and compliance by Parent and Merger Sub with the
provisions of this Agreement will not, conflict with, or result in any
violation or breach of, or default (with or without notice or lapse of time, or
both) under, require consent under, or give rise to a right of, or result in,
termination, cancellation, modification or acceleration of any obligation or to
the loss of a benefit under, or result in the creation of any Lien in or upon
any of the properties or other assets of Parent or Merger Sub under (A) the
certificate of incorporation and bylaws of Parent or Merger Sub, (B) any
Contract to which Parent or Merger Sub is a party or any of their respective
properties or other assets are subject (including any credit facilities or
agreements and any other indebtedness arrangements), or (C) subject to the
governmental filings and other matters referred to in the following sentence,
any Laws and Orders applicable to Parent or Merger Sub or their respective
properties or other assets, other than, in the case of the immediately
preceding clauses (B) and (C), any such conflicts, violations, breaches,
defaults, consents, rights of termination, cancellation, modification or acceleration,
losses or Liens that would not have a Parent Material Adverse Effect. No consent, approval, order or authorization
of, action by or in respect of, or registration, declaration, notice to or
filing with, any Governmental Entity is required by or with respect to Parent
or Merger Sub in connection with the execution and delivery of this Agreement
by Parent or Merger Sub or the consummation by Parent and Merger Sub of the
transactions contemplated by this Agreement, except for (x) the filing (i) an
amendment to the Schedule 13D of Parent and (ii) the Schedule 13E-3 with
the SEC, (y) the filing of the Certificate of Merger with the Secretary of
State of the State of Delaware and appropriate documents with the relevant
authorities of the other states in which Parent and Merger Sub are qualified to
do business, and (z) such other consents, approvals, orders,
authorizations, actions, registrations, declarations, notices and filings the
failure of which to be obtained or made would not have a Parent Material
Adverse Effect.
(c)
Capital Structure; Operations.
The authorized capital stock of Merger Sub
consists of 1,000 shares of common stock, par value $0.01 per share, all of
which are issued and outstanding and owned by Parent. The authorized capital stock of Parent
consists of 7,500 shares of common stock, par value $0.01 per share; and 2,500
shares of preferred stock, par value $0.01 per share. Parent and Merger Sub were formed solely for
the purpose of engaging in the Merger and the other transactions contemplated
by this Agreement and have not engaged in any business activities or conducted
any operations other than in connection with the transactions contemplated by
this Agreement.
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(d)
Financing.
Parent has
delivered to the Company a true and complete copy, as of the date of this
Agreement, of an executed commitment letter to provide debt financing to Parent
(or Merger Sub) in an aggregate amount set forth therein, subject to the terms
and conditions thereof (the
Financing Commitment
), a portion of the
proceeds of which shall be used to consummate the Merger and the other
transactions contemplated by this Agreement (the
Financing
). As of the date of this Agreement, the
Financing Commitment, in the form delivered to the Company, (i) has not
been amended or modified, withdrawn or rescinded in any respect, (ii) represents
the entire agreement between the parties, and (iii) is in full force and
effect and is a legal, valid and binding obligation of Parent and, to the
Knowledge of Parent, the other parties thereto.
As of the date of this Agreement, subject to the accuracy of the representations
and warranties of the Company set forth in Section 4.01, Parent has no
reason to believe that it will be unable to satisfy on a timely basis any term
or condition to be satisfied by it contained in the Financing Commitment. Subject to the accuracy of the representations
and warranties of the Company set forth in Section 4.01(c), the proceeds
from the Financing, when funded in accordance with the Financing Commitment and
together with available funds at the Company, are sufficient for the
satisfaction of all of Parents obligations under this Agreement, including the
payment of the aggregate Merger Consideration and to pay all related fees and
expenses. Notwithstanding anything in
this Agreement to the contrary, the Financing Commitment may be superseded at
the option of Parent after the date of this Agreement but prior to the
Effective Time by a New Financing Commitment in accordance with Section 6.07. In such event, the term
Financing
Commitment
as used in this Agreement shall be deemed to include a New
Financing Commitment to the extent then in effect.
(e)
Brokers.
No broker,
investment banker or financial advisor or other Person is entitled to any
brokers, finders, financial advisors fees or commissions in connection with
the transactions contemplated by this Agreement based upon arrangements made by
or on behalf of Parent or Merger Sub.
(f)
Schedule 13E-3/Proxy Statement; Other Information.
None of the information provided by Parent or
Merger Sub with respect to itself for inclusion in the Schedule 13E-3 or the
Proxy Statement (the
Parent Information
) will, in the case of the
Schedule 13E-3, as of the date of its filing and of each amendment or
supplement thereto and, in the case of the Proxy Statement, (i) at the
time of the mailing of the Proxy Statement or any amendments or supplements
thereto and (ii) at the time of the Stockholders Meeting, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. Notwithstanding the foregoing, Parent and
Merger Sub make no representation or warranty with respect to any information
that is contained or incorporated by reference in the Proxy Statement or the
Schedule 13E-3 other than with respect to the Parent Information as set forth
in this Section 4.02(f).
(g)
Absence of Arrangements with Management.
Except for this Agreement, as of the date of
this Agreement, there are no contracts, undertakings, commitments, agreements
or obligations or understandings between Parent, any of its Affiliates or any
Stockholder relating to the transactions contemplated by this Agreement or the
operations of the Company after the Effective Time.
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(h)
Access to Information and Investigation by Parent.
Parent and its Representatives have received
access to such books and records, facilities, equipment, contracts and other
assets of the Company which it and its Representatives, as of the date hereof,
have requested to review, and that it and its Representatives have had full
opportunity to meet with officers and other Representatives of the Company for
the purpose of investigating and obtaining information regarding the Companys
business, operations and legal affairs. Parent has conducted its own
independent investigation, review and analysis of the business, operations,
assets, liabilities, results of operations, financial condition, and prospects
of the Company and its Subsidiaries, which investigation, review and analysis
was done by Parent and, to the extent Parent deemed appropriate, by Parents
Representatives. Without limiting the generality of the foregoing, none of the
Company or its Subsidiaries nor any of their respective Representatives or any
other person has made a representation or warranty to Parent with respect to (i) any
projections, estimates or budgets for the Company or its Subsidiaries, (ii) any
material, documents or information relating to the Company or its Subsidiaries
made available to Parent, or (iii) in connection with any materials
prepared for or in connection with Parents arrangement of the Financing or the
Financing Commitment, except as expressly and specifically covered by a
representation or warranty set forth in Section 4.01.
(i)
Solvency.
Assuming
the satisfaction of the conditions to the obligation of Parent to consummate
the Merger, or the waiver of such conditions, and the accuracy of the
representations and warranties of the Company set forth in Section 4.01
hereof, then immediately after giving effect to the transactions contemplated
by this Agreement, the Surviving Corporation will be Solvent. For purposes of
this Section 4.02, the term
Solvent
with respect to the Surviving
Corporation means that, as of any date of determination, (i) the amount of
the fair saleable value of the assets of the Surviving Corporation and its Subsidiaries,
taken as a whole, exceeds, as of such date, the sum of (A) the value of
all liabilities of the Surviving Corporation and its Subsidiaries, taken as a
whole, including contingent liabilities valued at the amount that is reasonably
expected to become due, as of such date, as such quoted terms are generally
determined in accordance with the applicable federal laws governing
determinations of the solvency of debtors, and (B) the amount that will be
required to pay the liabilities that are reasonably expected to become due of
the Surviving Corporation and its Subsidiaries, taken as a whole, on its
existing debts (including contingent liabilities) as such debts become absolute
and matured, (ii) the Surviving Corporation and its Subsidiaries, taken as
a whole, will not have, as of such date, an unreasonably small amount of
capital for the operation of their businesses in which it is engaged or
proposed to be engaged by Parent following such date, and (iii) the
Surviving Corporation and its Subsidiaries, taken as a whole, will be able to
pay its liabilities, including contingent and other liabilities, as they
mature. For purposes of this definition, not have an unreasonably small amount
of capital for the operation of the businesses in which it is engaged or
proposed to be engaged and able to pay its liabilities, including contingent
and other liabilities, as they mature means that the Surviving Corporation
will be able to generate enough cash from operations, asset dispositions or
refinancing, or a combination thereof, to meet its obligations as they become
due.
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ARTICLE
V
COVENANTS
RELATING TO CONDUCT OF BUSINESS; NO SOLICITATION
Section 5.01
Conduct of Business by the Company
.
(a)
During the period from the date of this
Agreement to the earlier of the termination of this Agreement in accordance
with the provisions of Section 8.01 or the Effective Time (the
Interim
Period
), except as contemplated by this Agreement or as consented to in
writing in advance by Parent, the Company shall, and shall cause each of its
Subsidiaries to, carry on its business in all material respects in the ordinary
course and, to the extent consistent therewith, use all commercially reasonable
efforts to preserve intact its current business organizations, to keep
available the services of its current officers, key employees and consultants
and to preserve its relationships with customers, suppliers, licensors,
licensees, distributors and others having business dealings with it. In addition to and without limiting the
generality of the foregoing, during the Interim Period from the date of this
Agreement to the Effective Time, except as contemplated by this Agreement, the
Company shall not, and shall not permit any of its Subsidiaries to, without
Parents prior written consent:
(i) (A) declare,
set aside or pay any dividends on, or make any other distributions (whether in
cash, stock or property) in respect of, any of its capital stock, other than
dividends or distributions by a direct or indirect Subsidiary wholly owned by
the Company to the Company or another directly or indirectly wholly owned
Subsidiary of the Company in the ordinary course of business consistent with
past practice, (B) split, combine or reclassify any of its capital stock
or issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock, or (C) purchase,
redeem or otherwise acquire any shares of its capital stock or any other
securities thereof or any rights, warrants or options to acquire any such
shares or other securities;
(ii) issue,
deliver, sell, grant, pledge or otherwise encumber or subject to any Lien any
shares of its capital stock, any other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities, or any phantom stock, phantom
stock rights, stock appreciation rights or stock based performance units,
including pursuant to Contracts as in effect on the date of this Agreement
(other than the issuance of shares of Company Stock upon the exercise of
Company Stock Options in accordance with their terms on the date of this
Agreement);
(iii) amend
or waive any provision in the Company Charter or the Company Bylaws or other
comparable charter or organizational documents of any of the Companys
Subsidiaries, except as may be required by applicable Law or the rules and
regulations of the SEC or the Nasdaq Stock Market, or, in the case of the
Company, enter into any agreement with any of its stockholders in their
capacity as such;
(iv) directly
or indirectly acquire, (A) by merging or consolidating with, by purchasing
a substantial portion of the assets of, by making an investment in or capital
contribution to, or by any other manner, any Person or division, business or
equity interest of any Person, or (B) any material asset or assets, except
for capital expenditures;
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(v) (A) incur,
create, assume or otherwise become liable for, any indebtedness for borrowed
money or guarantee any such indebtedness of another Person, issue or sell any
debt securities or calls, options, warrants or other rights to acquire any debt
securities of the Company or any of its Subsidiaries, guarantee any debt
securities of another Person, enter into any keep well or other Contract to
maintain any financial statement condition of another Person or enter into any
arrangement having the economic effect of any of the foregoing (other than
borrowings under the Companys existing loan facilities in the ordinary course
of business), or (B) make any loans or advances to any other Person,
except for loans, advances, capital contributions or investments between any
Subsidiary of the Company and the Company or another Subsidiary of the Company
in the ordinary course of business consistent with past practice;
(vi) except
as required by Law or any judgment, (A) pay, discharge, settle or satisfy
any material claims, liabilities, obligations or litigation (absolute, accrued,
asserted or unasserted, contingent or otherwise), other than the payment,
discharge, settlement or satisfaction in the ordinary course of business or in
accordance with their terms, of liabilities disclosed, reflected or reserved
against in the most recent financial statements (or the notes thereto) of the
Company included in the Filed Company SEC Documents (for amounts not in excess
of such reserves), or (B) cancel any material indebtedness;
(vii) except
(x) as required to ensure that any Benefit Plan is not then out of
compliance with applicable Law, or (y) to comply with any Benefit Plan or
Contract entered into prior to the date of this Agreement, (A) adopt,
enter into, terminate or amend (1) any collective bargaining Contract or
Benefit Plan or (2) any other Contract, plan or policy involving the
Company or any of its Subsidiaries as applied to directors, executive officers
and sales managers of the Company (
Key Persons
), or (B) increase
in any manner the compensation, bonus or fringe or other benefits of, or pay
any discretionary bonus of any kind or amount whatsoever to, any current or
former director, officer, employee or consultant, except in the ordinary course
of business consistent with past practice to employees of the Company or its
Subsidiaries other than Key Persons.
(viii) adopt
or enter into a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of such
entity (other than among wholly-owned Subsidiaries of the Company); or
(ix) authorize
any of, or commit, resolve, propose or agree to take any of, the foregoing
actions.
(b)
Advice of Changes; Filings.
The Company, on the one hand, and Parent and Merger Sub, on the other
hand, shall promptly advise the other party in writing if (i) any
representation, warranty, condition or agreement made by it contained in this
Agreement becomes untrue or inaccurate in a manner that would result in the
failure of any one more of the conditions set forth in Section 7.02(a) or
7.02(b) or Section 7.03(a) or 7.03(b), and (ii) the Company or Parent
or Merger Sub fails to comply with or satisfy in any material respect any
covenant, condition or agreement to be complied with or satisfied by it under
this Agreement; provided, however, that no such notification shall affect the
representations, warranties,
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covenants or agreements of the parties (or remedies with respect
thereto) or the conditions precedent to the obligations of the parties under
this Agreement.
(c)
Confidential Portions of
Governmental Entity Filings.
The Company
and Parent shall, to the extent permitted by Law, promptly provide the other
with copies of all filings made by such party with any Governmental Entity in
connection with this Agreement and the transactions contemplated by this
Agreement, other than the portions of such filings that include confidential or
proprietary information not directly related to the transactions contemplated
by this Agreement.
(d)
Actions Taken at Direction of
CEO.
Notwithstanding any other provision of this
Agreement to the contrary, the Company shall not be deemed to be in breach of
any agreement or obligation hereunder including, without limitation, those set
forth in Articles V and VI hereof, if the alleged breach is the proximate
result of action taken by the Company at the direction of the Chief Executive
Officer without the approval or direction of the Company Board (or an
authorized committee thereof).
Section 5.02
No Solicitation
.
(a)
Certain Definitions.
The following terms in this Section 5.02 have the meanings ascribed
thereto:
Acceptable
Confidentiality Agreement
means a confidentiality agreement approved by
the Special Committee, provided that such confidentiality agreement shall not
prohibit compliance with Section 5.02(f)(i).
Takeover
Proposal
means any inquiry, proposal or offer (including, without
limitation, a letter of intent) from any Person or group of Persons (other than
Parent and its Affiliates) relating to, or that is reasonably likely to lead
to, any direct or indirect acquisition or purchase, in one transaction or a
series of related transactions, of assets (including equity securities of any
Subsidiary of the Company) or businesses that constitute 25% or more of the
revenues, net income or assets of the Company and its Subsidiaries (taken as a
whole), or 25% or more of any class of equity securities of the Company or any
of its Subsidiaries, any tender offer or exchange offer that if consummated would
result in any Person or group of Persons beneficially owning 25% or more of any
class of equity securities of the Company or any of its Subsidiaries, or any
merger, consolidation, business combination, recapitalization, liquidation,
dissolution, joint venture, binding share exchange or similar transaction
involving the Company or any of its Subsidiaries pursuant to which any Person
or group of Persons or the shareholders of any Person or group of Persons would
own 25% or more of any class of equity securities of the Company or any of its
Subsidiaries, in each case other than the transactions contemplated by this
Agreement.
Superior
Proposal
means any written Takeover Proposal that, if consummated, would
result in such Person or group of Persons (or their equityholders) owning,
directly or indirectly, more than 50% of the shares of Company Stock then
outstanding (or of the shares of the surviving entity in a merger or the direct
or indirect parent company of the surviving entity in a merger) or a majority
of the assets of the Company and its Subsidiaries (taken as a whole), which the
Special Committee determines in good faith (after consultation with its outside
counsel and
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financial advisor) would, if consummated, be more
favorable to the Stockholders from a financial point of view than the
transactions contemplated by this Agreement (taking into account all the terms
and conditions of such Takeover Proposal and this Agreement, including (x) the
likelihood and timing of consummation of such transaction on the terms set
forth therein (as compared to the terms herein), (y) all appropriate
legal, financial (including the financing terms of such Takeover Proposal),
regulatory and other aspects of such Takeover Proposal, and (z) any
changes to the financial and other terms of this Agreement proposed by Parent
in response to such Takeover Proposal or otherwise).
(b) Notwithstanding
any other provision of this Agreement to the contrary, at any time prior to the
close of business on the 20
th
day following the date of this Agreement (the
Go-Shop
Period
), the Company (acting under the direction of the Special Committee)
and its Subsidiaries and their respective Representatives shall have the right
to, directly or indirectly: (i) initiate, solicit and encourage, whether
publicly or otherwise, Takeover Proposals, (ii) continue or otherwise
participate in any discussions or negotiations regarding any Takeover Proposal,
and (iii) otherwise cooperate with or take any other action to facilitate
any proposal that constitutes, or could reasonably be expected to lead to, a
Takeover Proposal. During the period from the expiration of the Go-Shop Period
to the Effective Time or the date, if any, on which this Agreement is earlier
terminated pursuant to Section 8.01, the Company will not, and will cause
its Subsidiaries not to, and will use its reasonable best efforts to cause the Companys
and its Subsidiaries respective officers, directors, employees and other
Representatives not to, directly or indirectly, (i) initiate or solicit or
knowingly encourage (including by way of providing information), the submission
of any inquiries, proposals or offers or any other efforts or attempts that
constitute or may reasonably be expected to lead to, a Takeover Proposal or (ii) (A) engage
in negotiations or discussions with, or furnish access to its properties, books
and records or provide any information or data to, any Person relating to any
Takeover Proposal, (B) approve, endorse or recommend, or propose publicly
to approve, endorse or recommend, any Takeover Proposal, (C) execute or
enter into any letter of intent, agreement in principle, merger agreement,
acquisition agreement or other similar agreement providing for or relating to
any Takeover Proposal, (D) enter into any agreement or agreement in
principle requiring the Company to abandon, terminate or fail to consummate the
transactions contemplated by this Agreement or breach its obligations under
this Agreement or (E) publicly propose or agree to do any of the
foregoing. Notwithstanding anything in
the preceding sentence to the contrary, the Company may continue to take any of
the actions described in clauses (i) and (ii) of the preceding sentence
from and after the expiration of the Go-Shop Period and prior to obtaining
Stockholder Approval with respect to any party that has made a Takeover
Proposal prior to the end of the Go-Shop Period or with whom the Company is
having ongoing discussions or negotiations as of the expiration of the Go-Shop
Period regarding a possible Takeover Proposal (each such party, an
Excluded
Party
).
(c) Notwithstanding
anything to the contrary contained in Section 5.02(b) and in addition to
the rights of the Company pursuant to the first sentence and last sentence of Section 5.02(b),
if after the expiration of the Go-Shop Period and prior to obtaining
Stockholder Approval (i) the Company receives a Takeover Proposal that the
Special Committee believes in good faith to be bona fide following disclosure
thereof to the full Company Board, (ii) the Special Committee determines
in good faith, after consultation with its financial advisors and outside
counsel, that such Takeover Proposal constitutes or could reasonably be
expected to
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result in a Superior Proposal, and (iii) after consultation with
its counsel, the Special Committee determines in good faith that the failure to
take such action would be inconsistent with its fiduciary duties to the
Stockholders under applicable Law, then the Company (acting under the direction
of the Special Committee) may (A) participate in discussions or
negotiations (including, as a part thereof, making any counterproposal) with
the Person or group of Persons making the Takeover Proposal regarding such
Takeover Proposal, and (B) furnish information with respect to the Company
and its Subsidiaries to the Person or group of Persons making the Takeover
Proposal; provided that the Company (x) will not, and will not allow its
Representatives to, disclose any non-public information concerning the Company
or any of its Subsidiaries to such Person or group of Persons without entering
into an Acceptable Confidentiality Agreement, and (y) will promptly
provide or make available to Parent any non-public information concerning the
Company or its Subsidiaries provided to such other Person or group of Persons
which was not previously provided or made available to Parent.
(d) Within
twenty-four (24) hours following the expiration of the Go-Shop Period, the
Company shall notify Parent in writing of the identity of each person (i) who
is an Excluded Party or (ii) to whom the Company has provided non-public
information and provide a copy of any Takeover Proposal which has been received
by the Company. From and after the expiration of the Go-Shop Period, the Company
will promptly (and in any event within one (1) Business Day) notify Parent of
the receipt by the Company of any Takeover Proposal, which notice shall include
the material terms of and identity of the Person(s) making such Takeover
Proposal. From and after the date of
this Agreement, the Company will keep Parent informed on a current basis of the
status and details of any such Takeover Proposal and of any amendments or
proposed amendments thereto and any developments, discussions and negotiations concerning
such Takeover Proposal, in each case, in any event no later than forty-eight
(48) hours after the occurrence of the applicable amendment, development,
discussion, or negotiation. Without
limiting the foregoing, after the expiration of the Go-Shop Period the Company
shall promptly (within one (1) Business Day) notify Parent orally and in
writing if it determines to begin providing information or to engage in
discussions or negotiations with a Person or group of Persons in connection
with any Takeover Proposal (other than any Excluded Party).
(e) Subject
to compliance with its obligations under Rules 14d-9 or 14e-2 under the
Exchange Act, as applicable, neither the Special Committee nor the Company
Board may (i) approve, endorse or recommend (or publicly propose to
approve, endorse or recommend) any Takeover Proposal or enter into a definitive
agreement with respect to a Takeover Proposal, or (ii) modify or amend (or
publicly propose to modify or amend) in a manner adverse to Parent or withdraw
(or publicly propose to withdraw) the Company Board Recommendation ((i) or
(ii) above being referred to as a
Change in Recommendation
); provided,
however, that Special Committee and Company Board may, at any time prior to
obtaining the Stockholder Approval, make a Change in Recommendation if (i) the
Special Committee determines, in good faith (after consultation with its legal
counsel), that the failure to take such action would be inconsistent with its
fiduciary duties to the stockholders of the Company under applicable Law, or (ii) in
response to a Superior Proposal under the circumstances contemplated in Section 5.02(f).
(f) Notwithstanding
anything to the contrary contained in this Agreement, if, at any time prior to
obtaining the Stockholder Approval, the Company receives a Takeover Proposal
which the Special Committee concludes in good faith constitutes a Superior
Proposal
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after giving effect to all of the adjustments which may be offered by
Parent pursuant to clause (ii) below, the Company Board may (x) effect
a Change in Recommendation and/or (y) terminate this Agreement (in
accordance with Section 8.01(e)) in order to enter into a definitive
agreement with respect to such Superior Proposal, if the Special Committee
determines in good faith, after consultation with its counsel, that failure to
take such action would be inconsistent with its fiduciary duties to the
Stockholders under applicable Law;
provided
,
however
, that the
Company shall not terminate this Agreement pursuant to the foregoing clause
(y), and any purported termination pursuant to the foregoing clause (y) shall
be void and of no force or effect, unless concurrently with such termination
the Company pays the Company Termination Fee payable pursuant to Section 6.05(b);
provided, further, that the Company Board may not effect a Change in
Recommendation pursuant to the foregoing clause (x) or terminate this
Agreement pursuant to the foregoing clause (y) unless:
(i) the
Company shall have provided prior written notice to Parent, at least three (3) calendar
days in advance (the
Notice Period
), of its intention to effect a
Change in Recommendation in response to such Superior Proposal or terminate
this Agreement to enter into a definitive agreement with respect to such
Superior Proposal, which notice shall specify the material terms and conditions
of any such Superior Proposal (including the identity of the Person or group of
Persons making such Superior Proposal), and shall have contemporaneously
provided a copy of the relevant proposed transaction agreements with the Person
or group of Persons making such Superior Proposal and other material documents;
and
(ii) prior
to effecting such Change in Recommendation or terminating this Agreement to
enter into a definitive agreement with respect to such Superior Proposal, the
Company shall, and shall cause its financial and legal advisors to, during the
Notice Period, negotiate with Parent in good faith (to the extent Parent
desires to negotiate) to make such adjustments in the terms and conditions of
this Agreement so that such Takeover Proposal ceases to constitute a Superior
Proposal.
In the
event of any revision to the Superior Proposal, the Company shall be required
to deliver a new written notice to Parent and to comply with the requirements
of this Section 5.02(f) with respect to such new written notice.
(g) Nothing
in this Agreement shall prohibit or restrict the Company Board, in
circumstances not involving a Takeover Proposal, from amending, modifying or
withdrawing the Company Boards recommendation to the extent that the Special
Committee determines in good faith (after consultation with its legal counsel)
that such action is necessary under applicable Law in order for the directors
to comply with their fiduciary duties to the Companys stockholders. The
Company shall give Parent written notice of any such action taken by the
Company Board not later than the Business Day next succeeding the day on which
such action is taken, setting forth in reasonable detail the action taken and
the basis therefor.
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ARTICLE
VI
ADDITIONAL
AGREEMENTS
Section 6.01
Preparation of the Proxy Statement and
Schedule 13E-3; Stockholders Meeting
.
(a) As
soon as reasonably practicable following the date of this Agreement, the Company
shall prepare, and the Company shall file with the SEC, the Proxy
Statement. The Company shall cause the
Proxy Statement to be mailed to the Stockholders as promptly as practicable
after clearance by the SEC. Parent shall
furnish to the Company all information as may be reasonably requested by the
Company in connection with the preparation, filing and distribution of the
Proxy Statement. No filing of, or
amendment or supplement to, the Proxy Statement will be made by the Company
without providing Parent a reasonable opportunity to review and comment
thereon. If at any time prior to the
Effective Time any information relating to the Company or Parent, or any of
their respective Affiliates, directors or officers, should be discovered by the
Company or Parent which should be set forth in an amendment or supplement to
the Proxy Statement, so that such document would not include any misstatement
of a material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they are made,
not misleading, the party which discovers such information shall promptly
notify the other party hereto and an appropriate amendment or supplement
describing such information shall be promptly filed with the SEC and, to the
extent required by Law, disseminated to the stockholders of the Company. The parties shall notify each other promptly
of the receipt of any comments from the SEC or the staff of the SEC and of any
request by the SEC or the staff of the SEC for amendments or supplements to the
Proxy Statement or for additional information and shall supply each other with
copies of all correspondence between it or any of its Representatives, on the
one hand, and the SEC or the staff of the SEC, on the other hand, with respect
to the Proxy Statement or the Merger.
(b) Concurrently
with the filing of the Proxy Statement with the SEC, Parent and its Affiliates
shall prepare and file with the SEC, together with the Company, the Schedule
13E-3. Parent and the Company shall cause the Schedule 13E-3 to comply with the
rules and regulations promulgated by the SEC and respond promptly to any
comments of the SEC or its staff regarding the Schedule 13E-3. Each party agrees to provide the other party
and its counsel with copies of any comments that such party or its counsel may
receive from the staff of the SEC regarding the Schedule 13E-3 promptly after
receipt thereof. The Company shall
promptly furnish to Parent all information concerning the Company and its
executive officers and directors as may reasonably be requested in connection
with the preparation of the Schedule 13E-3.
The Company and its counsel shall be given an opportunity to review and
comment on the Schedule 13E-3 and each supplement, amendment or response to
comments with respect thereto prior to filing with or delivering to the SEC.
(c) The
Company shall use its reasonable best efforts, as soon as practicable following
the date of this Agreement and the receipt of clearance of the Proxy Statement
from the SEC, to establish a record date for, duly call, give notice of,
convene and hold a meeting of the Stockholders (the
Stockholders Meeting
)
for the purpose of obtaining the Stockholder Approval; provided that such date
may be extended to the extent reasonably necessary to permit
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the Company to file and distribute any material amendment to the Proxy
Statement as is required by applicable Law. Subject to Section 5.02, the
Company Board shall recommend to the Stockholders adoption of this Agreement
and the Merger and shall include the Company Board Recommendation in the Proxy
Statement. A Change in Recommendation permitted
by Sections 5.02(e), (f) or (g) will not constitute a breach by the
Company of this Agreement. Without limiting the generality of the foregoing,
but subject to the terms of this Agreement, the Companys obligations pursuant
to the first sentence of this Section 6.01(c) shall not be affected by the
commencement, public proposal, public disclosure or communication to the
Company of any Takeover Proposal (whether or not a Superior Proposal). In
addition, notwithstanding any Change in Recommendation, unless this Agreement
is terminated pursuant to, and in accordance with, Section 8.01, this
Agreement shall be submitted to the Stockholders at the Stockholders Meeting
for the purpose of adopting this Agreement.
Section 6.02
Access to Information; Confidentiality
.
(a) During
the Interim Period, to the extent permitted by applicable Law, in connection
with Parent securing the Financing contemplated by Section 4.02(d), the
Company shall afford to Parent, and to Parents Representatives, and
representatives of the Financing providers with whom Parent has executed the
Financing Commitment, reasonable access during normal business hours and upon
reasonable prior notice to the Company during the period prior to the Effective
Time to all its and its Subsidiaries properties, books, Contracts,
commitments, personnel and records, and, during such period, the Company shall
furnish promptly to Parent (i) a copy of each report, schedule,
registration statement and other document filed by it during such period
pursuant to the requirements of federal or state securities Laws, and (ii) all
other information concerning its and its Subsidiaries business, properties and
personnel as Parent may reasonably request; provided that such access and
inspections shall not unreasonably disrupt the operations of the Company or its
Subsidiaries; and provided further, that the Company shall not be required to
(or to cause any of its Subsidiaries to) so confer, afford such access or
furnish such copies or other information to the extent that doing so would
result in a violation of Law, result in the loss of attorney-client privilege
or violate confidentiality obligations owing to third parties. Without limiting
the foregoing, during the Interim Period, the Company shall (and shall cause its
Affiliates to) cooperate with Parent in all respects in connection with Parent
securing the Financing contemplated by Section 4.02(d).
(b) Except
for disclosures expressly permitted by the terms of this Agreement, Parent
shall hold, and shall cause its accountants, counsel, financial advisors and
other Representatives to hold, all information received from the Company,
directly or indirectly, in confidence and not make any public disclosure
thereof; provided, that the foregoing shall not prevent Parent from disclosing
such information (i) to the extent required by applicable Law or by a
Governmental Entity (including, inter alia, in any Schedule 13D or 13E-3 filing
that Parent is required to make), (ii) to the extent such information is
or becomes generally available to the public other than by disclosure by Parent
or any Affiliate or Representative of Parent, and (iii) as reasonably
necessary in connection with Parent securing the Financing contemplated by Section 4.02(d).
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Section 6.03
Reasonable Best Efforts.
(a)
Upon the terms and subject to the
conditions set forth in this Agreement, each of the parties agrees to use its
reasonable best efforts to take, or cause to be taken, all actions, and to do,
or cause to be done, and to assist and cooperate with the other parties in
doing, all things necessary, proper and advisable to consummate and make
effective, as promptly as practicable, the Merger and the other transactions
contemplated by this Agreement, including using reasonable best efforts to
accomplish the following: (i) that the conditions set forth in Article VII
are satisfied; (ii) the obtaining of all necessary actions or nonactions,
waivers, consents, clearances, and approvals from Governmental Entities and
non-governmental third parties and the making of all necessary registrations,
notices and filings (including filings with Governmental Entities); and (iii) the
obtaining of all necessary consents, approvals or waivers from third parties.
Subject to first having used all reasonable best efforts to negotiate a
resolution of any objections underlying such lawsuits or other legal
proceedings, the Company and Parent shall use reasonable best efforts to defend
and contest any lawsuits or other legal proceedings, whether judicial or
administrative, challenging this Agreement or the consummation of the Merger or
the other transactions contemplated by this Agreement, including seeking to
have any stay, temporary restraining order, or preliminary injunction entered
by any Governmental Entity vacated or reversed.
(b)
The Company and Parent shall cooperate
and consult with each other in connection with the making of all such filings,
notifications and any other material actions pursuant to this Section 6.03,
subject to applicable Law, by permitting counsel for the other party to review
in advance, and consider in good faith the views of the other party in
connection with, any proposed material written communication to any
Governmental Entity and by providing counsel for the other party with copies of
all filings and submissions made by such party and all correspondence between
such party (and its advisors) with any Governmental Entity and any other
information supplied by such party and such partys Affiliates to a
Governmental Entity or received from such a Governmental Entity in connection
with the transactions contemplated by this Agreement; provided, however, that
material may be redacted (x) as necessary to comply with contractual
arrangements, and (y) as necessary to address good faith legal privilege
or confidentiality concerns. Neither
party shall file any such document or take such action if the other party has
reasonably objected (and not withdrawn its objection) to the filing of such
document or the taking of such action on the grounds that such filing or action
would reasonably be expected to either (i) prevent, materially delay or
materially impede the consummation of the Merger or the other transactions
contemplated hereby, or (ii) cause a condition set forth in Article VII
to not be satisfied in a timely manner.
Neither party shall consent to any voluntary extension of any statutory
deadline or waiting period or to any voluntary delay of the consummation of the
transactions contemplated by this Agreement at the behest of any Governmental
Entity without the consent of the other party.
(c)
Each of the Company and Parent will
promptly inform the other party upon receipt of any material communication from
any Governmental Entity regarding any of the transactions contemplated by this
Agreement. If the Company or Parent (or
any of their respective Affiliates) receives a request for additional
information or documentary material from any such Governmental Entity that is
related to the transactions contemplated by this Agreement, then such party
will endeavor in good faith to make, or cause to be made, as soon as reasonably
practicable and after consultation with the other party, an appropriate
response in compliance with such request.
The parties agree not to participate, or to permit their Affiliates to
participate,
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in any substantive meeting or discussion with any Governmental Entity
in connection with the transactions contemplated by this Agreement unless it so
consults with the other party in advance and, to the extent not prohibited by
such Governmental Entity, gives the other party the opportunity to attend and
participate. Each party will advise the
other party promptly of any understandings, undertakings or agreements (oral or
written) which the first party proposes to make or enter into with any
Governmental Entity in connection with the transactions contemplated by this
Agreement. In furtherance and not in
limitation of the foregoing, each party will use all reasonable efforts to
resolve any objections that may be asserted with respect to the transactions
contemplated by this Agreement under any antitrust, competition or trade
regulatory Laws, including (subject to first having used all reasonable efforts
to negotiate a resolution to any such objections) contesting and resisting any
action or proceeding and to have vacated, lifted, reversed or overturned any
decree, judgment, injunction or other Order, whether temporary, preliminary or
permanent, that is in effect and that prohibits, prevents or restricts
consummation of the Merger or the other transactions contemplated by this
Agreement and to have such statute, rule, regulation, decree, judgment,
injunction or other Order repealed, rescinded or made inapplicable so as to
permit consummation of the transactions contemplated by this Agreement.
(d)
Notwithstanding anything herein to the
contrary (including Section 6.03), no party is required to, and the
Company may not, without the prior written consent of Parent, become subject
to, consent or agree to, or otherwise take any action with respect to, any
requirement, condition, limitation, understanding, agreement or Order to sell,
to hold separate or otherwise dispose of, or to conduct, restrict, operate,
invest or otherwise change the assets or business of the Company, Parent, Merger
Sub, or any of their Affiliates in any manner which, individually or in the
aggregate with all other such requirements, conditions, understandings,
agreements and Orders could reasonably be expected to have a Material Adverse
Effect on the combined business, financial condition or results of operations
of Parent, Merger Sub and the Company and its Subsidiaries taken as a
whole. Notwithstanding anything in this
Agreement to the contrary, the Company will, upon the request of Parent, become
subject to, or consent or agree to or otherwise take any action with respect
to, any requirement, condition, understanding, agreement or Order to sell, to
hold separate or otherwise dispose of, or to conduct, restrict, operate, invest
or otherwise change the assets or business of the Company or any of its
Affiliates, so long as such requirement, condition, understanding, agreement or
Order is binding on the Company only in the event that the Closing occurs. Furthermore, without the prior written
consent of the Parent (determined in its sole discretion), in no event shall
the Company or Parent or any of their respective Subsidiaries or Affiliates: (i) pay
any consideration to, amend or enter into any agreement with, any
non-governmental third party to obtain any consent to the Merger or to
otherwise comply with Section 6.03(e); or (ii) agree to the
imposition of limitations on the ability of Parent or any Affiliate of Parent
to hold, or exercise full rights of ownership of, any shares of capital stock
of the Surviving Corporation, including the right to vote such shares on all
matters properly presented to the stockholders of the Surviving Corporation.
(e)
The Company and the Company Board shall (i) use
reasonable best efforts to ensure that no state takeover Law or similar Law is
or becomes applicable to this Agreement, the Merger or any of the other
transactions contemplated by this Agreement, and (ii) if any state
takeover Law or similar Law becomes applicable to this Agreement, the Merger or
any of the other transactions contemplated by this Agreement, use reasonable
best efforts to ensure that the
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Merger and the other transactions contemplated by this Agreement may be
consummated as promptly as practicable on the terms contemplated by this
Agreement and otherwise to minimize the effect of such Law on this Agreement,
the Merger and the other transactions contemplated by this Agreement.
Section 6.04
Indemnification,
Exculpation and Insurance
.
(a)
Parent acknowledges and agrees that the
Surviving Corporation shall by operation of law assume the obligations with
respect to all rights to indemnification and exculpation from liabilities,
including advancement of expenses, for acts or omissions occurring at or prior
to the Effective Time now existing in favor of the current or former directors,
officers, employees or agents of the Company or any of its Subsidiaries to the
same extent as provided in the Companys or any of its Subsidiaries
certificate or articles of incorporation, bylaws or other organizational
documents or any indemnification Contract between such directors, officers,
employees or agents and the Company or any of its Subsidiaries (in each case,
as in effect on the date of this Agreement), without further action, as of the
Effective Time and such obligations shall survive the Merger and shall continue
in full force and effect in accordance with their terms for a period of not
less than six (6) years from the
Effective Time and that all rights to indemnification in respect of any action
pending or asserted or any claim made within such period shall continue until
the disposition of such action or resolution of such claim.
(b)
In the event that the Surviving
Corporation or any of its successors or assigns (i) consolidates with or
merges into any other Person and is not the continuing or surviving corporation
or entity of such consolidation or merger, or (ii) transfers or conveys
all or substantially all of its properties and other assets to any Person,
then, and in each such case, the Surviving Corporation shall cause proper
provision to be made so that the successors and assigns of the Surviving
Corporation shall expressly assume the obligations set forth in this Section 6.04
for a period of not less than six (6) years from the Effective Time.
(c)
For six (6) years after the
Effective Time, the Surviving Corporation shall maintain (directly or
indirectly through the Companys existing insurance programs) in effect
directors and officers liability insurance in respect of acts or omissions
occurring at or prior to the Effective Time, covering each person currently
covered by the directors and officers liability insurance policy maintained
by the Company or its Subsidiaries on terms with respect to such coverage and
amounts comparable to the insurance maintained currently by the Company or its
Subsidiaries, as applicable; provided
that the Surviving Corporation may substitute therefor policies of at least the
same coverage containing terms and conditions which are not less advantageous
to the beneficiaries of the current policies and with carriers having an A.M.
Best key rating of A X or better, provided
that such substitution shall not result in any gaps or lapses in coverage with
respect to matters occurring prior to the Effective Time, and provided, further, that the Surviving
Corporation shall first use its reasonable best efforts to obtain from such
carriers a so-called tail policy providing such coverage and being effective
for the full six (6) year period referred to above, and shall be entitled
to obtain such coverage in annual policies from such carriers only if it is
unable, after exerting such efforts for a reasonable period of time, to obtain
such a tail policy; and provided,
further, that the Surviving Corporation shall not be required to pay an
annual premium in excess of 200% of the last annual premium paid by the Company
prior to the date of this Agreement (or, in the case of a tail policy
obtained pursuant
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to the preceding provision, shall not be required to
pay an aggregate premium therefor in excess of an amount equal to 300% of such
last annual premium) and, if the Surviving Corporation is unable to obtain the
insurance required by this Section 6.04(c), it shall obtain as much
comparable insurance as possible for an annual premium (or an aggregate
premium, as the case may be) equal to such maximum amount.
(d)
The provisions of this Section 6.04 (i) are
intended to be for the benefit of, and will be enforceable by, each indemnified
party, his or her heirs and his or her representatives, and (ii) are in
addition to, and not in substitution for, any other rights to indemnification
or contribution that any such Person may have by Contract or otherwise. It is expressly agreed that the indemnified
parties shall be third party beneficiaries of this Section 6.04.
Section 6.05
Fees
and Expenses
.
(a)
Except as otherwise provided in this Section 6.05,
all fees and expenses incurred in connection with this Agreement, the Merger
and the other transactions contemplated by this Agreement shall be paid by the
party incurring such fees or expenses, whether or not the Merger is
consummated. Parent acknowledges and
agrees that the Surviving Corporation shall promptly pay to the Special
Committee and/or independent members of the Company Board after the Effective
Time, any and all fees and/or expenses reasonably incurred and duly documented
by the Special Committee or such members of the Company Board in connection
with the Merger, provided proper documentation of such fees and/or expenses
satisfactory to the board of directors of the Surviving Corporation has been
presented for examination by the board of directors of the Surviving
Corporation.
(b)
In the event that:
(i)
this Agreement is terminated by the
Company pursuant to Section 8.01(e) or by Parent pursuant to Section 8.01(f);
or
(ii)
(A) a Takeover Proposal shall have
been made to the stockholders of the Company generally or a Takeover Proposal
shall have otherwise become publicly known, disclosed or proposed or any Person
shall have publicly announced an intention (whether or not conditional) to make
a Takeover Proposal, (B) thereafter this Agreement is terminated by either
Parent or the Company pursuant to Section 8.01(b)(i) (provided that,
in the case of a termination by Parent pursuant to Section 8.01(b)(i), at
the time of such termination Parent shall have obtained the Financing on the
terms and conditions set forth in the Financing Commitments) or Section 8.01(b)(ii) or
by Parent pursuant to Section 8.01(c), and (C) within twelve (12)
months after such termination, the Company enters into, or submits to the
stockholders of the Company for adoption, a definitive agreement with respect
to any Takeover Proposal, or consummates the transactions contemplated by any Takeover
Proposal (provided that, for purposes of this Section 6.05(b)(ii), all
references to 25% in the definition of Takeover Proposal shall be deemed to be
50%) which, in each case, need not be the same Takeover Proposal that shall
have been publicly announced or made known at or prior to termination of this
Agreement; then (in the case of the occurrence of either or both of matters
described in Sections 6.05(b)(i) and 6.05(b)(ii)) the Company shall pay
Parent a one-time Company Termination Fee (less any Expenses that may
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previously have been paid or are payable in the circumstances as
provided in Section 6.05(c) below) by transfer of immediately
available funds on the first Business Day following (x) in the case of a
payment required by Section 6.05(b)(i), the date of termination of this
Agreement, and (y) in the case of a payment required by Section 6.05(b)(ii) above,
the date of the consummation of such Takeover Proposal. For purposes of this
Agreement,
Company Termination Fee
means an amount equal to the out of
pocket expenses actually incurred by Parent in connection with the Merger, such
amount not to exceed $300,000 in the aggregate. The Parents right to receive,
and the Companys obligation to pay, the Company Termination Fee pursuant to
this Section 6.05(b) upon the termination of this Agreement by Parent
pursuant to Section 8.01(f) shall be in addition to, and not in lieu
of, Parents and Merger Sub rights under Section 9.08 hereof.
(c)
In the event that this Agreement is
terminated (i) by Parent, on the one hand, or the Company, on the other
hand, pursuant to Section 8.01(b)(ii) or pursuant to a different
section of Section 8.01 at a time when this Agreement was terminable
pursuant to Section 8.01(b)(ii), or (ii) by Parent pursuant to Section 8.01(b)(i) or
Section 8.01(c) or pursuant to a different section of Section 8.01
at a time when this Agreement was terminable by the Parent pursuant to Section 8.01(b)(i) or
Section 8.01(c) (provided in the case of a termination pursuant to Section 8.01(b)(i) that
a Stockholders Meeting at which the approval of this Agreement is voted upon
by the Stockholders shall not have been duly convened prior to the Outside
Date), then in the case of any such termination of this Agreement the Company
shall pay to Parent an amount equal to the sum of Parents or Merger Subs
Expenses (not to exceed $250,000 in the aggregate) for which Parent has not
theretofore been reimbursed by the Company in cash by wire transfer in
immediately available funds, such payment to be made following such termination
within two (2) Business Days following delivery to the Company of notice
of demand for such payment. For purposes of this Agreement, the term
Expenses
means, with respect to a party hereto, all reasonable, documented out-of-pocket
expenses (including all reasonable fees and expenses of debt financing sources
(including those who are parties to any financing commitments), counsel,
accountants, investment bankers, experts and consultants to a party hereto)
incurred by a party or on its behalf in connection with or related to
authorization, negotiation, execution and performance of this Agreement and the
transactions contemplated hereby, including, inter alia, the organization of
Parent and Merger Sub. Notwithstanding
any other provision of this Agreement to the contrary, the Company shall not be
obligated under this Section 6.05(c) to pay any Expenses of Parent in
the event that this Agreement is terminated by Parent pursuant to Section 8.01(c) if
such termination is based upon either (1) the breach of any representation
or warranty of the Company set forth in Section 4.01 hereof, or (2) the
breach or failure to perform a covenant or agreement and such breach or failure
is the proximate result of action taken by the Company at the direction of the
Chief Executive Officer without the approval or direction of the Company Board
(or an authorized committee thereof).
(d)
The Company and Parent acknowledge and
agree that the agreements contained in this Section 6.05 are an integral
part of the transactions contemplated by this Agreement, and that, without
these agreements, the Company and Parent would not have entered into this
Agreement; accordingly, if the Company fails to pay when due the amount payable
pursuant to this Section 6.05, and, in order to obtain such payment,
Parent commences a suit that results in a judgment against the Company for the
amounts set forth in this Section 6.05, the Company shall pay to Parent
its costs and expenses (including reasonable attorneys fees and expenses)
incurred in connection with such suit, together with interest on the terms set
forth in
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this Section 6.05, from the date such payment was required to be
made until the date of receipt by the Parent of immediately available funds in
such amount at the prime rate, published in the Wall Street Journal, in effect
on the date such payment was required to be made by the Company.
(e)
Each of the parties hereto acknowledges
that the agreements contained in this Section 6.05 are an integral part of
the transactions contemplated by this Agreement and that the Termination Fee is
not a penalty, but rather is liquidated damages in a reasonable amount that
will compensate Parent in the circumstances in which such termination fee is
payable for the efforts and resources expended and opportunities foregone while
negotiating this Agreement and in reliance on this Agreement and on the
expectation of the consummation of the transactions contemplated hereby, which
amount would otherwise be impossible to calculate with precision.
(f)
For avoidance of doubt, it is understood
and agreed by the parties that under no circumstances shall Parent be entitled
to receive more than $250,000 as Expenses or more than $300,000 as the Company
Termination Fee or more than $300,000 as the aggregate of the Company
Termination Fee and Expenses) pursuant to the terms of this Agreement.
Section 6.06
Public
Announcements
.
Except with respect to the announcement of
any Change in Recommendation (or proposed Change in Recommendation) made
pursuant to, and in accordance with, the express terms of Section 5.02 of
this Agreement, Parent and the Company shall consult with each other before
issuing, and give each other the opportunity to review and comment upon, any
press release or other public statements with respect to the transactions
contemplated by this Agreement, including the Merger, and shall not issue any
such press release or make any such public statement prior to such
consultation, except as such party may reasonably conclude may be required by
applicable Law, court process or by obligations pursuant to any listing
agreement with any national securities exchange. The parties agree that the initial press
release to be issued with respect to the transactions contemplated by this
Agreement shall be in the form heretofore agreed to by the parties.
Section 6.07
Financing
.
(a)
Parent shall use its commercially
reasonable efforts to consummate the Financing on the terms and conditions
described in the Financing Commitment (or on other terms that would not
adversely impact the ability of Parent to timely consummate the transactions
contemplated by this Agreement). Subject
to Section 8.01(g) of this Agreement, in the event that any portion
of the Financing becomes unavailable in the manner or from the sources
contemplated in the Financing Commitment, (i) Parent shall promptly notify
the Company, and (ii) Parent shall use its commercially reasonable efforts
to arrange to obtain any such portion from alternative sources, on terms that
are no less favorable to Parent, as promptly as practicable following the
occurrence of such event, including entering into definitive agreements with
respect thereto (such definitive agreements entered into pursuant to the first
or second sentence of this Section 6.07(a) being referred to as the
Financing
Agreements
). In connection with its
obligations under this Section 6.07, Parent shall be permitted to amend,
modify or replace the Financing Commitment with one or more new Financing
Commitments (a
New Financing Commitment
), provided that Parent shall
not permit any replacement of, or amendment or modification to be made to, or
any waiver of any material provision or remedy
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under, the Financing Commitment can reasonably be expected to delay the
Closing beyond the Outside Date. Parent
shall keep the Company reasonably informed of the status of Parents efforts to
arrange the Financing. Notwithstanding
anything to the contrary in this Section 6.07(a) or otherwise in this
Agreement, neither Parent or Merger Sub nor any of their respective Affiliates
shall be obligated or required to commence or pursue any legal action or
proceeding seeking to compel any Person to fund any portion of the Financing
required to consummate the Merger.
(b)
The Company shall, and shall cause each
of its Subsidiaries to, reasonably cooperate in connection with the arrangement
of the Financing as may be reasonably requested by Parent (provided that such
requested cooperation does not unreasonably interfere with the ongoing
operations of the Company and its Subsidiaries). Such cooperation by the Company and its
Subsidiaries shall include, at the reasonable request of Parent, (i) using
its commercially reasonable efforts to cause to be delivered such officers or
other certificates as are customary in financings of such type (including a
certificate of the chief financial officer of the Company with respect to
solvency matters) and as are, in the good faith determination of the persons
executing such certificates, accurate, (ii) agreeing to enter into such
agreements as are customary in financings of such type, including definitive
financing documents, lock-box, blocked account and similar agreements, and
agreeing to pledge, guarantee, grant security interests in, and otherwise grant
liens on, the Companys or its Subsidiaries assets pursuant to such agreements,
as may be reasonably requested (and executing and delivering any documents or
instruments, or agreeing to enter into agreements, in connection with the
foregoing); provided, that no obligation of the Company or its Subsidiaries
under any such agreement, pledge, guarantee or grant contemplated by this
clause (ii) shall be effective until the Effective Time, (iii) using
its commercially reasonable efforts to cause its independent registered public
accountants to deliver such comfort letters as are customary in financings of
such type, (iv) providing Parent and its Financing sources as promptly as
practicable with financial and other pertinent information (including monthly
financial statements of the Company and its Subsidiaries with respect to the
Company and its Subsidiaries, (v) cooperating with any field examination
required by the Financing source, (vi) making the Companys executive
officers and other relevant employees reasonably available to assist the
lenders providing the Financing, and (vii) taking all corporate actions,
subject to the occurrence of the Closing, to permit consummation of the
Financing and the direct borrowing or incurrence of all proceeds of the
Financing by the Surviving Corporation immediately following the Effective
Time.
ARTICLE
VII
CONDITIONS
PRECEDENT
Section 7.01
Conditions
to Each Partys Obligation to Effect the Merger
.
The
respective obligation of each party to effect the Merger is subject to the
satisfaction or (to the extent permitted by Law) waiver by both Parent and the
Company on or prior to the Closing Date of the following conditions:
(a)
Stockholder Approval.
The Company shall have obtained the Stockholder Approval.
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(b)
No Injunctions or Restraints.
There shall not be in effect any statute, regulation, order, decree or
judgment of any Governmental Entity which makes illegal or enjoins or prevents
the consummation of the Merger.
Section 7.02
Conditions
to Obligations of Parent and Merger Sub
.
The obligations of Parent and Merger Sub to
effect the Merger are further subject to the satisfaction or (to the extent
permitted by Law) waiver by Parent on or prior to the Closing Date of the
following conditions:
(a)
Representations and Warranties.
The representations and warranties of the Company contained in this
Agreement that are qualified as to materiality or Material Adverse Effect shall
be true and correct, and the representations and warranties of the Company
contained in this Agreement that are not so qualified shall be true and correct
in all material respects, in each case as of the date of this Agreement and as
of the Closing Date as though made on the Closing Date, except to the extent
such representations and warranties expressly relate to an earlier date, in
which case as of such earlier date.
Parent shall have received a certificate signed on behalf of the Company
by the chief executive officer and the chief financial officer of the Company
to such effect dated as of the Closing Date.
(b)
Performance of Obligations of the
Company.
The Company shall have performed in all
material respects all obligations required to be performed by the Company under
this Agreement at or prior to the Closing Date. Parent shall have received a
certificate signed on behalf of the Company by the chief financial officer of
the Company to such effect dated as of the Closing Date.
(c)
Appraisal Rights.
The aggregate number of shares of Company Stock at the Effective Time,
the holders of which have properly exercised appraisal rights under Section 262,
shall not equal 10% or more of the shares of Company Stock outstanding as of
the record date for the Stockholders Meeting.
(d)
Financing.
Parent shall have obtained the Financing on the terms and conditions set
forth in the Financing Commitment.
(e)
Consents.
There shall not be any consents or approvals of any third parties
required in connection with or as a result of the execution, delivery and
performance of this Agreement and the consummation by the Company of the Merger
and each of the other transactions contemplated hereby under any Contract to
which the Company or any of its Subsidiaries is a party or any of their
respective properties or other assets are subject or any Law or Order
applicable to the Company or any of its Subsidiaries or their respective
properties or other assets, except (i) any such consent or approval
(including the consent of Tajima) as has been obtained and such consents are in
full force and affect and, (ii) any such consents or approvals which would
not have a Material Adverse Effect.
(f)
Fairness Opinion
. Burnham Securities, Inc. shall not
have withdrawn, amended or modified its opinion dated July 1, 2009 to the
effect that, as of such date, the Merger Consideration is fair, from a
financial point of view, to the holders of shares of Company Stock, other than
Parent, Merger Sub and Paul Gallagher.
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Section 7.03
Conditions to Obligation of the Company
.
The obligation of the Company to effect the
Merger is further subject to the satisfaction or (to the extent permitted by
Law) waiver by the Company on or prior to the Closing Date of the following
conditions:
(a)
Representations and Warranties.
The representations and warranties of Parent and Merger Sub contained in
this Agreement that are qualified as to materiality shall be true and correct,
and the representations and warranties of Parent and Merger Sub contained in
this Agreement that are not so qualified shall be true and correct in all
material respects, in each case as of the date of this Agreement and as of the
Closing Date as though made on the Closing Date, except to the extent such
representations and warranties expressly relate to an earlier date, in which
case as of such earlier date. The
Company shall have received a certificate signed on behalf of Parent and Merger
Sub by an executive officer of Parent and Merger Sub, respectively, to such
effect.
(b)
Performance of Obligations of
Parent and Merger Sub.
Parent and Merger Sub shall
have performed in all material respects all obligations required to be
performed by them under this Agreement at or prior to the Closing Date, and the
Company shall have received a certificate signed on behalf of Parent and Merger
Sub by its respective Chief Executive Officer to such effect dated as of the
Closing Date.
Section 7.04
Frustration
of Closing Conditions
.
Neither
the Company, on the one hand, nor Parent and Merger Sub, on the other hand, may
rely on the failure of any condition set forth in Section 7.01, Section 7.02
or Section 7.03, as the case may be, to be satisfied if such failure was
caused by such partys failure to act in good faith or use its reasonable best
efforts to consummate the Merger and the other transactions contemplated by
this Agreement, as required by and subject to Section 6.03.
ARTICLE
VIII
TERMINATION,
AMENDMENT AND WAIVER
Section 8.01
Termination
.
This Agreement may be terminated at any time
prior to the Effective Time, whether before or after receipt of the Stockholder
Approval:
(a)
by mutual written consent of Parent and
the Company;
(b)
by either Parent or the Company:
(i)
if the Merger shall not have been
consummated on or before October 30, 2009 (the
Outside Date
);
provided
,
however
, that the right to terminate this Agreement under this Section 8.01(b)(i) shall
not be available to any party whose breach of a representation, warranty,
covenant or agreement in this Agreement has (directly or indirectly) in whole
or in material part been a cause of or resulted in the failure of the Merger to
be consummated on or before such date;
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(ii)
if the Stockholder Approval shall not
have been obtained at the Stockholders Meeting duly convened therefor or at
any adjournment or postponement thereof; or
(iii)
if
any Governmental Entity of competent jurisdiction shall have issued or entered
an injunction or similar legal restraint or order permanently enjoining or
otherwise prohibiting the consummation of the Merger and such injunction, legal
restraint or order shall have become final and non-appealable; provided,
however, that the party seeking to terminate this Agreement pursuant to this Section 8.01(b)(iii) shall
have used such reasonable best efforts as may be required by Section 5.03
to prevent, oppose and remove such injunction;
(c)
by Parent, if the Company shall have
breached or failed to perform any of its representations, warranties, covenants
or agreements set forth in this Agreement, which breach or failure to perform (i) would
give rise to the failure of any condition set forth in Section 7.02, and (ii) is
uncured or incapable of being cured by the Company prior to the earlier to
occur of (A) thirty (30) calendar days following receipt of written notice
of such breach or failure to perform from Parent, or (B) the Outside Date;
provided, however, that Parent shall not have the right to terminate this
Agreement pursuant to this Section 8.01(c) if it or Merger Sub is
then in material breach of any representation, warranty, covenant or other
agreement contained in this Agreement that would cause any of the conditions in
Section 7.03 not to be satisfied;
(d)
by the Company, if Parent or Merger Sub
shall have breached or failed to perform any of its representations,
warranties, covenants or agreements set forth in this Agreement, which breach
or failure to perform (i) would give rise to the failure of any condition
set forth in Section 7.03, and (ii) is uncured or incapable of being
cured by Parent or Merger Sub prior to the earlier to occur of (A) thirty
(30) calendar days following receipt of written notice of such breach or
failure to perform from the Company, or (B) the Outside Date; provided,
however, that the Company shall not have the right to terminate this Agreement
pursuant to this Section 8.01(d) if it is then in material breach of
any representation, warranty, covenant or other agreement contained in this
Agreement that would cause any of the conditions in Section 7.02 not to be
satisfied;
(e)
prior to obtaining the Stockholder
Approval, by the Company, in accordance with and subject to the terms and
conditions of, Section 5.02(f);
(f)
by Parent, in the event that (i) the
Special Committee or the Company Board shall have made a Change in
Recommendation (or publicly proposes to make a Change in Recommendation), or (ii) the
Company has failed to comply in any material respect with Section 5.02
(including the Company approving, recommending or entering into any actual or
proposed acquisition agreement in violation of Section 5.02), or (iii) the
Company shall have failed to include the Company Board Recommendation in the
Proxy Statement; or
(g)
by the Company, if any portion of the
Financing becomes unavailable in the manner or from the sources contemplated in
the Financing Commitment; provided that the Company shall not exercise its
rights under this Section 8.01(g) unless it has provided Parent not
less than five (5) business days prior written notice and Parent does not
arrange for a New Financing Commitment prior to the expiration of such five (5) business
day period.
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Section 8.02
Effect
of Termination
.
In the event of termination of this Agreement
by either the Company or Parent as provided in Section 8.01, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of Parent or the Company or their directors, officers
or stockholders, under this Agreement, other than the provisions of Section 6.02(b),
Section 6.05, this Section 8.02 and Article IX, which provisions
shall survive such termination.
Section 8.03
Amendment
.
This Agreement may be amended by the parties
hereto at any time before or after receipt of the Stockholder Approval;
provided, however, that after the Stockholder Approval have been obtained,
there shall be made no amendment that by applicable Law requires further
approval by the stockholders of the Company without such approval having been
obtained. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
Section 8.04
Extension;
Waiver
.
At any time prior to the Effective Time, the parties may (a) extend
the time for the performance of any of the obligations or other acts of the
other parties, (b) to the extent permitted by applicable Law, waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto, or (c) subject to the proviso to the
first sentence of Section 8.03 and to the extent permitted by applicable
Law, waive compliance with any of the agreements or conditions contained
herein. Any agreement on the part of a party to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf
of such party. The failure of any party
to this Agreement to assert any of its rights under this Agreement or otherwise
shall not constitute a waiver of such rights nor shall any single or partial
exercise by any party to this Agreement of any of its rights under this
Agreement preclude any other or further exercise of such rights or any other
rights under this Agreement.
Section 8.05
Procedure
for Termination or Amendment
.
A termination of this Agreement pursuant to Section 8.01
or an amendment of this Agreement pursuant to Section 8.03 shall, in order
to be effective, require, in the case of Parent or Merger Sub or the Company,
action by its respective board of directors.
ARTICLE
IX
GENERAL
PROVISIONS
Section 9.01
Nonsurvival
of Representations and Warranties
.
None of the representations and warranties in
this Agreement or in any instrument delivered pursuant to this Agreement shall
survive the Effective Time. This Section 8.01 shall not limit any covenant
or agreement of the parties which by its terms contemplates performance after
the Effective Time.
Section 9.02
Notices
.
Except for notices that are specifically
required by the terms of this Agreement to be delivered orally, all notices,
requests, claims, demands and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (which is
confirmed) or sent by overnight courier (providing proof of delivery) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
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If to Parent or Merger
Sub, to:
Hirsch Holdings Inc.
50 Engineers Road
Suite 100
Hauppauge, New York 11788
Attention: Paul Gallagher
Facsimile: (631) 457-8876
with a copy (which shall
not constitute notice) to:
Baker & McKenzie
LLP
1114 Avenue of the
Americas
New York, New York 10036
Attention: Thomas J. Rice
Facsimile: (212) 310-1647
If to the Company, to:
Hirsch International
Corp.
50 Engineers Road
Suite 100
Hauppauge, New York 11788
Attention: Dan Vasquez,
Secretary
Facsimile: (631) 457-8877
with a copy (which shall
not constitute notice) to:
Bryan Cave LLP
1290 Avenue of the
Americas
New York, New York 10104
Attention: Michael Rosen, Esq.
David
Fisher, Esq.
Telecopier (212) 541-4630
with additional copy
(which shall not constitute notice) to:
Thompson
Hine LLP
335
Madison Avenue, 12th Floor
New
York, New York 10017
Attn:
Richard S. Heller, Esq.
Facsimile: (212) 344-6101
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Section 9.03
Consents
and Approvals
.
For any matter under this Agreement requiring
the consent or approval of any party to be valid and binding on the parties
hereto, such consent or approval must be in writing.
Section 9.04
Counterparts
.
This Agreement may be executed in
counterparts (including by facsimile), all of which shall be considered one and
the same agreement and shall become effective when two or more counterparts
have been signed by all of the parties and delivered to the other parties.
Section 9.05
Entire
Agreement; No Third-Party Beneficiaries
.
This Agreement (including the Schedules) and
any agreements entered into contemporaneously herewith constitute the entire
agreement, and supersede all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter of this
Agreement. Except for (A) following the Effective Time, the rights of the
Companys stockholders to receive the Merger Consideration in accordance with Section 3.01(c),
and (B) the provisions of Section 6.04 hereof, this Agreement
(including the Schedules) is not intended to and do not confer upon any Person
(including, inter alia, the Stockholders in their capacity as such) other than
the parties hereto any legal or equitable rights or remedies.
Section 9.06
Governing
Law
.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of New York, without giving effect to the conflict of law
principles that would require the application of the law of another
jurisdiction.
Section 9.07
Assignment
.
Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned, in whole or in part, by
operation of law or otherwise by any of the parties without the prior written
consent of the other party, and any assignment without such consent shall be
null and void; provided, however, that Parent may assign any of its rights,
interest and obligations under this Agreement to any of its Affiliates without
the consent of the Company, but no such assignment shall relieve the assigning
party of its obligations hereunder. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of, and be enforceable by,
the parties and their respective successors and assigns.
Section 9.08
Enforcement;
Consent to Jurisdiction
.
The parties agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties to
this Agreement shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
of this Agreement exclusively in any state or federal court sitting in the
State of New York. Each of the parties
hereto (a) irrevocably consents to submit itself to the personal
jurisdiction of any state or federal court sitting in the State of New York in
the event any dispute arises out of this Agreement or the transactions
contemplated by this Agreement, (b) agrees that it will not attempt to
deny or defeat such personal jurisdiction by motion or other request for leave
from any such court, and (c) agrees that it will not bring any action
relating to this Agreement or the transactions contemplated by this Agreement
in any court other than any state or federal court sitting in the State of New
York. Any judgment from any such court described above may, however, be
enforced by any party in any other court in any other jurisdiction.
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Section 9.09
Severability
.
If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of
law or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect. Upon such determination that any term or
other provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible to the fullest extent
permitted by applicable Law in an acceptable manner to the end that the transactions
contemplated by this Agreement are fulfilled to the extent possible.
Section 9.10
No
Recourse
.
This Agreement may only be enforced against, and any claims or causes of
action that may be based upon, arise out of or relate to this Agreement, or the
negotiation, execution or performance of this Agreement may only be made
against the entities that are expressly identified as parties hereto, and no
past, present or future Affiliate, director, officer, employee, incorporator,
member, manager, partner, shareholder, agent, attorney or representative of any
party hereto shall have any liability for any obligations or liabilities of the
parties to this Agreement or for any claim based on, in respect of, or by
reason of, the transactions contemplated hereby.
Section 9.11
WAIVER
OF JURY TRIAL
.
EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING BETWEEN THE PARTIES
HERETO ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
[Signature Page Follows]
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IN
WITNESS WHEREOF, each of the parties has caused this Agreement and Plan of Merger
to be signed by its respective officers hereunto duly authorized, all as of the
date first written above.
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HIRSCH INTERNATIONAL
CORP.
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By:
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/s/ Dan Vasquez
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Name:
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Dan Vasquez
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Title:
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Secretary
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HIC ACQUISITION COMPANY
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By:
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/s/ Paul Gallagher
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Name:
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Paul Gallagher
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Title:
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President
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HIRSCH HOLDINGS, INC.
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By:
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/s/ Paul Gallagher
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Name:
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Paul Gallagher
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Title:
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President
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[Signature Page to
Agreement and Plan of Merger Agreement]
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Exhibit A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HIRSCH INTERNATIONAL CORP.
ARTICLE I
The
name of the corporation is Hirsch International Corp.
ARTICLE II
The
address of the corporations registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801. The name of the corporations registered
agent at such address is The Corporation Trust Company.
ARTICLE III
The purpose of the corporation is to engage in any
part of the world in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Delaware.
ARTICLE IV
The
total number of shares of stock which the corporation shall have authority to
issue is 1,000, all of which shall be common stock, and the par value of each
such share shall be $0.01.
ARTICLE V
In
furtherance and not in limitation of the powers conferred by statute, the board
of directors shall have the power, both before and after receipt of any payment
for any of the corporations capital stock, to adopt, amend, repeal or
otherwise alter the bylaws of the corporation;
provided
,
however
,
that the grant of such power to the board of directors shall not divest the
stockholders of or limit their power to adopt, amend, repeal or otherwise alter
the bylaws of the corporation.
ARTICLE VI
Meetings
of stockholders may be held within or outside the State of Delaware, as the
bylaws of the corporation may provide.
The books of the corporation may be kept outside the State of Delaware
at such place or places as may be designated from time to time by the board of
directors or in the bylaws of the corporation.
Elections of directors need not be by written ballot unless the bylaws
of the corporation so provide.
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ARTICLE VII
No
director shall be personally liable to the corporation or any of its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent such exemption from liability or limitation thereof is not
permitted under the General Corporation Law of the State of Delaware as the
same exists or may hereafter be amended.
If the General Corporation Law of the State of Delaware is hereafter
amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
corporation shall be eliminated or limited to the fullest extent authorized by
the General Corporation Law of the State of Delaware, as so amended. Any repeal or modification of this Article 8
shall not adversely affect any right or protection of a director of the
corporation with respect to any acts or omissions of such director occurring
prior to such repeal or modification.
ARTICLE VIII
To
the fullest extent permitted by applicable law, the corporation shall indemnify
(and advance expenses to) its directors, officers, employees and agents (and
any other persons to which the General Corporation Law of the State of Delaware
permits the corporation to provide indemnification) through bylaw provisions,
agreements with such directors, officers, employees, agents or other persons,
vote of stockholders or disinterested directors or otherwise.
ARTICLE IX
Whenever
a compromise or arrangement is proposed between this corporation and its
creditors or any class of them and/or between this corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this corporation under Section 291
of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for this corporation
under Section 279 of Title 8 of the Delaware Code, order a meeting of the
creditors or class of creditors and/or of the stockholders or class of
stockholders of this corporation, as the case may be, to be summoned in such
manner as the said court directs. If a
majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this corporation, as the case may be,
and also on this corporation.
ARTICLE X
The
corporation reserves the right to amend, alter, change or repeal any provision
contained in this certificate of incorporation in the manner now or hereafter
prescribed by applicable law, and all rights and powers conferred upon
stockholders herein are granted subject to this reservation.
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Annex B
[Letterhead of Burnham Securities Inc.]
July 1,
2009
Special
Committee of the Board of Directors
of
Hirsch International Corp.
50
Engineers Road
Hauppauge,
NY 11788
Attention:
Chris Davino
Ladies
and Gentlemen:
We
understand that Hirsch International Corp., a Delaware corporation (Hirsch or
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), propose to enter into an Agreement and
Plan of Merger (the Merger Agreement), which provides, among other things,
for the merger of Merger Sub with and into the Company (the Merger) whereby
each outstanding share of the Companys class A common stock, par value $0.01
per share (the Class A Stock), and each outstanding share of the Companys
class B common stock, par value $0.01 per share (the Class B Stock and,
together with the Class A Stock, the Common Stock), will be converted
into the right to receive $0.31 in cash (the Merger Consideration).
You
have asked for our opinion as to whether the consideration to be received in
the Merger by the Non-Affiliated Stockholders (as such term is defined below)
of the Company is fair from a financial point of view to such Non-Affiliated
Stockholders. For purposes of this
opinion, the term Non-Affiliated Stockholders means stockholders of the
Company other than Parent, Merger Sub and Paul Gallagher.
For
purposes of the opinion set forth herein, we have:
(a)
reviewed certain publicly
available financial statements and other business and financial information of
the Company;
(b)
reviewed certain internal
financial statements and other financial and operating data concerning the
Company;
(c)
reviewed certain financial
projections prepared by management of the Company;
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(d)
discussed the past and
current operations and financial condition and the prospects of the Company
with senior executives of the Company;
(e)
reviewed the letter dated June 12,
2009 from Mr. Paul Gallagher to the Special Committee of the Companys
Board of Directors (the Committee) regarding his offer to acquire the Common
Stock, which letter the Company filed with the Securities and Exchange
Commission under cover of a Current Report on Form 8-K dated June 12,
2009;
(f)
at the request of the
Committee, conducted a market check after the public announcement of Mr. Gallaghers
offer letter;
(g)
reviewed the Companys
liquidity, liquidity projections prepared by management of the Company and the
Companys efforts to access additional capital;
(h)
reviewed a liquidation
analysis conducted by a third party commissioned by the Committee;
(i)
reviewed the limited trading
in the Companys common stock and the Companys comparatively small market
capitalization;
(j)
compared the market prices
and trading history of the Companys common stock with those of certain other
publicly-traded companies that we deemed relevant (as reported by reliable
information sources);
(k)
reviewed the financial terms
and premiums paid, to the extent publicly available, of certain other
transactions;
(l)
considered the Companys
prospects if it were to remain independent (as well as the risks involved in
achieving those prospects);
(m)
reviewed drafts of the
Merger Agreement as they became available; and
(n)
performed such other
analyses and considered such other factors as we have deemed appropriate.
We
have assumed and relied upon, without independent verification, the accuracy
and completeness of the information that was publicly available or supplied or
otherwise made available to us by the Company, and formed a substantial basis
for the opinion. With respect to the
financial projections, we have assumed that they have been reasonably prepared
on bases reflecting the best currently available estimates and judgments of the
management of the Company of the future financial performance of the
Company. In addition, we have assumed
that the Merger will be consummated in
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accordance
with the terms set forth in the Merger Agreement without any material waiver,
amendment or delay of any terms or conditions.
We are not legal, tax, regulatory or actuarial advisors. We are financial advisors only and have
relied upon, without independent verification, the assessment of Parent and the
Company and their respective legal, tax, regulatory or actuarial advisors with
respect to such matters. We express no
opinion with respect to fairness of the amount or nature of the compensation to
any of the Companys officers, directors or employees, or any class of such
persons, relative to the consideration to be received by the Non-Affiliated
Stockholders pursuant to the Merger Agreement.
We have not made any independent valuation or appraisal of the assets or
liabilities of the Company, nor have we been furnished with any such
appraisals. We take no responsibility
for the accuracy of the liquidation analysis provided to us and did not
independently verify it or the assumptions or methodologies used to prepare
it. Our opinion is necessarily based on
financial, economic, market and other conditions as in effect on, and the
information made available to us as of, the date hereof. Events occurring after the date hereof may
affect this opinion and the assumptions used in preparing it, and we do not
assume any obligation to update, revise or reaffirm this opinion unless
otherwise agreed.
We
have acted as financial advisor to the Special Committee of the Board of
Directors of Hirsch in connection with this transaction and will receive a fee
for our services, a substantial portion of which is contingent upon the
rendering of this opinion (but not on the conclusions reached in the
opinion). In the two years prior to the
date hereof, we have not provided financial advisory services to the Company,
its officers or directors (including the independent directors) or received any
fees from the Company, its officers or directors (including the independent
directors), and there have been no material relationships between us and the
Company or any other party to the Merger and no such material relationships are
contemplated as of the date hereof. We
may seek to provide services to Hirsch and Parent in the future and would
expect to receive fees for such services.
This
opinion has been approved by the Burnham fairness committee in accordance with
our customary practice. This opinion is
for the information of the Special Committee of the Board of Directors of
Hirsch and may not be used for any other purpose without our prior written
consent, except that Parent and Hirsch may refer to and include the opinion and
may refer to our role as financial advisor to the Special Committee of the Board
of Directors of Hirsch in connection with the Merger in any documents relating
to the Merger, including but not limited to any proxy statement or information
statement sent to Hirsch stockholders or filed with the Securities and Exchange
Commission under Section 13(e) or Section 14(d) of the
Securities and Exchange Act of 1934, as amended. We express no opinion or recommendation as
whether the Non-Affiliated Stockholders should approve the Merger. Our opinion does not address the relative
merits of the Merger as compared to any other alternative business transaction,
or other alternatives, or whether or not such alternatives could be achieved or
are available.
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Based
on and subject to the foregoing, we are of the opinion on the date hereof that
the consideration to be received in the Merger by the Non-Affiliated
Stockholders is fair from a financial point of view to such stockholders.
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Very
truly yours,
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BURNHAM SECURITIES INC.
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By:
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/s/
Randal V. Stephenson
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Randal Stephenson
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Managing
Director
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Annex C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION
LAW
8 Del. C. § 262
Section 262.
Appraisal rights
(a)
Any stockholder
of a corporation of this State who holds shares of stock on the date of the
making of a demand pursuant to subsection (d) of this section with respect
to such shares, who continuously holds such shares through the effective date
of the merger or consolidation, who has otherwise complied with subsection (d) of
this section and who has neither voted in favor of the merger or consolidation
nor consented thereto in writing pursuant to § 228 of this title shall be
entitled to an appraisal by the Court of Chancery of the fair value of the stockholders
shares of stock under the circumstances described in subsections (b) and (c) of
this section. As used in this section,
the word stockholder means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words stock and share
mean and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words depository
receipt mean a receipt or other instrument issued by a depository representing
an interest in one or more shares, or fractions thereof, solely of stock of a
corporation, which stock is deposited with the depository.
(b)
Appraisal
rights shall be available for the shares of any class or series of stock of a
constituent corporation in a merger or consolidation to be effected pursuant to
§ 251 (other than a merger effected pursuant to § 251(g) of this
title), § 252, § 254, § 257, § 258, § 263 or
§ 264 of this title:
(1)
Provided, however, that no
appraisal rights under this section shall be available for the shares of any
class or series of stock, which stock, or depository receipts in respect
thereof, at the record date fixed to determine the stockholders entitled to
receive notice of and to vote at the meeting of stockholders to act upon the
agreement of merger or consolidation, were either (i) listed on a national
securities exchange or (ii) held of record by more than 2,000 holders; and
further provided that no appraisal rights shall be available for any shares of
stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of § 251 of this title.
(2)
Notwithstanding paragraph (1) of
this subsection, appraisal rights under this section shall be available for the
shares of any class or series of stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of merger or
consolidation pursuant to §§ 251, 252, 254, 257, 258, 263 and 264 of this
title to accept for such stock anything except:
a.
Shares of stock of the
corporation surviving or resulting from such merger or consolidation, or
depository receipts in respect thereof;
b.
Shares of stock of any other
corporation, or depository receipts in respect thereof, which shares of stock
(or depository receipts in respect thereof) or
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depository
receipts at the effective date of the merger or consolidation will be either
listed on a national securities exchange or held of record by more than 2,000
holders;
c.
Cash in lieu of fractional
shares or fractional depository receipts described in the foregoing
subparagraphs a. and b. of this paragraph; or
d.
Any combination of the
shares of stock, depository receipts and cash in lieu of fractional shares or
fractional depository receipts described in the foregoing subparagraphs a., b.
and c. of this paragraph.
(3)
In the event all of the
stock of a subsidiary Delaware corporation party to a merger effected under
§ 253 of this title is not owned by the parent corporation immediately
prior to the merger, appraisal rights shall be available for the shares of the
subsidiary Delaware corporation.
(c)
Any corporation
may provide in its certificate of incorporation that appraisal rights under
this section shall be available for the shares of any class or series of its
stock as a result of an amendment to its certificate of incorporation, any
merger or consolidation in which the corporation is a constituent corporation
or the sale of all or substantially all of the assets of the corporation. If the certificate of incorporation contains
such a provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d)
Appraisal
rights shall be perfected as follows:
(1)
If a proposed merger or
consolidation for which appraisal rights are provided under this section is to
be submitted for approval at a meeting of stockholders, the corporation, not
less than 20 days prior to the meeting, shall notify each of its stockholders
who was such on the record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsection (b) or (c) hereof
that appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to
demand the appraisal of such stockholders shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of such stockholders shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of such stockholders
shares. A proxy or vote against the
merger or consolidation shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after the effective date of
such merger or consolidation, the surviving or resulting corporation shall
notify each stockholder of each constituent corporation who has complied with
this subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2)
If the merger or
consolidation was approved pursuant to § 228 or § 253 of this title,
then either a constituent corporation before the effective date of the merger
or
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consolidation
or the surviving or resulting corporation within 10 days thereafter shall
notify each of the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval of the merger
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section.
Such notice may, and, if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders of the effective
date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holders shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of such holders
shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either (i) each
such constituent corporation shall send a second notice before the effective
date of the merger or consolidation notifying each of the holders of any class
or series of stock of such constituent corporation that are entitled to
appraisal rights of the effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second notice to all such
holders on or within 10 days after such effective date; provided, however, that
if such second notice is sent more than 20 days following the sending of the
first notice, such second notice need only be sent to each stockholder who is
entitled to appraisal rights and who has demanded appraisal of such holders
shares in accordance with this subsection.
An affidavit of the secretary or assistant secretary or of the transfer
agent of the corporation that is required to give either notice that such
notice has been given shall, in the absence of fraud, be prima facie evidence
of the facts stated therein. For
purposes of determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be not
more than 10 days prior to the date the notice is given, provided, that if the
notice is given on or after the effective date of the merger or consolidation,
the record date shall be such effective date.
If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e)
Within 120 days
after the effective date of the merger or consolidation, the surviving or
resulting corporation or any stockholder who has complied with subsections (a) and
(d) hereof and who is otherwise entitled to appraisal rights, may commence
an appraisal proceeding by filing a petition in the Court of Chancery demanding
a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time
within 60 days after the effective date of the merger or consolidation, any
stockholder who has not commenced an appraisal proceeding or joined that
proceeding as a named party shall have the right to withdraw such stockholders
demand for appraisal and to accept the terms offered upon the merger or
consolidation. Within 120 days after the
effective date of the merger or consolidation, any stockholder who has complied
with the requirements of subsections (a) and (d) hereof, upon written
request, shall be entitled to receive from the corporation surviving the merger
or resulting from the consolidation a statement setting forth the aggregate
number of shares not voted in favor of the merger or consolidation and with
respect to which demands for appraisal have been received and the aggregate
number of holders of such shares. Such
written statement shall be mailed to the stockholder within 10 days after such
stockholders written request for such a
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statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever
is later. Notwithstanding subsection (a) of
this section, a person who is the beneficial owner of shares of such stock held
either in a voting trust or by a nominee on behalf of such person may, in such
persons own name, file a petition or request from the corporation the
statement described in this subsection.
(f)
Upon the filing
of any such petition by a stockholder, service of a copy thereof shall be made
upon the surviving or resulting corporation, which shall within 20 days after
such service file in the office of the Register in Chancery in which the
petition was filed a duly verified list containing the names and addresses of
all stockholders who have demanded payment for their shares and with whom
agreements as to the value of their shares have not been reached by the
surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by
the Court, shall give notice of the time and place fixed for the hearing of
such petition by registered or certified mail to the surviving or resulting
corporation and to the stockholders shown on the list at the addresses therein
stated. Such notice shall also be given
by 1 or more publications at least 1 week before the day of the hearing, in a
newspaper of general circulation published in the City of Wilmington, Delaware
or such publication as the Court deems advisable. The forms of the notices by mail and by
publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g)
At the hearing
on such petition, the Court shall determine the stockholders who have complied
with this section and who have become entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
(h)
After the Court
determines the stockholders entitled to an appraisal, the appraisal proceeding
shall be conducted in accordance with the rules of the Court of Chancery,
including any rules specifically governing appraisal proceedings. Through such proceeding the Court shall
determine the fair value of the shares exclusive of any element of value
arising from the accomplishment or expectation of the merger or consolidation,
together with interest, if any, to be paid upon the amount determined to be the
fair value. In determining such fair
value, the Court shall take into account all relevant factors. Unless the Court in its discretion determines
otherwise for good cause shown, interest from the effective date of the merger
through the date of payment of the judgment shall be compounded quarterly and
shall accrue at 5% over the Federal Reserve discount rate (including any
surcharge) as established from time to time during the period between the
effective date of the merger and the date of payment of the judgment. Upon application by the surviving or
resulting corporation or by any stockholder entitled to participate in the
appraisal proceeding, the Court may, in its discretion, proceed to trial upon
the appraisal prior to the final determination of the stockholders entitled to
an appraisal. Any stockholder whose name
appears on the list filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted such stockholders
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings
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until it is finally determined that such
stockholder is not entitled to appraisal rights under this section.
(i)
The Court shall
direct the payment of the fair value of the shares, together with interest, if
any, by the surviving or resulting corporation to the stockholders entitled
thereto. Payment shall be so made to
each such stockholder, in the case of holders of uncertificated stock
forthwith, and the case of holders of shares represented by certificates upon
the surrender to the corporation of the certificates representing such
stock. The Courts decree may be
enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of
any state.
(j)
The costs of
the proceeding may be determined by the Court and taxed upon the parties as the
Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order all or a portion
of the expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k)
From and after
the effective date of the merger or consolidation, no stockholder who has
demanded appraisal rights as provided in subsection (d) of this section
shall be entitled to vote such stock for any purpose or to receive payment of
dividends or other distributions on the stock (except dividends or other
distributions payable to stockholders of record at a date which is prior to the
effective date of the merger or consolidation); provided, however, that if no
petition for an appraisal shall be filed within the time provided in subsection
(e) of this section, or if such stockholder shall deliver to the surviving
or resulting corporation a written withdrawal of such stockholders demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of
the corporation, then the right of such stockholder to an appraisal shall
cease. Notwithstanding the foregoing, no
appraisal proceeding in the Court of Chancery shall be dismissed as to any
stockholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just; provided, however that
this provision shall not affect the right of any stockholder who has not
commenced an appraisal proceeding or joined that proceeding as a named party to
withdraw such stockholders demand for appraisal and to accept the terms
offered upon the merger or consolidation within 60 days after the effective
date of the merger or consolidation, as set forth in subsection (e) of
this section.
(l)
The shares of
the surviving or resulting corporation to which the shares of such objecting
stockholders would have been converted had they assented to the merger or
consolidation shall have the status of authorized and unissued shares of the
surviving or resulting corporation.
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Annex D
UNITED STATES
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 year ended December 31,
2008
OR
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
Commission
file number
000-23434
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)
|
|
|
|
|
|
50 Engineers Road, Hauppauge, NY
|
|
11788
|
(Address of principal executive offices)
|
|
(Zip Code)
|
Registrants telephone number, including area
code:
(631) 436-7100
Securities registered pursuant to Section 12(b) of
the Act:
|
Title of
each class
|
|
Name of
each exchange on which registered
|
|
|
Class A Common Stock $0.01 Par Value
|
|
NASDAQ Global Market
|
|
Securities registered pursuant to Section 12(g) of
the Act:
NONE
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
o
No
x
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of
the Act. Yes
o
No
x
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.
Yes
x
No
o
Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§ 229.405 of this chapter) during the preceeding 12 months (or
for such shorter period that the registrant was required to submit and post
such files). Yes
o
No
o
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 registrants 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.
x
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See definition of large accelerated filer and smaller
reporting company in Rule 12b-2 of the Exhange Act.
Large accelerated filer
o
|
|
Accelerated filer
o
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
x
|
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Act). Yes
o
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 June 30,
2008 (the last business day of the registrants most recently completed second
fiscal quarter), was approximately $9,739,000.
The number of shares outstanding of each of the
registrants classes of common stock, as of March 24, 2009 were:
Class of Common
Equity
|
|
Number of Shares
|
|
|
|
|
|
Class A Common Stock
Par Value $.01
|
|
9,083,065
|
|
Class B Common Stock
Par Value $.01
|
|
400,018
|
|
*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.
Table of
Contents
Hirsch
International Corp.
Form 10-K
For the Twelve months ended December 31, 2008
Table of Contents
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PART I
ITEM 1. BUSINESS
General
Hirsch International Corp. (Hirsch
or the Company), a Delaware Corporation,
founded in 1968 is a leading provider of equipment and education and support
services to the decorated apparel industry. The Company represents the
decorated apparel industrys leading brands including Tajima embroidery
equipment, MHM screen printing equipment, SEIT textile bridge lasers, Pulse
Microsystems digitizing and design software, Kornit and Mimaki digital
printers. On August 4, 2008, the Company acquired 80% of the outstanding
equity interest in U. S. Graphic Arts, Inc. (U.S. Graphics) pursuant to
a Share Purchase and Sale Agreement. In connection with, and as a condition to
the acquisition, Graphic Arts Acquisition Corporation, a wholly-owned
subsidiary of the Company, purchased certain outstanding indebtedness of U.S.
Graphics and agreed, under certain circumstances, to make further advances to
U. S. Graphics. U. S. Graphics develops and manufactures digital inkjet
printers for the worldwide decorated apparel industry.
Through its distribution agreements with Tajima Industries, Ltd. (Tajima),
the Company offers a complete line of technologically advanced single- and
multi-head embroidery machines, proprietary application software, and a
complete line of embroidery parts. On August 2, 2006, the Company entered
into an exclusive ten year distribution agreement with MHM Siebdruckmaschinen
Gmbh (MHM) for distribution of MHM screenprinting equipment throughout North
America. On January 25, 2007 the Company entered into a ten-year distribution
agreement with SEIT Electtronica SRL (SEIT) based in Italy. Hirsch provides
sales and support services for the SEIT line of laser application equipment
throughout the U.S. SEITs textile lasers are used in conjunction with Tajima
and other brands of embroidery equipment. On February 18, 2008, the
Company signed an agreement with Kornit Digital LTD (Kornit) to distribute
nationally a line of digital direct-on-garment printers and to provide sales
and service support in thirteen states. Also, on May 16, 2008, the Company
entered into a one year agreement with Mimaki USA (Mimaki) to distribute its
digital printers. Hirsch also provides comprehensive service programs, and user
training and support for all of its equipment lines. 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 Companys customer base for decorated apparel equipment includes
large operators who run numerous machines (which accounts for a smaller
percentage of the Companys business than in years past) as well as individuals
who customize products on a single machine. Principal customer groups include: (i) contractors,
who serve manufacturers that outsource their embellishment requirements; (ii) manufacturers,
who use embroidery, screenprinting, laser etching or digital printing to
embellish their apparel, accessories, towels, linens and other products; and (iii) graphic
and decorated apparel entrepreneurs, who produce customized products for
individuals, sports leagues, school systems, fraternal organizations,
promotional advertisers and other groups.
Hirsch has certain exclusive rights to sell new embroidery machines
manufactured by Tajima in the U.S. and certain non-exclusive rights to
distribute these machines to U.S. based customers who expand their operating
facilities into the Caribbean region. Tajima, located in Nagoya, Japan, is one
of the worlds leading manufacturers of embroidery machines, and is regarded as
a technological innovator and producer of high quality, reliable and durable
embroidery equipment.
The Company enjoys a good relationship with Tajima, having spanned over
30 years. Hirsch is one of
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Tajimas
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.
Today, assembly of Tajima machines of up to eight heads are completed at Tajimas
Rancho Dominguez, California facility using both Tajima supplied sub-assembly
kits and locally supplied components. Shorter lead times required for the
Companys orders coupled with Tajimas production flexibility enables the
Company to be responsive to the changing needs of the market.
The Company has exclusive rights with MHM for North America. MHM,
located in Erl, Austria, has been a world-wide leader in the screen printing
industry for over 25 years with over 30 partners throughout Europe, Asia,
Africa and South and Central America.
In addition to offering a complete line of technologically-advanced
embroidery, textile bridge lasers, screenprinting machines, digital printing
equipment and supplies, customer training, support and service, Hirsch provides
an array of value-added products to its customers. The Company is a distributor
in the United States of software developed by its former software subsidiary,
Pulse Microsystems Ltd. (Pulse). 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.
Through its subsidiary, U. S. Graphics, the company develops and
manufactures digital printers and related supplies and accessories for the
decorated apparel industry. The Company sells these products internationally.
Hirsch also sells a broad range of supplies, machine parts and
accessories for all of its apparel decorating equipment. The Companys
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 Companys long-term goal is to
leverage its reputation, knowledge of the marketplace, Tajima, MHM, SEIT,
Kornit and Mimaki distribution rights, U. S. Graphic digital printing equipment
and its industry expertise and technological innovation to enable it to
increase its market share.
The
Decorated Apparel Industry
The decorated apparel industry today uses a variety of 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 soft goods for sale at affordable
prices. In addition, the intricacy of the designs capable of being embellished
has attracted commercial appeal for special event promotional marketing.
The
Screenprinting Industry
The screen printing industry today uses both manual and automated
screen printing presses to reproduce images onto a variety of materials such as
hats, T-shirts, labels and other soft goods. Like embroidery, screenprinting
uses licensed names, logos and designs provided by, among other sources,
professional and collegiate sport teams and the entertainment industry. Most
commercial and industrial printing is done on single or multi color automated
presses. These applications are used on a worldwide basis.
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Business
Strategy
The Companys objective is to establish and maintain long-term
relationships with its customers by providing them with a single source
solution for their apparel decorating 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, which was
approximately 54% of 2008 revenues, (ii) sells new digital printing
equipment, which was approximately 13% of 2008 revenues (iii) sells new
MHM screenprinting equipment, which was approximately 10% of 2008 revenues, (iv) distributes
Pulses proprietary application software programs for embroidery machines, (v) sells
SEIT textile lasers (vi) sells a broad range of supplies, accessories and
products, (vii) sells used embroidery machinery, and (viii) provides
comprehensive customer training, support and service for these embroidery,
screen printing machines and textile lasers. The Company believes that this
comprehensive approach positions it to become its customers
preferred vendor for their
equipment and related services. To complement its comprehensive approach
effectively and efficiently, the Companys 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 and possess an excellent reputation in the market. 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
(for a single head machine) to $150,000 (for a 30 head machine). 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.
Digital Printing Machines. The Company believes that offering Kornit
and Mimaki digital printing equipment along with the T-Jet Blazer Express sold
through our subsidiary U.S. Graphics, further enhances our market position in
the decorated apparel industry. U. S. Graphics has serviced the decorated apparel
industry with a wide range of educational services, software and supplies for
twenty-nine years. U. S. Graphics websites are among the most highly
trafficked in the United States. The Company currently offers three different
brands of digital printing presses. Kornit digital printers are high production
industrial machines that print direct-on-garment with the capabilities of
printing on light and dark garments. These units range from $95,000 to
$185,000. Mimaki digital printers are used for textiles and apparel and can
print directly on ready-made clothing and help designers support small lot
production and on-demand
market requests. The Company currently only distributes one model from
Mimaki that sells for $28,000. U.S. Graphics designs and manufactures several
direct-on-garment inkjet printers. U.S. Graphics sells through is existing
worldwide dealer network and company sales representatives. These units range
from $18,000 to $28,000.
Screenprinting Machines. The Company believes that offering MHM
screenprinting equipment will
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provide
us with an opportunity to strengthen our position in the apparel adornment
marketplace by being able to provide our existing customers a highly productive
line of equipment that complements our existing Tajima embroidery equipment, as
well as exposing the Company to a new customer base. For more than 25 years,
MHM has been synonymous with revolutionary innovations in the field of screen
printing. MHM places great emphasis on its continual research and development
that focuses on improving productivity, reliability and ease of use. The
Company offers a variety of automated screen printing presses ranging from an 8
station (6 color) model up to a 20 station (18 color) model. These units range
in price from $40,000 to $180,000. The Company also sells the flash cure units
and flocking modules that can be attached to any of the stations on the screen
printing press as well as dryers and related screen printing machine parts.
Pulse Software. Hirsch is a distributor of Pulse software which offers
a wide range of proprietary application software products to enhance and
simplify the embroidery process. Pulses computer-aided design software
packages target the different functions performed by embroiderers, and are
contained in an integrated product line. Pulse also has proprietary software
for the SEIT laser that is compatible with its embroidery software to provide
the customer with a complete software solution. A majority of Pulses
proprietary application software products are designed to operate in the
Microsoft®, Windows® 98, Windows® XP, and Windows Vista® 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 Companys established practice to aggressively market
this software with embroidery equipment and as an upgrade to its installed base
of over 22,000 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.
Textile Bridge Lasers. The Company believes that offering SEIT textile
lasers along with its Tajima brand of embroidery equipment will provide an
opportunity to further strengthen its position in the apparel decorating
marketplace. Selling SEIT textile lasers enables us to provide our existing
embroidery customers and new customers with another line of equipment that will
result in significant improvements in productivity to them.
Supplies, Accessories, Machine Parts and Products. The Company offers a
broad line of consumable supplies, accessories and machine parts utilized in
the apparel decorating process. The simplification of the decorating process is
an integral part of the Companys single source strategy. Moreover, the
expansion of the Companys marketing efforts is directed toward trade
publications, advertising as well as both industry and trade show participation.
To this end, the Company has an on-line store allowing customers to order
parts, supplies, and accessories 24 hours a day, 7 days a week.
Used Embroidery Machinery. The Company, on a case by case basis,
accepts used embroidery machines from customers on a trade-in basis as a
condition to the sale of a new machine. The amount of trade-ins has been
immaterial for the last several years. The Companys ability to accept used
machines is an important sales tool and necessary element in the Companys
sales strategy. On occasion, the Company will also purchase used machines from
customers and third-party leasing companies. The Company will then sell the
used machines that have been traded-in. 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, screenprinting and textile laser
machines and software that it sells. The Companys service
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department
includes field service technicians throughout the U.S. who are directed by four
centrally located regional technicians. After the Company delivers a machine to
a customer, the Companys trained personnel may assist in the installation,
setup and operation of the machine. The Company employs or contracts with 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.
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, through its
distribution agreements with Tajima, markets its embroidery products under the name
Tajima USA Sales and Support by Hirsch International Corp.
During 2006, the Company
became the exclusive North American distributor of MHM screenprinting equipment
and markets that brand as MHM North America by Hirsch. In January 2007
the Company became the exclusive distributor of the SEIT textile lasers. In
2008, the Company became distributor for Kornit and Mimaki digital printing
equipment. Additionally, on August 4, 2008, the Company acquired 80% of
the outstanding equity interest in U. S. Graphics. The Company reinforces
recognition of its names through trade magazine advertising and participation
in seminars and over 20 trade shows annually. The Companys sales staff is
headed by Kris Janowski, Executive Vice-President of Sales for the Company, and
consists of salespeople who maintain frequent contact with customers in order
to understand and satisfy each customers needs. The Companys products are
generally considered by the industry to consist of the highest quality
equipment available, and consequently the Company does not attempt to compete
exclusively on a price basis but rather on a value-added basis, through its
reputation, knowledge of the marketplace, investment in infrastructure and
experience in the industry. In the current climate of intense pricing
competition from the lower cost manufacturers, the Company attempts, to the
best degree possible, to maintain a balance between market share and profit
margin.
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. To this end, the Company has opened a
Solutions Studio in Solon, Ohio. This very unique facility focuses on
technology and application development for all graphic and decorated apparel
products. The Company provides comprehensive one to five day training programs
to assist customers in the use, operation and servicing of the machines and
software it sells. Customers are trained in the operation of machines as well
as in techniques 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 operations. Telephone software support
(for embroidery) 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, SEIT, Kornit, Mimaki and MHM 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. For its U. S. Graphics subsidiary, the Company
maintains its training center in Tempe, Arizona where technical phone support
and training of its technical staff is administered.
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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 and one year for its MHM screenprinting
equipment, Kornit digital printer, Mimaki digital printers and U. S. Graphics
digital printers. The warranty covers specific classes of parts and labor.
Tajima provides the Company with a limited two year warranty and MHM, Kornit
and Mimaki provides the Company with a limited one year warranty. As a
consequence, the Company absorbs a portion of the cost of providing warranty
service on its products.
Supplier
Relationships with Tajima
On August 30, 2004, the Company entered into new consolidated
distribution agreements (the Consolidated Agreements) with 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 non-exclusive distribution rights in the remaining
11 western states (the West Coast Agreement) for the period February 21,
2004 through February 21, 2005. As of February 21, 2008, the Company
entered into two agreements with Tajima modifying certain terms of the
Consolidated Agreements. The most significant modification was that the term of
the West Coast Agreement was changed to February 21, 2008 through February 20,
2009. The Company is currently negotiating an extension of the West Coast
Agreement.
Each of the Agreements may be terminated upon the failure by the
Company to achieve certain minimum sales quotas. For 2008 a waiver was received
and for 2007 the minimum sales quotas were met. Furthermore, the agreements may
be terminated if (a) Paul Gallagher is no longer Chief Executive Officer
of the Company or (b) if Tajima determines that a change in control of the
Company has occurred.
The Companys ordering cycle for new embroidery machines is
approximately three to eight months, approximately seven to ten weeks for new
screen printing equipment and approximately eight weeks for new textile lasers,
prior to delivery to the Company. Since the Company generally delivers new
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 Companys business, financial condition and results of operations.
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 supplier because: (i) the
Company has maintained a relationship with Tajima for 30 years and is one of
Tajimas largest distributors; (ii) Tajimas success in the United States
is, in large part, attributable to the Companys knowledge of the marketplace
as well as the Companys reputation for customer support; and (iii) the
Company supports Tajimas development activities.
Supplier
Relationship with MHM
On August 2, 2006, the Company entered into an exclusive ten year
distribution agreement with MHM for distribution of MHM screenprinting
equipment throughout North America. The agreement provides that the Company
must purchase a minimum of $5 million worth of screenprinting equipment during
each year. If the Company fails to achieve the minimum quota in any year by
ordering only half or less of the required quantity of
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MHM
products, MHM has the right to terminate the agreement. During the initial
period of the agreement, the Company purchased at least one half of the minimum
quota.
Supplier
Relationship with SEIT
On January 25, 2007, the Company entered into an exclusive ten
year distribution agreement with SEIT for distribution of SEIT line of laser
application equipment throughout the U.S. There are no minimum purchase quotas
in the agreement.
Supplier
Relationship with Kornit
On February 18, 2008, the Company entered into a distribution
agreement with Kornit for distribution of Kornit line of digital printing
equipment. The agreement is exclusive for thirteen states in the United States
and non-exclusive for the remaining thirty-nine states. There are no minimum
purchase quotas in the agreement.
Supplier
Relationship with Mimaki
On May 16, 2008, the Company entered into a distribution agreement
with Mimaki for distribution of its
digital printing equipment. The agreement
gives the Company non-exclusive distribution rights for all of the United
States. There are no minimum purchase quotas in the agreement.
Other
Supplier Relationships
The Company obtains its inventory for its supplies and accessories
business from many different sources. The Company believes that alternate
sources of supply are readily available.
Customers
The Companys customer base for decorated apparel equipment includes
large operators who run numerous machines (which accounts for a smaller
percentage of the Companys business than in years past) as well as individuals
who customize products on a single machine. Principal customer groups include: (i) contractors,
who serve manufacturers that outsource their embellishment requirements; (ii) manufacturers,
who use embroidery, screenprinting, laser etching or digital printing to
embellish their apparel, accessories, towels, linens and other products; and (iii) graphic
and decorated apparel 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 embroidery equipment manufacturers,
such as Barudan, Brother International, Happy, Melco Industries and SWF, all of
whom distribute products into the Companys markets. The Company also competes
with original screen printing equipment manufacturers, such as M & R,
TAS, Anatol and Workhorse. For textile laser bridges, the Company competes
against GMI and Proell and for digital printing, competes against DTG and
Brother. 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
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equipment
it distributes. Due to the recent decline in overall demand for the decorated
apparel 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 the
Company to maintain its profit margins would have a material adverse effect on
the Company.
Further, the Companys customers are subject to competition from
importers of decorated apparel products, which could materially and adversely
affect the Companys customers, and consequently could have a material adverse
effect on the Companys business, financial conditions and results of
operations.
The Companys success is dependent, in part, on the ability of Tajima,
MHM, Kornit, Mimaki and SEIT to continue producing products that are
technologically superior and price competitive with those of other
manufacturers. The failure of Tajima, MHM, Kornit, Mimaki and SEIT to produce
technologically superior products at a competitive price could have a material
adverse effect on the Companys business, financial condition and results of
operations.
Employees
As of December 31, 2008, the Company employed 138 persons who are
engaged in sales, service, customer care, finance, administration and management
for the Company. None of the Companys employees are represented by unions. The
Company believes its relationship with its employees is good.
Item 1A. RISK FACTORS
The Company is dependent on its relationship with Tajima and
if that relationship were terminated, the Companys business, financial
condition and results of operations would be materially adversely affected.
For the year ended December 31, 2008, approximately 54% of the
Companys revenues resulted from the sales of embroidery equipment supplied by
Tajima and for the year ended December 31, 2007 72% of the Companys
revenues resulted from new Tajima equipment sales. Two separate distributorship
agreements (collectively, the Tajima Agreements) govern the Companys 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 Tajimas complete line of
standard embroidery, chenille embroidery and certain specialty embroidery
machines in all 50 states. The Main Agreement, which 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 non-exclusive West Coast Agreement which covers nine western
continental states, and Alaska and Hawaii, the Company is a distributor of
Tajimas complete line of standard embroidery, chenille embroidery and certain
specialty embroidery. The West Coast Agreement, as amended, expired February 20,
2009. 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 Companys right to distribute embroidery
machines in the territories covered by the West Coast Agreement which would
have a material adverse effect on the Companys business, operations and
financial condition. Each of the Tajima agreements contains language that
permits termination if the Company fails to achieve certain minimum sales
quotas or annual targets. In 2008 the Company received a waiver and for 2007,
the Company met its minimum quota. Furthermore, the
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agreements
may be terminated for, among other reasons, if (a) Paul Gallagher is no
longer Chief Executive Officer 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 Companys
business, financial condition and results of operations.
If the Companys supply of Tajima equipment is disrupted,
the Companys financial condition and results of operations could be materially
adversely affected.
Importing Tajimas 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 Companys
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.
The decline in the domestic embroidery industry and the U.S.
economy has had a material adverse effect on the Company.
Beginning in fiscal 1999 and continuing to present day, 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, the 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 with Tajima), both 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. Our operating results are impacted by the health of the United States
economy. Our business and financial performance has been and continues to be
adversely affected by current economic conditions that cause a decline in
business and spending of our customers, including a reduction in the
availability of credit for our customers, financial market volatility and
recession.
Since the Company pays certain suppliers in foreign
currency, it is subject to foreign currency risks.
The Company pays for its Tajima embroidery machinery in Japanese Yen,
its MHM screenprinting equipment in U.S. Dollars and Euros and its SEIT lasers
in Euros. Any change in the valuation of the U.S. Dollar compared to the
Japanese Yen and to the Euro can change the cost to the Company of its embroidery
machines, its screenprinting machines and its textile laser inventory and can
result in competitive pressures for reduced U.S. dollar pricing among Yen-based
and Euro 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 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
D-11
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and
losses in foreign exchange transactions are recorded in the cost of sales
section of the statement of operations.
The Company is dependent on its relationship with MHM and if
that relationship were terminated, the Companys business, financial condition
and results of operations would be materially adversely affected.
For year 2008, approximately 10% of the Companys revenues resulted
from the sale of screen printing equipment supplied by MHM. The distribution
agreement provides the Company with exclusive rights for ten years to sell MHM
screen printing equipment in North America. The agreement stipulates that the
Company must purchase a minimum of $5 million worth of screen printing
equipment during each year. If the Company fails to achieve the minimum quota
in any year because it only orders half of the quantity required, then MHM
Austria shall have the right to terminate the agreement. For 2008 MHM waived
its minimum purchase requirement.
If the Company does not accurately predict inventory level
needs, its business could be materially adversely affected.
The Companys ordering cycle for new embroidery machines is
approximately three to eight months, approximately seven to ten weeks for new
screen printing equipment and approximately eight weeks for new textile lasers
prior to delivery to the Company. Since the Company generally delivers new
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 Companys business, financial condition and results of operations.
The Company may not be able to successfully compete against
its competitors.
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 Tajimas 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 screen printing equipment, textile lasers, software,
supplies, accessories and proprietary products as well as providing customer
training, support and services. Due to the decline in overall demand in the
apparel decorating industry which occurred during the last several years,
potential customers may emphasize price differences over value-added services
and support in purchasing new equipment. Severe price competition may impair
the Companys 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 Companys failure to compete
effectively in these areas could have a material adverse effect on its
business, financial condition and results of operations.
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 Tajimas embroidery equipment
to be of the highest quality and state of the art. The Companys future success
will depend, to a certain extent, on the ability of Tajima to adapt to
D-12
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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 Companys business, financial conditions and results of
operations.
The Company is dependent on its existing management team and
if any of the key personnel left, the Company would be adversely affected.
Changes in Companys business have resulted in increased
responsibilities for management and have placed increased demands upon the
Companys operating, financial and technical resources. The Companys continued
success will depend to a significant extent upon the abilities and continued
efforts of Paul Gallagher, its Chief Executive Officer. Mr. Gallagher is
bound by a 3 year agreement that commenced on September 11, 2006. The loss
of the services of Mr. Gallagher, or the services of other key management
personnel, could have a material adverse effect upon the Companys business,
financial condition and results of operations.
The Companys subsidiary, U.S. Graphics, is dependent on its
shareholders for financial support, and since continued support has not been
determined, U. S. Graphics could be adversely affected.
U. S. Graphics incurred a net loss in 2007 and 2008 and currently does
not have a credit facility with bank Accordingly, U. S. Graphics currently
seeks financial support from its parent through a revolving note payable. If such
support is not sustained from its parent, U.S. Graphics will face liquidity
issues.
The current economic environment has resulted in lower
consumer confidence and lower sales
.
If this trend
continues the Company could
be adversely affected.
This current trend may lead to further reduced consumer spending, which
could affect our net sales and our future profitability. Therefore, we have
taken cost reduction actions to address the uncertainty period posed by the
current economic conditions. The Company is also seeking a new revolving line
of credit. However, there is no guarantee that the cost reduction actions, or
the new revolving line of credit, if obtained, will offset any future effect on
our net sales.
The Companys current share price is below the $1.00 minimum
listing requirement for the NASDAQ Global market and the market value of its
publically held shares is below the $5 million requirement. NASDAQ Global
market has currently suspended these listing requirements until July 20,
2009.
If NASDAQ Global Market does not extend its suspension of its $1.00
minimum listing requirement and the $5 million minimum market value of publicly
held shares requirement, or the Company does not get compliant with these
listing requirements by July 20, 2009, the Company could be delisted.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
D-13
Table of Contents
ITEM 2. PROPERTIES
The Companys corporate headquarters is in Hauppauge, New York in a
15,000 square foot facility.
During fiscal 2002, the Companys the companys corporate headquarters
building was sold to M3GH Properties, LLC and subsequently leased back to the
Company. This property housed the Companys executive offices, the Northeast
sales office, technical services, machine and parts warehousing, and order
fulfillment. On February 23, 2006, the Company surrendered this lease and
concurrently signed a new 62 month lease for approximately 15,000 square feet
in a facility also located in Hauppauge, New York which became the Companys
new headquarters facility in July 2006.
In addition to the Companys headquarters, the Company leases 20
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.
U. S. Graphics is located in Tempe, AZ where they develop and
manufacture digital printing equipment within a 25,000 square foot facility
that has a three year lease that commenced August 4, 2008 and expires on August 3,
2011. The Company does not guarantee the lease.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in various litigation matters, each 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 Companys consolidated financial position or results of
operations and cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a)
The Companys
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 Global 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 Global
Market. Trading began in the Class A Common Stock on February 17,
1994. Class B Common Stock is not publicly traded.
D-14
Table
of Contents
2008
|
|
High
|
|
Low
|
|
Fourth Quarter ended December 31, 2008
|
|
$
|
0.99
|
|
$
|
0.22
|
|
Third Quarter ended September 30, 2008
|
|
$
|
1.42
|
|
$
|
0.96
|
|
Second Quarter ended June 30, 2008
|
|
$
|
2.28
|
|
$
|
1.24
|
|
First
Quarter ended March 31, 2008
|
|
$
|
1.98
|
|
$
|
1.46
|
|
2007
|
|
High
|
|
Low
|
|
Fourth Quarter ended December 31, 2007
|
|
$
|
2.67
|
|
$
|
1.69
|
|
Third Quarter ended September 30, 2007
|
|
$
|
4.70
|
|
$
|
2.15
|
|
Second Quarter ended June 30, 2007
|
|
$
|
5.25
|
|
$
|
3.20
|
|
First Quarter ended March 31, 2007
|
|
$
|
4.12
|
|
$
|
2.08
|
|
(b)
As of
March 24, 2009, the Company believes that there were approximately 101
record holders of its Class A Common Stock and 1 record holder of its
Class B Common Stock.
(c)
No dividends
were declared during 2008 or 2007.
(d)
Equity
Compensation Plan Information
Plan category
|
|
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights (a)
|
|
Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
(b)
|
|
Number of securities
remaining available
for future issuance
under equity
compensation plans
excluding securities
reflected in column
(a) (c)
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by security holders
|
|
1,683,000
|
|
$
|
1.62
|
|
1,215,000
|
|
|
|
|
|
|
|
|
|
|
ITEM
6. SELECTED FINANCIAL DATA
Disclosure not required by
smaller reporting companies.
ITEM 7. MANAGEMENTS
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 Companys 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 Companys Consolidated Financial Statements, including the
Notes thereto. Historical results are not necessarily indicative of trends in
operating results for any future period. The current economic environment has
resulted in lower consumer confidence and lower sales. This trend may lead to further
reduced consumer spending, which could affect our net sales and our
profitability.
D-15
Table of
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Company
Overview
The Company, founded in 1968, is a leading provider
of equipment and education and support services to the decorated apparel
industry. The Company represents the decorated apparel industrys leading
brands including Tajima embroidery equipment, MHM screen printing equipment,
SEIT textile bridge lasers, Pulse Microsystems digitizing and design software,
Kornit and Mimaki digital printers. 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 Tajima USA, Inc.
(TUI), screen printing machines manufactured by MHM, textile laser machines
manufactured by SEIT, digital printer manufactured by Kornit and Mimaki as well
as a wide variety of supplies and accessories.
On August 4, 2008, the Company acquired 80% of
the outstanding equity interest in U. S. Graphic Arts, Inc. (U.S.
Graphics) pursuant to a Share Purchase and Sale Agreement. In connection with,
and as is condition to the acquisition, Graphic Arts Acquisition Corporation, a
wholly-owned subsidiary of the Company, purchased certain outstanding
indebtedness of U.S. Graphics and agreed, under certain circumstances, to make
further advances to U. S. Graphics. U. S. Graphics develops and manufactures
digital inkjet printers for the worldwide decorated apparel industry.
The current economic environment has resulted in
lower consumer confidence and lower sales. This trend may lead to further
reduced consumer spending, which could affect our net sales and our future
profitability. Therefore, we have taken cost reduction actions to address the
uncertainty posed by the current economic conditions. The Company is also
seeking a new revolving line of credit.
The Company is and has been
affected by the fluctuating value in foreign exchange of the US dollar versus
the Yen resulting in dollar price pressure for machine sales. Most Japanese
based equipment competitors in the industry (including the Company) have faced
difficulty as a result of the fluctuation in the exchange rate.
Results of Operations
The following table presents certain income
statement items expressed as a percentage of total revenue for the years ended December 31,
2008 and 2007.
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Net sales
|
|
100
|
%
|
100
|
%
|
Cost of sales
|
|
69.8
|
%
|
62.6
|
%
|
Operating expenses
|
|
46.7
|
%
|
33.8
|
%
|
Interest expense
|
|
0.1
|
%
|
0.0
|
%
|
Other expense (income), net
|
|
-0.4
|
%
|
-0.7
|
%
|
Income (loss) before income taxes
|
|
-16.3
|
%
|
4.3
|
%
|
Income tax provision
|
|
0.0
|
%
|
0.3
|
%
|
Net Income (loss)
|
|
-16.3
|
%
|
4.0
|
%
|
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Table of
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Use of Estimates and Critical Accounting Policies
The preparation of Hirschs 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 are likely to 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,
screenprinting and laser 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 2008 and 2007, most sales of new equipment did
not require installation as a substantive part of sales, and accordingly, the
Company recorded its sales at the time the machinery was shipped. Service
revenues (which are not material) and costs are recognized when services are
provided. Sales of software are recognized when shipped since no post-contract
or support obligations remain. Sales of parts and supplies are recognized when
shipped.
Identifiable Intangible Assets Our definite lived intangible assets
are tested under FAS 144 Accounting for the Impairment or Disposal of
Long-Lived Assets
when impairment
indicators are present. An undiscounted model is used to determine if the
carrying value of the asset is recoverable. If not, a discounted analysis is
done to determine the fair value. We engage a valuation analysis expert to
prepare the models and calculations used to perform the tests, and we provide
them with estimates regarding the expected growth and performance for future
years.
Changes in the assumptions used could materially impact our fair value
estimates. Assumptions critical to our fair value estimates are: (i) discounted
rate used to derive the present value factors used in determining the fair
value of the trademarks and customer lists; (ii) royalty rates used in our
trademark valuation; (iii) projected average revenue growth rates used in
the trademark and customer list models; and (iv) projected long-term
growth rates used in the derivation of terminal year values. These and other
assumptions are impacted by economic conditions and expectations of management
and will change in the future based on period-specific facts and circumstances.
The 2008 impairment charge to identifiable intangible assets of
$845,000 relates to the customer list of U.S. Graphics, which was primarily the
result of a decrease in the projected revenue derived from repeat customers,
especially due to poor performance in early 2009. At December 31, 2008,
after the impairment charge, we had identifiable intangible assets of
approximately $481,000.
As indicated above, the method to compute the amount of impairment
incorporates quantitative data and
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qualitative
criteria including new information that can dramatically change the decision
about the valuation of an intangible asset in a very short period of time.
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 customers financial condition and current
economic trends. If the actual uncollected amounts significantly exceed the
estimated allowance, then the Companys operating results could be
significantly adversely affected. The Company maintains a lien on its equipment
sales until the required payment is made.
Inventories - Inventories are valued at the lower of
cost or market. Cost is determined using the First-in, first-out weighted
average cost method for supplies and parts and specific cost for embroidery and
screenprinting 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
managements 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 Companys cost of sales,
gross profit and net income (loss) could be significantly adversely affected.
Warranty - The Company provides a five-year limited warranty for its
embroidery machines and a one-year limited warranty for its screenprinting,
textile lasers and digital printing machines. The Companys 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 Companys 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 Companys operating expenses and net income (loss) could
be significantly adversely affected.
Stock Based Compensation - The Company accounts for share-based
compensation cost in accordance with Statement of Financial Standards No. 123(R),
Share-Based Payment. The fair value of each option award is estimated on the
date of grant using a Black-Scholes option valuation model. The compensation
cost is recognized over the service period which is usually the vesting period
of the award. For the years ended December 31, 2008 and 2007, the Company
recognized $353,000 and $759,000, respectively, of non-cash compensation
expense included in Selling, General and Administrative expense in the
Consolidated Statement of Operations. The Company used the Black-Scholes
valuation model. This option pricing model requires the impact of highly
subjective assumptions including the expected lives, volatility, risk free rate &
expected dividend rate. It also requires the Company to estimate for
forfeitures.
2008
as Compared to 2007
Net sales. Net sales for 2008 were $42.5 million, a decrease of $10.1
million, or 19.2% compared to $52.6 million for 2007. The decrease in sales
volume 2008 is mainly attributable to the decrease in sales volume of $14.3
million from Tajima embroidery equipment, a $0.6 million decrease in
screenprinting equipment, and a decrease of $0.8 million from software sales.
Offsetting these products were increases in SEIT textile lasers of $0.8
million, Kornit and Mimaki digital printers of $1.0 million, and sales from U.
S Graphics of $4.2 million from their T-Jet digital printer and ancillary
products. All other product categories combined for a decrease of
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$0.3
million. There are no major customers who exceed 10% of revenues in either
period.
Cost of sales. For 2008, cost of sales decreased $3.2 million or 9.7%,
from $32.9 million in 2007 to $29.7 million in 2008. The decrease was primarily
the result of $7.6 million in Tajima embroidery machines, $0.7 million in MHM
screenprinting equipment. Offsetting the increase was a $3.8 million increase
from U. S. Graphics, $1.0 million from Kornit and Mimaki digital printing
equipment, $0.6 million in SEIT textile lasers. All other product categories
resulted in a net decrease of $0.2 million. Included in cost of sales for 2008
and 2007 was a currency gain of $177,000 and $43,000 respectively. The Companys
gross margin decreased for 2008 to 30.2%, as compared to 37.4% for 2007. The
reduction in gross margin was a result of reduced selling prices and higher
product costs. For the year ended December 31, 2008 as compared to the
year ended December 31, 2007, the Company experienced a decrease in gross
margin dollars primarily from embroidery machines of $6.7 million, and from
software sales of $0.8 million. These were offset by increases in gross margin
dollars from U. S. Graphics of $0.4 million, from MHM screenprinting machines
of $0.1 million, and from SEIT Textile lasers of $0.2 million and $0.2 million
from Kornit and Mimaki digital printers. All other product categories combined
resulted in a total gross margin decrease of $0.2 million. The fluctuation of
the dollar against the yen, which is the currency the Companys embroidery
machines are priced in, has affected and is likely to continue to affect the
Companys machine sales pricing competitiveness. Embroidery machinery prices
have changed in US dollars due to these exchange rate fluctuations. Some, but
not, all of the Companys competitors face similar circumstances.
Operating Expenses. For 2008, overall operating expenses increased $2.1
million or 11.8%, from $17.8 million in 2007 to $19.9 million for 2008.
Selling, general and administrative expenses associated with the Companys
ongoing operations increased $0.8 million, or 4.4% to $19.0 million for 2008
from $18.2 million for 2007. The increase in selling, general and
administrative expenses are attributable to increased marketing costs
associated with adding three new digital printing products of $0.2 million,
increased depreciation and amortization associated with implementing a new
Enterprise Resource Planning (ERP) and Customer Relationship Manangement (CRM)
system of $0.1 million and $2.6 million in operating expenses from U.S
Graphics. These increases were partially offset by decreases in salaries and
commissions of $1.2 million, reduction of professional fees of $0.3 million and
all other items netting to a $0.6 million decrease. Included in 2008 operating
expenses was an impairment charge for $845,000, related to the impairment of
the Customer List from U.S. Graphics. Included in 2007 were approximately $0.9
million in bonus costs and the recognition of $450,000 in income associated
with the settlement agreement with Sheridan Square Entertainment.
Interest Expense. Interest expense for 2008 was $63,000 as compared to
$12,000 for 2007. The increased interest expense relates to financing costs
primarily from U.S. Graphics.
Other (Income) Expense. Other income for 2008 was $190,000 of other
income as compared to $357,000 in 2007. In both 2008 and 2007 this was
primarily due to lower cash balances at lower interest rates resulting in lower
interest income.
Income Tax Provision. The income tax provision reflects an effective
tax rate of 0.0% for 2008 as compared to an effective tax rate of 7.1% for
2007. The difference of the above rates to the federal statutory rate are a
result of adjustments for state income taxes and permanent differences offset
by the valuation allowance established on deferred tax assets since the Company
cannot determine the future utilization of those assets.
Net Income. The net loss for 2008 was $6.9 million as compared to net
income for year 2007 was $2.1 million, a change of $9.0 million.
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Liquidity
and Capital Resources
The Companys working capital decreased $8.4 million or 44.2% to $10.6
million at December 31, 2008 from $19.0 million at December 31, 2007.
This decrease was primarily the result of decreased operating results.
During 2008, the Companys cash decreased $9.5 million or 66.0% to $4.9
million from $14.4 million at December 31, 2007. Cash used in operating
activities in calendar 2008 was $7.5 million. Of these amounts, $2.3 million
resulted from the unrestricting of cash used to collateralize a standby letter
of credit, $9.8 million was used in other operating activities including
the paydown of accounts payable and the purchase of inventory.
Cash used in investing activities consisted of capital expenditures of
$1.4 million which is from the investment in a new CRM and ERP system. Cash
used in financing activities was $0.5 million primarily relating to the payoff
of acquired debt.
Revolving
Credit Facility and Borrowings
The Company does not currently have a credit facility as it believes it
has sufficient cash to fund current working capital needs. The Company, at this
time, does intend to enter into a new revolving line of credit.
Future
Capital Requirements
The Company believes its existing cash and funds generated from
operations will be sufficient to meet its working capital requirements. Working
capital requirements at the Companys subsidiary, U.S. Graphics, is primarily
dependant on a revolving note payable with its ultimate parent. If U.S.
Graphics cannot sustain the facility, U.S. Graphics will have working capital
deficiencies.
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 customers
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 Companys operating results.
Off
Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
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Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements,
which
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS No. 157 defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15,
2007. In February 2008, the FASB provided a one-year deferral for the
implementation of SFAS 157 for nonfinancial assets and liabilities recognized
or disclosed at fair value in the financial statements on a nonrecurring basis.
The adoption of SFAS No. 157 did not have a material impact on our results
of operations or our financial position. For 2008, SFAS 157 had no impact
because the Company does not have any financial assets and liabilities that get
marked to market on a recurring basis.
In December 2007, the FASB issued SFAS No. 141 (revised
2007), Business Combinations
(SFAS 141R), which requires an acquirer to
do the following: expense acquisition related costs as incurred; to record
contingent consideration at fair value at the acquisition date with subsequent
changes in fair value to be recognized in the income statement; and any
adjustments to the purchase price allocation are to be recognized as a period
cost in the income statement. SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the first annual
reporting period beginning on or after December 15, 2008. Earlier
application is prohibited. The adoption of SFAS 141R will effect the accounting
for future acquisitions, if any.
In December 2007, the FASB issued Statement No. 160, Noncontrolling
Interests in Consolidated Financial Statementsan amendment of ARB No. 51.
This statement establishes
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. This statement is
effective prospectively, except for certain retrospective disclosure
requirements, for fiscal years beginning after December 15, 2008. The
adoption of FASB No. 160 is not expected to have a material impact on our
results of operations or our financial position.
In March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133,
which changes the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged
items affect an entitys financial position, financial performance, and cash
flows. SFAS No. 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Disclosure not required by smaller reporting companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the information contained in pages F-1 through F-24 hereof.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
The
Companys management, including its Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), has evaluated the effectiveness of the Companys
disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act) as of December 31, 2008. Based on that evaluation, the Companys CEO
and CFO have concluded that the Companys disclosure controls and procedures
are effective in recording, processing, summarizing and reporting, within the
time periods specified in the SECs rules and forms, information required
to be disclosed by the Company in the reports it files or submits under the
Exchange Act, and in ensuring that information required to be disclosed in the
reports that the Company files or submits under the Exchange Act is collected
and conveyed to the Companys management, including its CEO and CFO, to allow
timely decisions to be made regarding required disclosure.
Managements
Report on Internal Control Over Financial Reporting
The
Companys management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). The Company performed an
evaluation, under supervision and with participation of the Companys
management, including its CEO and CFO, of the effectiveness of the Companys
internal control over financial reporting based on the framework in
Internal Control-Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
Managements assessment of and conclusion of the effectiveness of internal
control over financial reporting did not include the internal controls of U. S.
Graphics, which was acquired on August 4, 2008, and which is included in
the statements of income, stockholders equity, and cash flows for the year
then ended. U. S. Graphics represented 9.9% of revenues and 9% of our assets.
Additional information regarding the acquisition of U.S. Graphics is available
in the Notes to the Consolidated Financial Statements included in this Form 10-K
for the year ended December 31, 2008. Management did not assess the
effectiveness of internal control over financial reporting of U. S. Graphics
because of the timing of the acquisition. Based on that evaluation, the CEO and
CFO concluded that the Companys internal control over financial reporting was
effective as of December 31, 2008.
This
annual report does not include an attestation report of the Companys independent
registered public accounting firm regarding internal control over financial
reporting. Managements report was not subject to attestation by the Companys
independent registered public accounting firm pursuant to temporary rules of
the Securities and Exchange Commission that permits the Company to provide only
managements report in this annual report.
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Changes
in Internal Control Over Financial Reporting
There
have been no changes in the Companys internal controls over financial
reporting during the most recent quarter that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Information
Regarding Executive Officers and Directors
The following table sets forth the names and ages as
of March 18, 2009 of the Companys directors and executive officers and
the positions they hold with the Company:
Name
|
|
Age
|
|
Position
|
Henry
Arnberg
|
|
66
|
|
Chairman
of the Board of Directors
|
Paul
Gallagher
|
|
59
|
|
Chief
Executive Officer, President, Chief Operating Officer and Director
|
Marvin
Broitman
|
|
70
|
|
Director
|
Mary
Ann Domuracki
|
|
54
|
|
Director
|
Christopher
J. Davino
|
|
43
|
|
Director
|
Beverly
Eichel
|
|
51
|
|
Executive
Vice President, Finance and Administration, Chief Financial Officer and Secretary
|
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. From December 1,
2004 through November 30, 2007 Mr. Arnberg was a consultant to the
Company. 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 Companys 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,
was the President of Uniwave, Inc., a company engaged in the engineering
and manufacturing of automation accessory equipment for textile machinery since
1968 until his retirement in May 2008. Mr. Broitman received a
Bachelor of Electrical
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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. (an
investment banking firm) 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
Certified Public Accountant and a member of the American Institute of Certified
Public Accountants (AICPA), and has a Bachelor of Business Administration
from 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 J. Davino was appointed on January 29, 2009 the
interim President, Chief Executive Officer of Premier Exhibitions, Inc.
Prior to that, he was the business leader of XRoads Solutions Group (a
corporate restructuring management consulting company) in their corporate
rescue practice. He has served as a director of the Company since October 2004.
Since early 2006, Mr. Davino has been President of Osprey Point Advisors,
LLC, a firm providing consulting and investment banking services to companies
including capital raising and mergers and acquisitions. From July 2004
through December 2005, Mr. Davino was President of E-Rail Logistics
Inc., a rail logistics company. Prior to that position, Mr. Davino worked
as a restructuring professional at Wasserstein and Perella and Zolfo Cooper. 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. Mr. Davino
received his Bachelor of Science in Finance from Lehigh University.
Beverly Eichel, has been Executive Vice President of Finance and
Administration and Chief Financial Officer of the Company since February 1,
2002. Ms. Eichel has also served as the Companys 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
non-active 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.
Committees
of the Board of Directors
The Board of Directors has an Audit Committee, a Compensation Committee
and a Stock Option Committee. The Audit Committee was established in accordance
with section 3(a)(58)(A) of the Securities Exchange Act of 1934, as
amended (the Exchange Act). Each member of the Audit Committee is an independent
director
as defined in Rule 4200(a)(15)
of the NASDAQ Capital Market, Inc. listing standards, as applicable and as
may be modified or supplemented. The members of the Audit Committee are Mary
Ann Domuracki, Marvin Broitman and Christopher J. Davino. MaryAnn Domuracki,
Chairman of the Audit Committee, is an audit committee financial expert within
the meaning of Item 407(d)(5) of Regulation S-K promulgated under the
Exchange Act. The audit committee has adopted a written Audit Committee
Charter.
The Company does not have a Nominating Committee. The view of the Board
of Directors is that it is appropriate for the Company not to have such a
committee as each member of the Board participates in the
D-24
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consideration of a nominee.
Of the five current Board members, three are independent
under the existing standards
of NASDAQ Capital Market issuers and director nominees are required to be
approved by a majority of the entire Board and a majority of the independent
directors. The Board generally relies on its network of industry and
professional contacts in connection with identifying potential Board members.
The Board is also open to presentation of nominees recommended by security
holders provided that sufficient information about the proposed nominees
business, industry and financial background is provided to the Board and such
information is received not less than 120 days prior to the release of the
proxy statement to our shareholders. The Board will only consider nominess that
have the requisite industry or financial experience to be able to advise and
direct senior management in the Companys operations. At a minimum, each
nominee: (i) must be prepared to represent the best interest of all of the
Companys shareholders, (ii) must be an individual who has demonstrated
integrity and ethics in his/her personal and professional field and has established
a record of professional accomplishment in his/her chosen field, (iii) must
not have (and his/her family members must not have) any material personal,
financial or professional interest in any present or potential competitor of
the Company; and (iv) must be prepared to participate fully in Board
activities, including attendance at, and active participation in, meetings of
the Board and not have other personal or professional commitments that would
interfere or limit his or her ability to do so.
Code
of Ethics
The Company has adopted a code of ethics applicable to the Companys
Chief Executive Officer and Chief 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 without charge, upon request, a copy of the Companys 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 Companys 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.
Code
of Conduct
The Company adopted a Code of Conduct that applies to all employees,
including all executive officers. Print copies of the Code of Conduct are
available to any stockholder that requests a copy.
Section 16(a) Beneficial
Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires
the Companys executive officers and directors and persons who own more than
ten percent of a registered class of the Companys equity securities
collectively, the Reporting Persons
to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and to furnish the
Company with copies of these reports. Based solely on the Companys review of
the copies of such forms received by it during the year ended December 31,
2007, the Company believes that the Reporting Persons complied with all filing
requirement applicable to them.
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ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation Components
The Company has entered into employment agreements with its President
and Chief Executive Officer and its Executive Vice President - Finance, Chief
Financial Officer and Secretary. These employment contracts cover the key
elements of the Companys executive compensation package, which consist of base
salary and short-term and long-term incentives, and cover severance and termination
benefits. These employment agreements are discussed below under the heading Employment
Agreements. Our policy for allocating between currently paid and long-term
compensation is to ensure adequate base compensation to attract and retain
personnel, while providing incentives to maximize long-term value for our
company and shareholders. Likewise, the Company provides cash compensation in
the form of base salary to meet competitive salary norms and reward good
performance on an annual basis and in the form of bonus compensation to reward
performance for specific short-term goals or in the discretion of the
Compensation Committee. The Company provides equity compensation to reward
performance for objectives and long-term strategic goals and to assist in
retaining executive officers and aligning the interests of Hirsch and its
shareholders.
Base Salary
Mr. Gallagher and Ms. Eichel are entitled to minimum base
salaries set forth in their employment agreements (See Employment Agreements).
The base salaries for Mr. Gallagher was $425,000 and for Ms. Eichel
$300,000 for 2008. For the year ending December 31, 2009, Mr. Gallagher
and Ms. Eichels base salaries are set by their employment agreements.
The
following are the salaries for the year ending December 31, 2009:
Executive Officer
|
|
Base Salary
|
|
Paul Gallagher
|
|
$
|
425,000
|
|
Beverly Eichel
|
|
$
|
315,000
|
|
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 years performance, the Companys
Compensation Committee understands and accepts that such payments may vary
considerably from one year to the next. The Companys bonus program generally
ties executive compensation directly back to the annual performance of the
Company overall. These executives may earn a percentage of their base salary
set forth in the executives employment agreement, pursuant to the Companys
annual incentive program, as a performance-related bonus.
There was no incentive plan or discretionary bonus awarded during the
period ended December 31, 2008.
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Long-Term Incentives
During the year ended December 31, 2008, and
2007, 75,000 options (pursuant to an employment agreement) and 625,000 options
(of which 425,000 was pursuant to employment agreement), respectively, were
granted to the Companys senior executives.
Timing of Grants.
Awards have
historically been granted to executive officers and eligible full-time
employees once per year. The Stock Option Committee has typically met annually
within the first 120 days after the start of the new fiscal year and approved
the annual grant of options (if given). In 2007, the Board of Directors and
Stock Option Committee kept its historical practice of granting annual awards
to directors, executive officers and eligible full-time employees under the
2003 Stock Option Plan. No additional awards, other than the 75,000 option
grant discussed above, were granted in year 2008 to executives.
There is no effort to time the meeting and the
related approval of awards with the release of material non-public information.
There are typically no releases of material non-public information by the
Company until the latter half of March when the announcement of the
earnings for the previous fiscal year is completed. The timing of grants for
newly hired executives is not timed in coordination with the release of
material non-public information. The Company does not grant awards based on the
pending release of material non-public information and the Company does not
release material non-public information for the purpose of affecting the value
of executive compensation.
Pricing of Grants.
Options granted
under the 2003 Stock Option Plan may not be granted at a price less than the
fair market value of the Class A Common Stock on the date of the grant.
SUMMARY
COMPENSATION TABLE FOR THE YEAR ENDED DECEMBER 31, 2008
The following table sets forth compensation earned
during the calendar year ended December 31, 2008 by the Companys
Principal Executive Officer, and Chief Financial Officer who are the only
executive officers of the Company (the Named Executives):
Name and
Principal
Position
|
|
Year
|
|
Salary
($)
|
|
Option
Awards
($) (1)
|
|
Non-Equity
Incentive
Plan
Compensation
($) (2)
|
|
All Other
Compensation
($)(3)
|
|
Total
Compensation
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul
Gallagher
|
|
2008
|
|
$
|
408,000
|
|
$
|
189,418
|
|
|
|
$
|
20,000
|
|
$
|
617,418
|
|
Chief
Executive Officer
|
|
2007
|
|
$
|
382,000
|
|
$
|
363,942
|
|
$
|
319,000
|
|
$
|
20,000
|
|
$
|
1,084,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beverly Eichel
Executive VP-Finance,
|
|
2008
|
|
$
|
299,000
|
|
$
|
37,532
|
|
|
|
|
|
$
|
336,532
|
|
|
2007
|
|
$
|
289,000
|
|
$
|
84,658
|
|
$
|
162,000
|
|
|
|
$
|
535,658
|
|
Chief
Financial Officer and Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
D-27
Table of Contents
(1)
|
Represents
the compensation costs of stock options for financial reporting purposes
under FAS 123R, rather than an amount paid or realized by the Named Executive
Officer. Pursuant to SEC rules, the amounts shown exclude the impact of
estimated forfeitures. More information with respect to the assumptions used
in the calculation of these amounts is included in Note 2n to the Companys
consolidated financial statements for the year ended December 31, 2008 .
|
(2)
|
The
amounts shown reflect cash awards to the Named Executives under the Incentive
Plan, which is discussed in further detail under the heading Short-Term
Incentives. These amounts were earned in 2007, but paid in 2008 . No amounts
were earned in 2008.
|
(3)
|
Represents
the cost to the Company of Mr. Gallaghers use of a company car.
|
OUTSTANDING
EQUITY AWARDS AT DECEMBER 31, 2008
|
|
Option Awards
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
|
Equity Incentive
Plan Awards:
Number of
Underlying
Unexercised
Unearned Options
(#)
|
|
Option
Exercise Price
($)
|
|
Option
Expiration Date
|
|
|
|
50,000
|
|
25,000
|
(1)
|
|
|
$
|
2.34
|
|
9/11/12
|
|
|
|
150,000
|
|
|
|
|
|
$
|
1.12
|
|
12/01/09
|
|
|
|
100,000
|
|
|
|
|
|
$
|
1.34
|
|
01/27/11
|
|
Paul Gallagher
|
|
133,000
|
|
67,000
|
(1)
|
|
|
$
|
1.20
|
|
02/24/11
|
|
|
|
100,000
|
|
200,000
|
(2)
|
|
|
$
|
2.12
|
|
10/04/11
|
|
|
|
25,000
|
|
50,000
|
(1)
|
|
|
$
|
1.19
|
|
9/11/13
|
|
|
|
75,000
|
(1)
|
|
|
|
|
$
|
2.12
|
|
10/04/11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beverly Eichel
|
|
40,000
|
|
|
|
|
|
$
|
1.12
|
|
12/01/09
|
|
|
50,000
|
|
|
|
|
|
$
|
1.34
|
|
01/27/11
|
|
|
34,000
|
|
17,000
|
(1)
|
|
|
$
|
1.20
|
|
02/24/11
|
|
|
67,000
|
|
33,000
|
(2)
|
|
|
$
|
2.12
|
|
11/20/11
|
|
|
(1)
|
|
Options
vest over three years and expire on the fifth anniversary of their grant.
|
|
|
|
|
|
(2)
|
|
These
options vest as follows:
|
|
|
·
|
One
third vest on the date immediately following the period that the closing
price of the Common Stock remains at or above $2.50 for at least twenty
consecutive trading days;
|
|
|
·
|
One
third vest commencing on the date occurring after September 11, 2007
immediately following the period that the closing price of the Common Stock
remains at or above $3.00 per share for a period of at least
twenty (20) consecutive trading days;
|
|
|
·
|
One
third vest commencing on the date occurring after September 11, 2008
immediately following the period that the closing price of the Common Stock
remains at or above $3.50 per share for a period of at least twenty (20)
consecutive trading days thereafter.
|
D-28
Table of Contents
Retirement Benefits
Each of the Companys executive officers is entitled
to participate in the Companys defined contribution 401K plan on the same
basis as all other eligible employees. Under the terms of the 401K plan, as
prescribed by the Internal Revenue Service, the contribution of any
participating employee is limited to the lesser of a maximum percentage of
annual pay or a maximum dollar amount ($15,500 for 2008 and 2007). Our
executive officers are subject to these limitations and therefore the Company
does not consider its retirement benefits to be a material portion of the
compensation program for our executive officers.
Change of Control/Severance Benefits
Each of Mr. Gallagher and Ms. Eichel has
an employment agreements (see Employment Agreements
below for a description of
change of control benefits).
If a change of control occurred on December 31,
2008, the following compensation would be due:
Paul
Gallagher
|
|
$
|
425,000
|
|
Beverly Eichel
|
|
$
|
300,000
|
|
Employment Agreements
Paul Gallagher President and
Chief Executive Officer
On November 13, 2006, Paul Gallagher entered
into an employment agreement with the Company (the Agreement) to continue his
employment as the Companys President and Chief Executive Officer. The
Agreement became effective as of September 11, 2006, has a term of three (3) years
and provides for the payment of a base annual salary during the first year of
the term of Three Hundred Seventy Five Thousand ($375,000) Dollars; Four
Hundred Thousand ($400,000) Dollars during the second year of the term and Four
Hundred Twenty Five Thousand ($425,000) Dollars during the third year of the
term. Mr. Gallagher is also entitled to participate in the Companys
employee benefit programs and to receive bonuses under the Companys annual
incentive plan (Incentive Plan) for key executive employees.
The Agreement also provides for severance payments
to be paid to Mr. Gallagher should his employment be terminated (a) prior
to the expiration of its term due to Mr. Gallaghers death or disability;
or (b) prior to or concurrent with the expiration of the term, if the
Company fails to offer Mr. Gallagher employment with the Company as its
Chief Executive Officer or Chief Operating Officer at substantially the same
level of base salary, employee benefits and bonus compensation as set forth in
the Agreement. On the triggering of the severance payment obligation, the Company
shall pay Mr. Gallagher his regular base salary for a period of six months
following the occurrence of such event during which period, Mr. Gallagher
would be entitled to receive all health and dental, disability, survivor income
and life insurance plan or other benefit plan maintained by the Company. In
addition, the Company is required to pay Mr. Gallagher a pro rata portion
of the amount, if any, he would have been entitled to receive under the
Incentive Plan established for senior executive officers. In the event the
Company terminates Mr. Gallaghers Employment without cause
(as defined in the
Agreement), reduces his compensation, benefits or responsibilities or commits
any other material breach of the provisions of the Agreement and fails to cure
or remedy such breach within thirty (30) days following receipt of written
notice thereof, the Company is required to continue payment of Mr. Gallaghers
base salary for a period of twelve (12) months, or if shorter, for a period
from the date of termination through and including the month of March, 2010
during which period, Mr. Gallagher would be entitled to receive all health
and dental, disability, survivor income and life insurance plan or other
benefit plan maintained by the Company.
D-29
Table of Contents
Under Mr. Gallaghers agreement there is a
change of control provision pursuant to 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 within six (6) months of the
change of control or his resignation for good reason
following a change in
control during such period. In such an event, Mr. Gallagher is entitled to
receive an amount equal to his base salary payable over the succeeding twelve
(12) months in equal installments. In addition, Mr. Gallagher would be
entitled to receive all health and dental, disability, survivor income and life
insurance plan or other benefit plan maintained by the Company. The
aforementioned employee benefits shall terminate when Mr. Gallagher
obtains employment with another employer during the severance period, and
become eligible for coverage under a substantially similar plan provided by the
new employer.
Mr. Gallagher was or will be granted options
(the Options) to purchase up to 525,000 shares (375,000 shares granted in
2006, 75,000 shares granted in 2007 and 75,000 shares were granted in 2008) of
the Companys Class A Common Stock pursuant to the Companys 2003 Stock
Option Plan. In 2006, 300,000 options were granted at an exercise price of
$2.12 per share and vest as follows:
·
100,000 Options
vested on the date immediately following the period that the closing price of
the Class A Common Stock remained at or above $2.50 for at least twenty
consecutive trading days which was April 16, 2007;
·
100,000 Options
vest commencing on the date occurring after September 11, 2007 immediately
following the period that the closing price of the Class A Common Stock
remains at or above $3.00 per share for a period of at least twenty (20)
consecutive trading days;
·
100,000 Options
vest commencing on the date occurring after September 11, 2008 immediately
following the period that the closing price of the Class A Common Stock
remains at or above $3.50 per share for a period of at least twenty (20)
consecutive trade days thereafter.
In 2006, Mr. Gallagher was also granted Options
to purchase an additional 75,000 shares of Class A Common Stock at an
exercise price of $2.12 per share. The Company issued options to purchase
75,000 shares of Class A Common Stock on September 11, 2007 (which
were granted at $2.34, the closing price on the Nasdaq Global Market on such
date) and Options to purchase 75,000 shares of the Class A Common Stock
were granted on September 11, 2008 at a strike price equal to the closing
price of the Companys Class A Common Stock on each of those dates. These
options will vest in three equal annual installments of 33 1/3 percent each of
the first, second, and third anniversary of the date of grant.
Finally, any unvested stock options held by Mr. Gallagher
at the time of termination in connection with a change of control shall become
immediately vested and exercisable.
Beverly Eichel Executive Vice
President, Chief Financial Officer and Secretary
Effective February 1, 2008, Ms. Eichel
entered into a two-year employment agreement to serve as the Companys
Executive Vice-President-Finance and Administration, Chief Financial Officer
and Secretary.
D-30
Table of Contents
Ms. Eichels employment agreement provides for
the payment of an annual salary of $300,000 during the first year of the
agreement, and $315,000 during the second year of the agreement. The agreement
also entitles Ms. Eichel to participate in and receive a bonus under the
Companys incentive plan, with a possible maximum bonus of 70% of Ms. Eichels
annual base salary. In addition, Ms. Eichels 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 agreement also provides for severance payments
to be paid to Ms. Eichel should her employment be terminated (a) prior
to the expiration of its term due to Ms. Eichels death or disability; or (b) prior
to or concurrent with the expiration of the term, if the Company fails to offer
Ms. Eichel employment with the Company as its Chief Financial Officer at
substantially the same level of base salary, employee benefits and bonus
compensation as set forth in the Agreement. On the triggering of the severance payment
obligation, the Company shall pay Ms. Eichel her regular base salary for a
period of six (6) months following the occurrence of such event during
which period, Ms. Eichel would be entitled to receive all health and
dental, disability, survivor income and life insurance plan or other benefit
plan maintained by the Company. In addition, the Company is required to pay Ms. Eichel
a pro rata portion of the amount, if any, she would have been entitled to
receive under the Incentive Plan established for senior executive officers. In
the event the Company terminates Ms. Eichels Employment without cause
(as defined in the
Agreement), reduces her compensation, benefits or responsibilities or commits
any other material breach of the provisions of the Agreement and fails to cure
or remedy such breach within thirty (30) days following receipt of written
notice thereof, the Company is required to continue payment of Ms. Eichels
base salary for a period of six (6) months during which period, Ms. Eichel
would be entitled to receive all health and dental, disability, survivor income
and life insurance plan or other benefit plan maintained by the Company.
Under Ms. Eichels employment agreement there
is a change of control provision pursuant to 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 within six (6) months of the
change of control, or her resignation for good reason
following a change of
control during such period. In such an event, Ms. Eichel is entitled to
receive an amount equal to her base salary payable over the succeeding twelve
(12) months in equal installments. Additionally, Ms. Eichel would also be
entitled to receive any and all health and dental, disability, survivor income
and life insurance plan or other benefit plan maintained by the Company in
which she participated prior to the date of termination.
The aforementioned employee benefits shall terminate when and if Ms. Eichel
obtains new employment and becomes eligible for coverage under the new
employers benefit plans.
Finally, any unvested stock options held by Ms. Eichel
at the time of termination in connection with a change of control shall become
immediately vested and exercisable.
DIRECTOR
COMPENSATION FOR THE YEAR ENDED DECEMBER 31, 2008
The
table below summarizes the compensation paid by the Company to non-employee
Directors for the year ended December 31, 2008.
D-31
Table of Contents
Name (1)
|
|
Fees Earned or Paid
in Cash
($)
|
|
Option
Awards (2)/(3)
($)
|
|
Total
($)
|
|
Marvin Broitman
|
|
$
|
22,000
|
|
$
|
10,056
|
|
$
|
32,056
|
|
Mary Ann Domuracki
|
|
$
|
21,000
|
|
$
|
10,056
|
|
$
|
31,056
|
|
Henry Arnberg
|
|
$
|
12,250
|
|
|
|
$
|
12,250
|
|
Christopher J. Davino
|
|
$
|
21,250
|
|
$
|
10,056
|
|
$
|
31,306
|
|
(1)
|
Paul
Gallagher, the Companys President and Chief Executive Officer, is not included
in this table as he is an employee of the Company and thus receive no
compensation for his services as a director. The compensation received by
Mr. Gallagher as an employee of the Company is shown in the Summary
Compensation Table.
|
(2)
|
Reflects
the dollar amount recognized for financial statement reporting purposes for
the year ended December 31, 2008 in accordance with FAS123(R) and
thus includes the amount from awards granted in and prior to 2008. As of
December 31, 2008 each Director has the following number of options
outstanding: Marvin Broitman 50,000, Mary Ann Domuracki 50,000, and
Christopher J. Davino 50,000.
|
(3)
|
For
the year ended December 31, 2008, in accordance with FAS123R, the grant
date fair value of the option awards for Marvin Broitman, Mary Ann Domuracki,
Christopher J. Davino was $10,056 for each director.
|
Directors
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 stockholders 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 Companys 2004 Non-Employee Director
Stock Option Plan. Under the terms of our 2004 Non-Employee Director Stock
Option Plan, each non-employee director receives a grant of 10,000 options upon
their appointment to the Board. In addition, each non-employee director
receives an automatic grant of 10,000 options on the date of our Annual Meeting
of Stockholders, the exercise price for all of these options is the closing
price on the Nasdaq Global Market on the date of the grant.
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 March 10, 2008, 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. Except as
otherwise noted, the individual director or executive officer or his or her
family had sole voting and investment power with respect to the identified
securities. The total number of shares of our Class A Common Stock and Class B
common stock outstanding as of March 24, 2009 was 9,083,065 and 400,018
respectively.
D-32
Table of Contents
Name and Address of Beneficial
Owner (1)
|
|
Title of Class
(2)
|
|
Amount and Nature
of Beneficial
Ownership
|
|
Percent of
Class
|
|
|
|
|
|
|
|
|
|
Henry Arnberg
|
|
Class A
|
|
913,158
|
|
10.1
|
%
|
|
|
Class B
|
|
400,018
|
(3)
|
100
|
%
|
|
|
|
|
|
|
|
|
Paul Gallagher
|
|
Class A
|
|
1,331,233
|
(8)
|
13.7
|
%
|
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marvin Broitman
|
|
Class A
|
|
65,728
|
(5)
|
*
|
|
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mary Ann Domuracki
|
|
Class A
|
|
30,000
|
(6)
|
*
|
|
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher Davino
|
|
Class A
|
|
30,000
|
(7)
|
*
|
|
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beverly Eichel
|
|
Class A
|
|
404,666
|
(9)
|
4.4
|
%
|
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Executive Officers and Directors as a group (6
persons)
|
|
Class A
|
|
2,774,785
|
|
29.7
|
%
|
Paul Levine
|
|
Class B
|
|
400,018
|
|
100
|
%
|
|
|
Class A
|
|
1,099,621
|
(4)
|
12.1
|
%
|
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adam Gross
|
|
Class A
|
|
588,235
|
(10)
|
6.6
|
%
|
APG Capital, LP
|
|
Class B
|
|
|
|
|
|
APG Capital Partners, LP
|
|
|
|
|
|
|
|
APG Capital Management, LLC
|
|
|
|
|
|
|
|
12 Greenway Plaza, Suite 1100
|
|
|
|
|
|
|
|
Houston, Texas 77046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyd I. Miller, III
|
|
Class A
|
|
656,861
|
(11)
|
7.2
|
%
|
4550 Gordon Drive
|
|
Class B
|
|
|
|
|
|
Naples, FL 34102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The PNC Financial Services Group, Inc.
|
|
Class A
|
|
493,702
|
(12)
|
5.4
|
%
|
PNC Bank, National Association
|
|
Class B
|
|
|
|
|
|
One PNC Plaza
|
|
|
|
|
|
|
|
249 Fifth Avenue
|
|
|
|
|
|
|
|
Pittsburg, PA 15222-2707
|
|
|
|
|
|
|
|
PNC Bankcorp, Inc.
|
|
|
|
|
|
|
|
300 Delaware Avenue, Suite 304
|
|
|
|
|
|
|
|
Wilmingon, DE 19801
|
|
|
|
|
|
|
|
D-33
Table of Contents
* Less than one percent
(1)
|
|
Unless
otherwise provided, addresses are c/o Hirsch International Corp., 50
Engineers Road, Hauppauge, New York 11788.
|
|
|
|
(2)
|
|
The
Companys 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. Shares of
Class A or Class B Common Stock that an individual or group has a
right to acquire within 60 days after March 10, 2008 pursuant to the
exercise of options, warrants or other rights are deemed to be outstanding
for the purpose of computing the beneficial ownership of shares and the
percentage of such individual or group, but are not deemed to be outstanding
for the purpose of computing the beneficial ownership of shares and
percentage of any other person or group shown in the table.
|
|
|
|
(3)
|
|
Includes
400,018 shares of Class B Common Stock held by an estate planning entity
for the benefit of Mr. Arnbergs children. Mr. Arnberg exercises
voting control over these shares. These shares may be converted into the same
number of Class A Common Stock.
|
|
|
|
(4)
|
|
Includes
100,000 shares of Class A Common Stock owned by trusts created for the
benefit of Mr. Levines children as to which he disclaims beneficial
ownership. Mr. Levines address is 2424 N. Federal Highway, Boca Raton,
FL 33431.
|
|
|
|
(5)
|
|
Includes
options to purchase 10,000, 10,000, 6,667 and 3,333 shares of Class A
Common Stock at an exercise price of $1.02, $1.33, $2.35 and $2.29 per share,
respectively.
|
|
|
|
(6)
|
|
Includes
options to purchase 10,000, 10,000, 6,667 and 3,333 shares of Class A
Common Stock at an exercise price of $1.02, $1.33, $2.35 and $2.29 per share,
respectively.
|
|
|
|
(7)
|
|
Includes
options to purchase 10,000, 10,000, 6,667 and 3,333 shares of Class A
Common Stock at an exercise price of $1.01, $1.33, $2.35 and $2.29 per share,
respectively.
|
|
|
|
(8)
|
|
Includes
options to purchase 150,000, 100,000, 133,334, 175,000, 50,000 and 25,000
shares of Class A Common Stock at an exercise price of $1.12, $1.34,
$1.20, $2.12, $2.34 and $1.19 per share respectively.
|
|
|
|
(9)
|
|
Includes
options to purchase 40,000, 50,000 and 33,333 and 33,333 shares of
Class A Common Stock at an exercise price of $1.12, $1.34, $1.20 and
$2.12 per share respectively.
|
|
|
|
(10)
|
|
Based
solely upon a Schedule 13-G filed with the Securities and Exchange Commission
by the referenced parties on February 12, 2009.
|
|
|
|
(11)
|
|
Based
solely upon a Schedule 13-G filed with the Securities and Exchange Commission
by the referenced party on February 05, 2009.
|
|
|
|
(12)
|
|
Based
solely upon a Schedule 13-G filed with the Securities and Exchange Commission
by the referenced parties on February 12, 2009. PNC Bank, National
Association is the trustee for trust accounts, holding the referenced shares.
In connection with the trust accounts, PNC Bank, National Association in its
capacity as trustee, entered into a Investment Advisory Agreement with Lloyd
I. Miller
III
. The Investment Advisor
Agreement may be terminated upon 30 days prior written notice.
|
D-34
Table of Contents
The Company is unaware of any arrangements between
stockholders that may result in a change in control of the Company.
The information required to be disclosed in this
Item pursuant to Regulation S-K Item 201(d) is hereby incorporated by
reference herein from the disclosure under Equity Compensation Plan
Information in Item 5 of this Form 10-K.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Prior to January 2003, we had advanced
approximately $496,000 for premiums on split dollar life insurance for Henry
Arnberg, the Companys Chairman of the Board and Paul Levine, our 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 $792,000 at December 31, 2006 for both
policies. During 2007, both policies were redeemed and the Company collected
$495,000 in full satisfaction of the advances.
On December 1, 2004, we entered into a 36 month
consultant agreement with Henry Arnberg, Chairman of the Board of Directors
which terminated on November 30, 2007. Under the agreement, Mr. Arnberg
was no longer an employee of the company, but remained Chairman of the Board of
Directors. A monthly fee of $12,500 was paid to Mr. Arnberg in lieu of any
other compensation for his service on the Board of Directors. Mr. Arnberg
continued to receive medical benefits as provided to the executive level of
employees of the Company, premiums for his disability policy and payments under
his automobile lease until it expired. Mr. Arnberg provided 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.
DIRECTOR
INDEPENDENCE STANDARDS
The Companys Board of Directors has determined that
each of Messrs. Broitman and Davino and Ms. Domuracki qualifies as an
independent director
in accordance with the listing requirements of NASDAQ. It is the policy
of the Board of Directors of the Company that a majority of its members be
independent of Hirsch management. A director is independent if the Board
affirmatively determines that the Director does not have any direct or indirect
material relationship with Hirsch or any member of senior management of Hirsch.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The policy of the Audit Committee is to review and
pre-approve both audit and non-audit services to be provided by our independent
registered public accounting firm (other than certain exceptions permitted by
the Sarbanes Oxley Act of 2002). The Audit Committee negotiates the annual
audit fee directly with our 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 considered and
discussed with BDO Seidman, LLP and management as to whether the provision of
permitted, audit-related non-audit services is compatible with
D-35
Table of Contents
maintaining
BDO Seidman, LLPs independence. All fees for both audit and tax services were
pre-approved by the Audit Committee.
The following table sets forth the fees paid to BDO
Seidman, LLP for professional services for years ended December 31, 2008
and 2007:
|
|
2008
|
|
2007
|
|
Audit Fees
|
|
$
|
249,000
|
|
$
|
181,500
|
|
Audit-Related Fees
|
|
115,300
|
|
13,800
|
|
Tax Fees
|
|
34,000
|
|
31,200
|
|
|
|
$
|
398,300
|
|
$
|
226,500
|
|
Audit fees include fees billed for the audit of
Hirsch International Corp. and its consolidated subsidiaries, and the review of
quarterly financial information.
Audit-Related Fees include fees billed for
consultation on accounting matters and historical audited financial statements
of U.S. Graphics.
Tax Fees include fees billed for the preparation of
tax returns and consulting on tax examinations and planning matters.
PART IV
ITEM 15. EXHIBITS
The
following documents are filed as part of this report:
D-36
Table of Contents
EXHIBIT
INDEX
Exhibit
No.
|
|
Description of Exhibit
|
|
|
|
(1) 3.1
|
|
Restated
Certificate of Incorporation of the Registrant
|
(2) 3.2
|
|
Amended
and Restated By-Laws of the Registrant
|
(3) 4.1
|
|
Specimen
of Class A Common Stock Certificate
|
(3) 4.2
|
|
Specimen
of Class B Common Stock Certificate
|
(4) 10.1
|
|
Distributorship
Agreement dated as of April, 2004 among the Company, Tajima Industries Ltd
(Tajima), Tajima USA, Inc and Tajima America Corp.
|
(4) 10.2
|
|
Distributorship
Agreement dated as of April, 2004 among the Company, Tajima Industries Ltd
(Tajima), Tajima USA, Inc and Tajima America Corp.
|
(5) 10.3
|
|
1993
Stock Option Plan, as amended
|
(6) 10.4
|
|
2003
Stock Option Plan, as amended
|
(5) 10.5
|
|
1994
Non-Employee Director Stock Option Plan, as amended
|
(7) 10.6
|
|
2004
Non-Employee Director Stock Option Plan
|
(8) 10.7
|
|
Lease
Agreement dated March 8, 2001 between the Company and Brandywine
Operating Partnership, L.P.
|
(9) 10.8
|
|
First
Amendment to Lease dated December 2001 between the Company and
Brandywine Operating Partnership, L.P.
|
(10) 10.9
|
|
Lease
Agreement dated February 23, 2006 between the Company and 50 Engineers
Road H LLC.
|
(11) 10.10
|
|
Employment
Agreement for Beverly Eichel, dated as of February 1, 2008
|
(12) 10.11
|
|
Distribution
Agreement, dated July 8, 2006, between MHM Siedruckmachinen Gmbh and
Hirsch Distribution, Inc.
|
(12) 10.12
|
|
Guaranty
of Obligation dated July 25, 2006
|
(13) 10.13
|
|
Employment
Agreement for Paul Gallagher, dated November 13, 2006
|
(14) 10.14
|
|
Sales,
Service and Support Representation Agreement (the Service Agreement), dated
as of January 1, 2008, between Kornit Digital LTD and Hirsch
International, Corp.
|
(14) 10.15
|
|
Letter
Agreement (modifying the Service Agreement), dated February 14, 2008,
between Konit Digital LTD and Hirsch International Corp.
|
10.16
|
|
Modification
Agreement (to Distribution Agreement), dated as of February 21, 2008,
among Tajima Industries LTD., Tajima America Corp. and Hirsch International
Corp. (filed herewith).
|
10.17
|
|
Extension
Agreement (to Distribution Agreement), dated as of February 21, 2008,
among Tajima Industries LTD., Tajima America Corp. and Hirsch International
Corp. (filed herewith).
|
(15) 14.1
|
|
Code
of Ethics
|
21.1
|
|
List
of Subsidiaries of the Registrant
|
23.1
|
|
Independent
Registered Public Accounting Firm Consent
|
D-37
Table of Contents
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.
|
(1)
|
|
Incorporated
by reference from the Registrants Form 10-Q filed for the quarter ended
July 31, 1997.
|
(2)
|
|
Incorporated
by reference from the Registrants Form 10-Q filed for the quarter ended
October, 31, 1997.
|
(3)
|
|
Incorporated
by reference from the Registrants Registration Statement on Form S-1,
Registration Number 33-72618.
|
(4)
|
|
Incorporated
by reference from the Registrants Form 10-Q filed for the quarter ended
July 31, 2004.
|
(5)
|
|
Incorporated
by reference from Registrants definitive proxy statement filed with the
Commission on May 30, 2002.
|
(6)
|
|
Incorporated
by reference from Registrants definitive proxy statement filed with the
Commission on August 20, 2007.
|
(7)
|
|
Incorporated
by reference from Registrants definitive proxy statement filed with the
Commissions on August 6, 2004.
|
(8)
|
|
Incorporated
by reference from Registrants Report on Form 8-K filed with the
Commission March 15, 2001.
|
(9)
|
|
Incorporated
by reference from Registrants Form 10-K for the fiscal year ended
January 31, 2002.
|
(10)
|
|
Incorporated
by reference from Registrants Report on Form 10-K filed with the
Commission for the fiscal year ended January 28, 2006.
|
(11)
|
|
Incorporated
by reference from Registrants Report on Form 10-K filed with the
Commission for the year ended December 31, 2007.
|
(12)
|
|
Incorporated
by reference from Registrants Report on Form 8-K filed with the
Commission on August 3, 2006.
|
(13)
|
|
Incorporated
by reference from Registrants Report on Form 8-K filed with the
Commission on November 16, 2006.
|
(14)
|
|
Incorporated
by reference from Registrants Report on Form 10-Q filed with the
Commission for the quarter ended March 31, 2008.
|
(15)
|
|
Incorporated
by reference from Registrants Report on Form 10-K filed with the
Commission for the fiscal year ended January 31, 2004.
|
D-38
Table of Contents
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:
March 31, 2009
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
|
|
Date
|
|
|
|
|
|
/s/
Henry Arnberg
|
|
Chairman
of the Board of Directors
|
|
March 31,
2009
|
Henry
Arnberg
|
|
|
|
|
|
|
|
|
|
/s/
Paul Gallagher
|
|
President,
Chief Executive Officer (Principal Executive
|
|
March 31,
2009
|
Paul
Gallagher
|
|
Officer),
Chief Operating Officer and Director
|
|
|
|
|
|
|
|
/s/
Beverly Eichel
|
|
Executive
VP-Finance and Administration, and Chief
|
|
March 31,
2009
|
Beverly
Eichel
|
|
Financial
Officer (Principal Accounting and Financial Officer) and Secretary
|
|
|
|
|
|
|
|
/s/
Daniel Vasquez
|
|
Corporate
Controller
|
|
March 31,
2009
|
Daniel
Vasquez
|
|
|
|
|
|
|
|
|
|
/s/
Marvin Broitman
|
|
Director
|
|
March 31,
2009
|
Marvin
Broitman
|
|
|
|
|
|
|
|
|
|
/s/
Mary Ann Domuracki
|
|
Director
|
|
March 31,
2009
|
Mary
Ann Domuracki
|
|
|
|
|
|
|
|
|
|
/s/
Christopher J. Davino
|
|
Director
|
|
March 31,
2009
|
Christopher
J. Davino
|
|
|
|
|
D-39
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Stockholders
Hirsch
International Corp.
Hauppauge,
New York
We have audited the accompanying consolidated
balance sheets of Hirsch International Corp. and subsidiaries as of December 31,
2008 and 2007, and the related consolidated statements of operations,
stockholders
equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Companys 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 control 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 Companys
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 December 31,
2008 and 2007, and the results of their operations and their cash flows for the
years then ended, in conformity with accounting principles generally accepted
in the United States of America.
/s/
BDO Seidman, LLP
|
|
BDO
Seidman, LLP
|
Melville,
New York
|
March 30,
2009
|
F-2
Table of
Contents
HIRSCH
INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
DECEMBER
31,
|
|
DECEMBER
31,
|
|
|
|
2008
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,852,000
|
|
$
|
14,422,000
|
|
Restricted cash (Note 2c)
|
|
|
|
2,284,000
|
|
|
|
|
|
|
|
Accounts receivable, net of an allowance for
possible losses of $479,000 and $503,000, respectively and a sales return
reserve of $50,000 for both years
|
|
4,961,000
|
|
5,798,000
|
|
Inventories, net (Note 3)
|
|
8,527,000
|
|
5,725,000
|
|
Other current assets
|
|
258,000
|
|
518,000
|
|
Total current assets
|
|
18,598,000
|
|
28,747,000
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT, Net (Note 4)
|
|
1,915,000
|
|
512,000
|
|
INTANGIBLE ASSETS, Net (Note 5)
|
|
481,000
|
|
|
|
OTHER ASSETS
|
|
36,000
|
|
41,000
|
|
TOTAL ASSETS
|
|
$
|
21,030,000
|
|
$
|
29,300,000
|
|
See
notes to consolidated financial statements.
F-3
Table of Contents
HIRSCH
INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
DECEMBER
31,
|
|
DECEMBER
31,
|
|
|
|
2008
|
|
2007
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
Accounts payable and accrued expenses (Notes 6,
11d)
|
|
$
|
7,071,000
|
|
$
|
8,842,000
|
|
Lease termination obligation
|
|
|
|
120,000
|
|
Other current liabilities
|
|
23,000
|
|
111,000
|
|
Customer deposits and other
|
|
852,000
|
|
621,000
|
|
Total current liabilities
|
|
7,946,000
|
|
9,694,000
|
|
Other Long term Liabilities Less current
maturities
|
|
25,000
|
|
|
|
Total liabilities
|
|
7,971,000
|
|
9,694,000
|
|
COMMITMENTS AND CONTINGENCIES (Note 11)
|
|
|
|
|
|
STOCKHOLDERS
EQUITY (Note
8):
|
|
|
|
|
|
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: 10,226,000 and 10,216,000 shares
respectively
|
|
102,000
|
|
102,000
|
|
Class B common stock, $.01 par value;
authorized: 3,000,000 shares, outstanding: 400,000 shares for both periods
|
|
4,000
|
|
4,000
|
|
Additional paid-in capital
|
|
43,393,000
|
|
43,031,000
|
|
Accumulated deficit
|
|
(28,443,000
|
)
|
(21,534,000
|
)
|
|
|
15,056,000
|
|
21,603,000
|
|
Less: Treasury Class A Common stock at cost
1,143,000 shares for both years (Note 9)
|
|
1,997,000
|
|
1,997,000
|
|
Total stockholders
equity
|
|
13,059,000
|
|
19,606,000
|
|
TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
$
|
21,030,000
|
|
$
|
29,300,000
|
|
See
notes to consolidated financial statements.
F-4
Table of Contents
HIRSCH
INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Year Ended
|
|
Year
Ended
|
|
|
|
December
31, 2008
|
|
December
31, 2007
|
|
NET SALES
|
|
$
|
42,527,000
|
|
$
|
52,619,000
|
|
COST OF SALES (Note 11c,d)
|
|
29,691,000
|
|
32,940,000
|
|
GROSS PROFIT
|
|
12,836,000
|
|
19,679,000
|
|
OPERATING EXPENSES
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
19,029,000
|
|
18,229,000
|
|
Impairment of Customer List (Note 5)
|
|
845,000
|
|
|
|
Litigation settlement
|
|
|
|
(450,000
|
)
|
Total operating expenses
|
|
19,874,000
|
|
17,779,000
|
|
OPERATING (LOSS)INCOME
|
|
(7,038,000
|
)
|
1,900,000
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
Interest expense
|
|
(63,000
|
)
|
(12,000
|
)
|
Other income (expense) net
|
|
190,000
|
|
357,000
|
|
Total other (expense) income
|
|
127,000
|
|
345,000
|
|
(LOSS) INCOME BEFORE (BENEFIT)PROVISION FOR INCOME
TAXES
|
|
(6,911,000
|
)
|
2,245,000
|
|
INCOME TAX(BENEFIT) PROVISION (Note 7)
|
|
(2,000
|
)
|
158,000
|
|
NET (LOSS)INCOME
|
|
$
|
(6,909,000
|
)
|
$
|
2,087,000
|
|
|
|
|
|
|
|
(LOSS) INCOME PER SHARE:
|
|
|
|
|
|
BASIC:
|
|
$
|
(0.73
|
)
|
$
|
0.23
|
|
|
|
|
|
|
|
DILUTED
|
|
$
|
(0.73
|
)
|
$
|
0.22
|
|
WEIGHTED AVERAGE NUMBER OF SHARES IN THE
CALCULATION OF (LOSS) INCOME PER SHARE
|
|
|
|
|
|
Basic
|
|
9,481,000
|
|
9,176,000
|
|
Diluted
|
|
9,481,000
|
|
9,511,000
|
|
See
notes to consolidated financial statements.
F-5
Table of Contents
HIRSCH
INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS
EQUITY
YEARS ENDED
DECEMBER 31, 2008 and 2007
|
|
Class A
|
|
Class B
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Common Stock
|
|
Additional
|
|
|
|
Treasury
|
|
|
|
|
|
(Note 8)
|
|
(Note 8)
|
|
Paid-In
|
|
Accumulated
|
|
Stock
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
(Note 9)
|
|
Total
|
|
BALANCE,
JANUARY 1, 2007
|
|
9,289,000
|
|
$
|
93,000
|
|
525,000
|
|
$
|
5,000
|
|
$
|
41,933,000
|
|
$
|
(23,621,000
|
)
|
$
|
(1,997,000
|
)
|
$
|
16,413,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options & warrants
|
|
802,000
|
|
8,000
|
|
|
|
|
|
339,000
|
|
|
|
|
|
347,000
|
|
Transfers
|
|
125,000
|
|
1,250
|
|
(125,000
|
)
|
(1,250
|
)
|
|
|
|
|
|
|
|
|
Compensation
expense
|
|
|
|
|
|
|
|
|
|
759,000
|
|
|
|
|
|
759,000
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
2,087,000
|
|
|
|
2,087,000
|
|
BALANCE,
DECEMBER 31, 2007
|
|
10,216,000
|
|
102,000
|
|
400,000
|
|
4,000
|
|
43,031,000
|
|
(21,534,000
|
)
|
(1,997,000
|
)
|
19,606,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options & warrants
|
|
10,000
|
|
|
|
|
|
|
|
9,000
|
|
|
|
|
|
9,000
|
|
Compensation
expense
|
|
|
|
|
|
|
|
|
|
353,000
|
|
|
|
|
|
353,000
|
|
Net
(loss)
|
|
|
|
|
|
|
|
|
|
|
|
(6,909,000
|
)
|
|
|
(6,909,000
|
)
|
BALANCE,
DECEMBER 31, 2008
|
|
10,226,000
|
|
$
|
102,000
|
|
400,000
|
|
$
|
4,000
|
|
$
|
43,393,000
|
|
$
|
(28,443,000
|
)
|
$
|
(1,997,000
|
)
|
$
|
13,059,000
|
|
See
notes to consolidated financial statements.
F-6
Table of Contents
HIRSCH
INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year
Ended
|
|
Year
Ended
|
|
|
|
December
31,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(6,909,000
|
)
|
$
|
2,087,000
|
|
Adjustments to reconcile net (loss) income to net
cash provided (used in) by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
403,000
|
|
226,000
|
|
Provision for reserves
|
|
510,000
|
|
|
|
Proceeds from settlement of notes receivable
|
|
|
|
450,000
|
|
Impairment loss
|
|
845,000
|
|
|
|
Stock option expense (Note 2n)
|
|
353,000
|
|
759,000
|
|
|
|
|
|
|
|
CHANGES IN ASSETS AND LIABILITIES:
|
|
|
|
|
|
Restricted cash
|
|
2,284,000
|
|
(2,284,000
|
)
|
Accounts receivable
|
|
1,234,000
|
|
(592,000
|
)
|
Inventories
|
|
(2,384,000
|
)
|
85,000
|
|
Other current assets and other assets
|
|
1,461,000
|
|
(164,000
|
)
|
Accounts payable and accrued expenses
|
|
(5,263,000
|
)
|
(946,000
|
)
|
Net cash used in operating activities
|
|
(7,466,000
|
)
|
(379,000
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
Capital expenditures
|
|
(1,351,000
|
)
|
(419,000
|
)
|
Acquisition fees for U. S. Graphics
|
|
(198,000
|
)
|
|
|
Investment in U. S. Graphics
|
|
(10,000
|
)
|
|
|
Net cash used in investing activities
|
|
(1,559,000
|
)
|
(419,000
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
Repayments of long-term debt
|
|
(4,000
|
)
|
(120,000
|
)
|
Payments of debt assumed in acquisition
|
|
(550,000
|
)
|
|
|
Collection of officers loan receivable
|
|
|
|
495,000
|
|
Exercise of stock options
|
|
9,000
|
|
347,000
|
|
Net cash (used in) provided by financing
activities
|
|
(545,000
|
)
|
722,000
|
|
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
(9,570,000
|
)
|
(76,000
|
)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
14,422,000
|
|
14,498,000
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
4,852,000
|
|
$
|
14,422,000
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
Interest paid
|
|
$
|
5,000
|
|
$
|
12,000
|
|
Income taxes paid
|
|
$
|
27,000
|
|
$
|
52,000
|
|
NON CASH FINANCING TRANSACTIONS:
|
|
|
|
|
|
Acquisition fees accrued but not paid
|
|
$
|
52,000
|
|
|
|
See notes to consolidated
financial statements.
F-7
Table of Contents
HIRSCH
INTERNATIONAL CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED
DECEMBER 31, 2008 and 2007
1.
BUSINESS
ORGANIZATION AND BASIS OF PRESENTATION
The Company is a single
source provider of sophisticated equipment and value added products and
services to the apparel decorating industry. The equipment and value added
products sold by the Company are widely used by contract embroiderers,
screenprinters, large and small manufacturers of apparel and fashion
accessories, retail stores and entrepreneurs servicing specialized niche
markets.
On August 4, 2008, the
Company acquired 80% of the outstanding equity interest in U.S. Graphic Arts, Inc.
(See Note 5) 100% of the net loss incurred during the period from August 4,
2008 through December 31, 2008, for U.S Graphic Arts, Inc. has been
included in these financial statements due to the accumulated loss.
The
Company operates as one segment.
2.
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
a.
Principles of
Consolidation The consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. All material inter-company
balances and transactions have been eliminated in consolidation.
b.
Revenue
Recognition The Company distributes decorated apparel equipment. Where
installation and customer acceptance are a substantive part of the sale, by its
terms, the Company defers recognition of the revenue until such customers
acceptance of installation has occurred. In 2008 and 2007, most sales of new
equipment did not require installation as a substantive part of its sales and
accordingly; these sales were recorded at the time of shipment.
Service revenues and costs
are recognized when services are provided. Sales of software are recognized
when shipped provided that no significant vendor and post-contract and support
obligations remain and collection is probable.
F-8
Table of
Contents
c.
Cash
Equivalents Cash equivalents consist of money market accounts with initial
maturities of three months or less. As of December 31, 2008, the Company
did not have any restricted cash. As of December 31, 2007 the Company had
$2.3 million in restricted cash used to collateralize shipments at 110% of the
¥232,000,000 standby letter of credit opened in April 2007 and closed September 30,
2008.
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, the age of customer receivable
balances, the customers financial condition and current economic trends. If
the actual uncollected amounts significantly exceed the estimated allowance,
then the Companys operating results would be significantly and adversely
affected. The Company maintains a lien on its equipment sales until the
required payment is made. The Company also maintains a sales return allowance
for returns that are credited in a subsequent period that related to a prior period.
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 Gains and losses from foreign currency transactions are
included in cost of sales.
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:
|
|
Years
|
|
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.
Identifiable
Intangible Assets The Company has certain identifiable intangible assets,
relating to
F-9
Table of Contents
the U.S. Graphics
acquisition with definite lives such as customer lists, tradenames and
non-compete agreements, which are amortized over their useful lives on a
straight-line method or on an accelerated method, which appropriately reflects
the economic benefits of the related intangible asset. These intangibles are
reviewed for impairment under SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets
when impairment indicators are present using
an undiscounted cashflow analysis to determine if the carrying value is
recoverable. If not, then a discounted cashflow analysis is performed to
determine the fair value. As a result of the 2008 impairment analysis, the
Company recorded an impairment charge of $845,000 as a result of the decreases
in projected profitability of U. S. Graphics.
j.
Warranty The
Company has a five-year limited warranty policy for its embroidery machines and
a one-year limited warranty for its screenprinting and digital printing
machines. The Companys 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
Companys stated warranty policies and practices, the historical frequency of
claims, and the cost to replace or repair its products under warranty.
k.
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 on a straight
line basis.
l.
Income Taxes
The Company records deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the Companys
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.
The Company adopted FIN 48
on January 1, 2007. Under FIN 48, tax benefits are recognized only for tax
positions that are more likely than not to be sustained upon examination by tax
authorities. The amount recognized is measured as the largest amount of benefit
that is greater than 50 percent likely to be realized upon ultimate settlement.
Unrecognized tax benefits are tax benefits claimed or to be claimed in tax
returns that do not meet these recognition and measurement standards. The
Companys adoption of FIN 48 did not have a material effect on the Companys
financial statements.
As permitted by FIN 48, the
Company also adopted an accounting policy to prospectively classify accrued
interest and penalties related to any unrecognized tax benefits in the Companys
income tax provision. Previously, the Companys policy was to classify interest
and penalties as an operating expense in arriving at pre-tax income. At December 31,
2008, the Company does not have accrued
F-10
Table of Contents
interest and penalties
related to any unrecognized tax benefits. The years subject to potential audit
vary depending on the tax jurisdiction. Generally, the Companys statute of
limitation for tax liabilities are open for tax years ended December 31,
2006, December 31, 2007, December 31, 2008 and forward. The Companys
major taxing jurisdictions include the U.S., Arizona, California and New York.
m.
Income (Loss)
Per Share Basic earnings (loss) per share is based on the weighted average
number of shares of common stock outstanding during the period. Diluted
earnings (loss) 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 of 835,000 were dilutive for the year ended December 31,
2007 and none were anti-dilutive. All options were anti-dilutive for the year
ended December 31, 2008. Not included in the calculation of basic and
diluted earnings per share were 1,143,000 in treasury shares for both periods.
n.
Stock-Based
Compensation The Company accounts for share-based compensation cost in
accordance with Statement of Financial Standards No. 123(R), Share-Based
Payment. The fair value of each option award is estimated on the date of grant
using a Black-Scholes option valuation model. The compensation cost is
recognized over the service period which is usually the vesting period of the
award. For the years ended December 31, 2008 and 2007, the Company
recognized $353,000 and $759,000, respectively, of non-cash compensation
expense included in Selling, General and Administrative expense in the
Consolidated Statements of Operations. The Company used the Black-Scholes
valuation model and straight-line amortization of compensation expense over the
requisite service period of the grant.
The following is a summary
of the assumptions used for options granted:
|
|
Year ended
December 31, 2008
|
|
Year ended
December 31, 2007
|
Risk-free
interest rate
|
|
2.64% - 3.23%
|
|
4.07% - 4.85%
|
Expected
dividend yield
|
|
0%
|
|
0%
|
Expected
term
|
|
5 years
|
|
5 years
|
Expected
volatility
|
|
62.9%-64.8%
|
|
63.68%-72.89%
|
The risk-free interest rate
is based on the U.S Treasury yield curve at the time of the grant. The expected
term of stock options granted is derived from historical data and represents
the period of time that stock options are expected to be outstanding. The
Company also uses historical data to estimate expected dividend yield and
forfeiture rates. The expected volatility is based on historical volatility,
implied volatility and other factors impacting the Company.
o.
Comprehensive
Income Statement of Financial Accounting Standards No. 130. Reporting
Comprehensive Income
(SFAS 130) is equivalent to the Companys net income (loss) for 2008
and 2007.
p.
Use of
Estimates The preparation of financial statements in conformity with
accounting principles
F-11
Table of Contents
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.
q.
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 December 31, 2008 and December 31, 2007, the fair value of the
Companys financial instruments approximated the carrying value.
r.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements,
which
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS No. 157 defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15,
2007. In February 2008, the FASB provided a one-year deferral for the
implementation of SFAS 157 for nonfinancial assets and liabilities recognized
or disclosed at fair value in the financial statements on a nonrecurring basis.
The adoption of SFAS No. 157 in 2008 did not have a material impact on our
results of operations or our financial position. For 2009, the Company believes
that SFAS157 will not have a material impact.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations
(SFAS 141R),
which requires an acquirer to do the following: expense acquisition related
costs as incurred; to record contingent consideration at fair value at the
acquisition date with subsequent changes in fair value to be recognized in the
income statement; and any adjustments to the purchase price allocation are to
be recognized as a period cost in the income statement. SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the first annual reporting period beginning on or after December 15,
2008. Earlier application is prohibited. The adoption of SFAS 141R will effect
the accounting for future acquisitions, if any.
In
December, 2007, the FASB issued Statement No. 160, Noncontrolling
Interests in Consolidated Financial Statementsan amendment of ARB No. 51.
This statement establishes
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. This statement is effective
prospectively, except for certain retrospective disclosure requirements, for
fiscal years beginning after December 15, 2008. The adoption of FASB No. 160
is not expected to have a material impact on our results of operations or our
financial position.
In
March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133,
which changes the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity
uses derivative instruments, (b) how
F-12
Table of Contents
derivative instruments and
related hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged
items affect an entitys financial position, financial performance, and cash
flows. SFAS No. 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008.
s.
Reclassifications
Certain reclassifications have been applied to prior year amounts to conform
to current year presentation.
t.
Shipping and
handling expenses The Company records freight charges to customers in net
sales and the cost of the freight in cost of sales. Other freight costs are
expensed in operating expenses on the statement of operations. These expenses
were approximately; $117,000 and $57,000 during the years ended December 31,
2008 and 2007, respectively.
u.
Advertising
expenses The Company expenses advertising as incurred. These expenses were
approximately; $338,000 and $305,000, during the years ended December 31,
2008 and 2007, respectively.
3. INVENTORIES
|
|
December 31,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
New machines
|
|
$
|
7,095,000
|
|
$
|
4,823,000
|
|
Used machines
|
|
211,000
|
|
45,000
|
|
Parts and accessories
|
|
3,227,000
|
|
2,270,000
|
|
Less reserve for slow-moving inventory
|
|
(2,006,000
|
)
|
(1,413,000
|
)
|
Total
|
|
$
|
8,527,000
|
|
$
|
5,725,000
|
|
4. PROPERTY,
PLANT AND EQUIPMENT
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Software
|
|
$
|
1,992,000
|
|
$
|
806,000
|
|
Machinery and equipment
|
|
1,475,000
|
|
988,000
|
|
Furniture and fixtures
|
|
377,000
|
|
345,000
|
|
Automobiles
|
|
21,000
|
|
15,000
|
|
Leasehold improvements
|
|
187,000
|
|
145,000
|
|
Total
|
|
4,052,000
|
|
2,299,000
|
|
Less: Accumulated depreciation and amortization
|
|
(2,137,000
|
)
|
(1,787,000
|
)
|
Property, plant and equipment, net
|
|
$
|
1,915,000
|
|
$
|
512,000
|
|
F-13
Table of Contents
5
.
ACQUISITION
On August 4, 2008, the
Company acquired 80% of the outstanding equity interest in U. S. Graphic Arts, Inc.
(U.S. Graphics) pursuant to a Share Purchase and Sale Agreement, dated as of August 4,
2008 (the Purchase Agreement), among the Company, U. S. Graphics, Scott O.
Fresener, Patricia Fresener, Scott M. Fresener, Mishelle Fresener
(collectively, the Seller) and Fresener Holdings, LLC. In connection with and
as a condition to this acquisition, Graphic Arts Acquisition Corporation, a
wholly-owned subsidiary of the Company, assumed certain outstanding
indebtedness of U.S. Graphics and agreed, under certain circumstances, to make
further advances to U. S. Graphics.
In addition to the standard
and customary representations, warranties, covenants and indemnities contained
in the Purchase Agreement, the Company has the right, from and after August 4,
2011, to purchase the remaining 20% equity interest in US Graphics for a
purchase price based on the greater of (x) the net income before taxes of
US Graphics multiplied by 4.5 or (y) the net book value of U.S. Graphics.
The Sellers, from August 4, 2009 through August 4, 2013, have the
right to cause the Company to purchase their remaining 20% equity interest in
US Graphics for a purchase price determined in the same manner as the price for
the Companys exercise of its option. The Company reviews the value of this
option quarterly and as of December 31, 2008 the option had no value. This
results in a derivative that gets marked to market each period so it could have
an effect on the financial statements in the future. All of the current period
net loss for U.S. Graphics has been included in these financial statements due
to the net loss since the acquisition date. Also, the Sellers have agreed not
to compete with U.S. Graphics through August 4, 2010.
U.S. Graphics is primarily
engaged in developing and manufacturing printers for the decorative apparel
industry. The assets of U.S Graphics include inventory of printers and ink,
equipment, intellectual property and other intangibles.
The following sets forth the components of the
purchase price (in 000s):
Total cash consideration
|
|
$
|
10
|
|
Direct acquisition costs
|
|
$
|
250
|
|
Total purchase price
|
|
$
|
260
|
|
The
following table provides the preliminary allocation of the purchase price based
upon the fair value of the assets acquired and liabilities assumed at August 4,
2008:
Assets:
|
|
|
|
Accounts receivable
|
|
$
|
317
|
|
Inventory
|
|
1,009
|
|
Other assets
|
|
623
|
|
Property & equipment
|
|
423
|
|
Non- Compete agreement
|
|
216
|
|
Customer list
|
|
922
|
|
Trademark
|
|
80
|
|
Patents
|
|
223
|
|
|
|
$
|
3,813
|
|
Liabilities:
|
|
|
|
Accounts payable & accrued expenses
|
|
$
|
3,553
|
|
|
|
|
|
Total Purchase Price
|
|
$
|
260
|
|
F-14
Table of
Contents
The
value allocated to identifiable intangible assets in the acquisition of U.S.
Graphic Arts are not deductible for income tax purposes.
The
Company completed its purchase price allocation in the fourth quarter based on
obtaining a final third party valuation. An adjustment was made to increase the
value of identifiable intangible assets and reducing previously recorded
goodwill.
Identifiable
intangible assets at December 31, 2008 consisted of:
|
|
Estimated
Useful Life
(Years)
|
|
Original
Cost
|
|
Accumulated
Amortization
|
|
Provision
for
Impairment
|
|
Net Carrying
Value
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Patents & Trademarks
|
|
17
|
|
$
|
303,000
|
|
$
|
8,000
|
|
|
|
$
|
295,000
|
|
Non-Compete Agreement
|
|
3
|
|
216,000
|
|
30,000
|
|
|
|
186,000
|
|
Customer list
|
|
3
|
|
922,000
|
|
77,000
|
|
$
|
845,000
|
|
|
|
|
|
|
|
$
|
1,441,000
|
|
$
|
115,000
|
|
$
|
845,000
|
|
$
|
481,000
|
|
Aggregate amortization expense relating to the above
identifiable intangible assets for the year ended December 31, 2008 was
$114,000. As of December 31, 2008, the estimated future amortization
expense is $90,000 for 2009, $90,000 for 2010, $66,000 for 2011, $18,000 for
2012, $18,000 for 2013 and $199,000 thereafter.
Our definite-lived intangible assets are evaluated
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable through the estimated
undiscounted future cash flows derived from such assets. When impairment
exists, the related assets are written down to fair value by utilizing a
discounted cash flow model. These cash flow models involve several assumptions.
Changes in our assumptions could materially impact our fair value estimates.
Assumptions critical to our fair value estimates are: (i) discount rates
used to derive the present value factors used in determining the fair value of
the intangible assets and (ii) projected average revenue growth rates.
These and other assumptions are impacted by economic conditions and
expectations of management and will change in the future based on
period-specific facts and circumstances. The initial purchase price allocated
value to the customer list was based upon projections made in September 2008.
As a result of our analysis done in the fourth quarter of 2008, our customer
list of $845,000 (cost less accumulated amortization) was deemed to be impaired
at December 31, 2008 due to the projected decreases in revenues and
profitability, specifically in early 2009 and an impairment charge of $845,000
was recorded.
The following table summarizes, on an unaudited pro
forma basis, the combined results of operations of the
Company and U.S. Graphic
Arts as though the acquisition transaction had occurred as of January 1,
2007. The pro forma amounts give effect to appropriate adjustments for
amortization of intangible assets, additional compensation related to an
employment agreement, interest expense and income taxes. The pro forma amounts
presented are not necessarily indicative of either the actual consolidated operating
results had the acquisition transaction occurred as of January 1, 2007.
|
|
Year ended
December 31, (in 000s except for per share
data)
|
|
|
|
2008
|
|
2007
|
|
Revenues
|
|
$
|
50,108
|
|
$
|
70,545
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(6,909
|
)
|
$
|
1,032
|
|
|
|
|
|
|
|
(Loss) Earnings per share of common stock
|
|
|
|
|
|
Basic
|
|
$
|
(0.73
|
)
|
$
|
0.12
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.73
|
)
|
$
|
0.12
|
|
F-15
Table of
Contents
6. ACCOUNTS
PAYABLE AND ACCRUED EXPENSES
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Accounts payable
|
|
$
|
5,134,000
|
|
$
|
6,405,000
|
|
Other accrued expenses
|
|
1,006,000
|
|
921,000
|
|
Accrued payroll and bonus costs
|
|
138,000
|
|
903,000
|
|
Accrued warranty
|
|
793,000
|
|
613,000
|
|
Total accounts payable and accrued expenses
|
|
$
|
7,071,000
|
|
$
|
8,842,000
|
|
The following table details the warranty reserve
activity for the years ended December 31, 2008 and 2007.
Warranty Reserve:
|
|
Opening
Balance
|
|
Additions
|
|
Costs Paid
|
|
Adjustments
|
|
Ending
Balance
|
|
Year ended December 31, 2008
|
|
$
|
613,000
|
|
$
|
301,000
|
|
$
|
(121,000
|
)
|
$
|
|
|
$
|
793,000
|
|
Year ended December 31, 2007
|
|
$
|
563,000
|
|
$
|
159,000
|
|
$
|
(109,000
|
)
|
$
|
|
|
$
|
613,000
|
|
7. INCOME
TAXES
The income tax provision
(benefit) from continuing operations for each of the periods presented herein
is as follows:
|
|
December 31,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Current:
|
|
|
|
|
|
Federal
|
|
$
|
|
|
$
|
38,000
|
|
State
|
|
(2,000
|
)
|
120,000
|
|
Total current
|
|
(2,000
|
)
|
158,000
|
|
Deferred:
|
|
|
|
|
|
Federal
|
|
|
|
|
|
State and foreign
|
|
|
|
|
|
Total deferred:
|
|
|
|
|
|
Total income tax provision
|
|
$
|
(2,000
|
)
|
$
|
158,000
|
|
F-16
Table of
Contents
The tax effects of temporary
differences that give rise to deferred income tax assets and liabilities at December 31,
2008 and December 31, 2007 are as follows:
|
|
December 31, 2008
|
|
December 31, 2007
|
|
|
|
Net
Current
Deferred
Tax
Assets
|
|
Net Long-
Term
Deferred
Tax Assets
(Liabilities)
|
|
Net
Current
Deferred
Tax
Assets
|
|
Net Long-
Term
Deferred
Tax Assets
(Liabilities)
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
236,000
|
|
|
|
$
|
221,000
|
|
|
|
Capital loss carryover
|
|
222,000
|
|
|
|
220,000
|
|
|
|
Inventories
|
|
1,130,000
|
|
|
|
607,000
|
|
|
|
Accrued warranty costs
|
|
317,000
|
|
|
|
245,000
|
|
|
|
Deferred compensation costs
|
|
28,000
|
|
|
|
15,000
|
|
|
|
Other accrued expenses
|
|
18,000
|
|
|
|
20,000
|
|
|
|
Property, Plant and Equipment
|
|
|
|
(150,000
|
)
|
|
|
(44,000
|
)
|
Intangible assets
|
|
|
|
668,000
|
|
|
|
1,080,000
|
|
Net operating loss
|
|
|
|
13,451,000
|
|
|
|
10,808,000
|
|
AMT tax credit
|
|
|
|
34,000
|
|
|
|
36,000
|
|
|
|
1,951,000
|
|
14,003,000
|
|
1,328,000
|
|
11,880,000
|
|
Less valuation allowance
|
|
(1,951,000
|
)
|
(14,003,000
|
)
|
(1,328,000
|
)
|
(11,880,000
|
)
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A full valuation allowance
for such deferred tax assets has been established at December 31, 2008 and
2007, since the Company cannot determine the future utilization of those
assets.
Net operating loss
carry-forwards of $24.5 million for federal and $56.5 million for state expire
on various dates through 2024.
During 2008, the Company
acquired 80% of the stock of U.S. Graphic Arts, Inc. The acquired net
operating loss carryovers of this entity are subject to the change of ownership
rules under Sections 382 of the Internal Revenue Code. In the event of a
greater than 50% change in ownership, a Companys ability to utilize its net
operating losses and tax credits otherwise available before such change may be
limited. Consequently, the annual utilization of the acquired Companys net
operating loss carryovers of $1,761,000 will be limited.
A reconciliation of the
differences between the federal statutory tax rate of 34 percent and the
Companys effective income tax rate is as follows:
F-17
Table
of Contents
|
|
December 31,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Federal statutory income tax rate
|
|
34.0
|
%
|
34.0
|
%
|
State income taxes, net of Federal benefit
|
|
0.0
|
|
5.4
|
|
Permanent differences
|
|
(2.4
|
)
|
13.4
|
|
Valuation Allowance
|
|
(31.6
|
)
|
(45.7
|
)
|
Effective income tax rate
|
|
0.0
|
%
|
7.1
|
%
|
8. 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 Companys current management and his affiliates) elect two-thirds of the
Companys 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 Companys 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. Currently, the Company does not have any preferred
stock outstanding.
b. Stock
Option Plans - The Company maintains two active stock option plans (2003 and
2004) pursuant to which an aggregate as of December 31, 2008, 1,215,000
shares of Common Stock may be granted. In addition, certain options granted
pursuant to the Companys 1994 Non-Employee Director Stock Option Plan remained
outstanding.
The 1993 Stock Option Plan
(the 1993 Plan) had 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 December 31, 2008 and 2007, for the 1993 Plan are
summarized below:
|
|
Shares
|
|
Exercise
Price Range
|
|
Weighted
Average
Exercise Price
|
|
Options outstanding December 31, 2006
|
|
629,000
|
|
$0.27-$0.95
|
|
$
|
0.31
|
|
Options cancelled
|
|
(31,000
|
)
|
$0.27
|
|
$
|
0.27
|
|
Options exercised
|
|
(598,000
|
)
|
$0.27-$0.86
|
|
$
|
0.31
|
|
Options outstanding December 31, 2007
|
|
0
|
|
$0
|
|
$
|
0
|
|
Options cancelled
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
|
Options outstanding December 31, 2008
|
|
0
|
|
$0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2008
|
|
0
|
|
$0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
F-18
Table of Contents
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.
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 Companys 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 optionees 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 December 31, 2008 and
2007 for the Directors
Plan are summarized below:
|
|
Shares
|
|
Exercise
Price Range
|
|
Weighted
Average
Exercise Price
|
|
Options & Warrants outstanding
December 31, 2006
|
|
160,000
|
|
$0.27-$0.96
|
|
$
|
0.60
|
|
Options exercised
|
|
40,000
|
|
$0.27-$0.96
|
|
|
|
Options cancelled
|
|
|
|
|
|
|
|
Warrants exercised
|
|
100,000
|
|
$0.50
|
|
$
|
0.50
|
|
Options outstanding
December 31,
2007
|
|
20,000
|
|
$0.92
|
|
$
|
0.92
|
|
Options exercisable-December 31, 2007
|
|
20,000
|
|
$0.92
|
|
$
|
0.71
|
|
Warrants exercisable-December 31, 2007
|
|
|
|
|
|
|
|
Options exercised
|
|
10,000
|
|
$0.92
|
|
$
|
0.92
|
|
Options cancelled
|
|
10,000
|
|
$0.92
|
|
$
|
0.92
|
|
Options outstanding
December 31,
2008
|
|
|
|
|
|
|
|
This plan expired in September 2004.
The 2003 Stock Option Plan,
as amended, (the 2003 Plan) has 2,750,000 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 Companys Common Stock.
F-19
Table of
Contents
Stock option transactions during the years ended December 31, 2008
and 2007, for the 2003 Plan are summarized below:
|
|
Shares
|
|
Exercise
Price Range
|
|
Weighted Average
Exercise Price
|
|
Options outstanding December 31, 2006
|
|
1,567,000
|
|
$0.97-$2.12
|
|
$
|
1.59
|
|
Options cancelled
|
|
(103,000
|
)
|
$1.06-$4.54
|
|
$
|
2.59
|
|
Options exercised
|
|
(64,000
|
)
|
$1.06-$1.39
|
|
$
|
1.37
|
|
Options issued
|
|
145,000
|
|
$2.15-$4.54
|
|
$
|
3.00
|
|
Options outstanding December 31, 2007
|
|
1,545,000
|
|
$0.97-$2.34
|
|
$
|
1.65
|
|
Options cancelled
|
|
(108,000
|
)
|
$0.97-$2.24
|
|
$
|
1.69
|
|
Options exercised
|
|
|
|
|
|
|
|
Options issued
|
|
96,000
|
|
$1.32
|
|
$
|
1.32
|
|
|
|
|
|
|
|
|
|
Options Outstanding at December 31, 2008
|
|
1,533,000
|
|
$0.97-$2.35
|
|
$
|
1.62
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2008
|
|
971,000
|
|
$0.97-$2.34
|
|
$
|
1.50
|
|
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 550,000 options granted to
executives during 2006. For these options, one third vest on the date
immediately following the period that the closing price of the Common Stock
remains at or above $2.50 for at least twenty consecutive trading days; one
third vest commencing on the date occurring after September 11, 2007
immediately following the period that the closing price of the Common Stock
remains at or above $3.00 per share for a period of at least twenty (20)
consecutive trading days; and the final third vest commencing on the date
occurring after September 11, 2008 immediately following the period that
the closing price of the Common Stock remains at or above $3.50 per share for a
period of at least twenty (20) consecutive trading days thereafter. There are
approximately 1,110,000 shares available for future grants under the 2003 Plan.
The 2004 Non-Employee
Director Stock Option Plan (the 2004 Plan) The 2004 Plan was adopted by the
Board of Directors in August 2004. The 2004 Plan reserves 148,000 shares
of Class A Common Stock for issuance to the Companys independent and
unaffiliated directors. Pursuant to the terms of the 2004 Plan, 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
Companys 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 are generally not transferable during an
optionees lifetime but 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
F-20
Table of Contents
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 December 31, 2008 and 2007, for the 2004 Plan are
summarized below:
|
|
Shares
|
|
Exercise
Price Range
|
|
Weighted Average
Exercise Price
|
|
Options outstanding-December 31, 2006
|
|
60,000
|
|
$1.01-$1.33
|
|
$
|
1.17
|
|
Options issued
|
|
60,000
|
|
$2.29-$2.35
|
|
$
|
2.32
|
|
Warrants issued
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
|
|
|
|
|
Options outstanding-December 31, 2007
|
|
120,000
|
|
$1.01-$2.35
|
|
$
|
1.75
|
|
Options issued
|
|
30,000
|
|
$0.97
|
|
$
|
0.97
|
|
Warrants issued
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding-December 31, 2008
|
|
150,000
|
|
$0.97 - $2.35
|
|
$
|
1.59
|
|
|
|
|
|
|
|
|
|
Options exercisable-December 31, 2008
|
|
80,000
|
|
$1.01 - $2.35
|
|
$
|
1.46
|
|
There are 0 shares available
for future grants under the Directors
Plan
c. Stock
Option Transactions.
A summary of option activity
under the Plans as of December 31, 2008, and changes during the year then
ended is presented below:
|
|
Shares
|
|
Weighted
Average
Exercise
Price
(per share)
|
|
Weighted-
Average
Remaining
Contractual
Term
(Years)
|
|
Aggregate
Intrinsic
Value
|
|
Options outstanding at beginning of period
|
|
1,685,000
|
|
$
|
1.65
|
|
3.3
|
|
$
|
601,000
|
|
Granted
|
|
126,000
|
|
$
|
1.16
|
|
|
|
|
|
Exercised
|
|
(10,000
|
)
|
$
|
0.92
|
|
|
|
|
|
Forfeited or expired
|
|
(118,000
|
)
|
$
|
1.62
|
|
|
|
|
|
Options outstanding at end of period
|
|
1,683,000
|
|
$
|
1.62
|
|
2.5
|
|
|
|
Options exercisable at end of period
|
|
1,051,000
|
|
$
|
1.50
|
|
2.2
|
|
|
|
Options available for future grants
|
|
1,215,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
Table of
Contents
The weighted average
grant-date fair value of stock options granted during the years ended December 31,
2008 and 2007 was $1.16, and $2.86, respectively. The total intrinsic value of
options exercised during years ended December 31, 2008 and 2007, was
$6,100 and $107,000, respectively.
A summary of the status of
the Companys nonvested shares as of December 31, 2008, and changes during
the year ended December 31, 2007 are presented below:
|
|
Shares
|
|
Weighted-Average Grant-
Date Fair Value (per share)
|
|
Non-vested at beginning of period
|
|
849,000
|
|
$
|
1.81
|
|
Granted
|
|
101,000
|
|
$
|
1.16
|
|
Vested
|
|
(250,000
|
)
|
$
|
1.54
|
|
Forfeited
|
|
(68,000
|
)
|
$
|
1.78
|
|
Non-vested at end of period
|
|
632,000
|
|
$
|
1.81
|
|
As of December 31,
2008, there was approximately $149,000 of total unrecognized stock-based
compensation costs related to non-vested share-based compensation arrangements
granted under our plans. That cost is expected to be recognized over the next
three years. The total fair value of shares vested during the
years ended December 31,
2008 and 2007 was $352,000 and $759,000 respectively.
9. TREASURY
STOCK
Treasury
stock at December 31, 2008 and December 31, 2007 consists of
1,143,000 shares of Class A common stock purchased in open market
transactions for a total cost of approximately $1,997,000 pursuant to a stock
repurchase program authorized by the Board of Directors in fiscal year 1999.
F-22
Table of
Contents
10.
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 employees annual compensation. The Company elected
not to make matching contributions for the years ended December 31, 2008
and 2007.
11. COMMITMENTS
AND CONTINGENCIES
a. Minimum
Operating Lease Commitments - The Company has non-cancelable operating leases
for various sales and service locations and automobiles. The annual aggregate
rental commitments required under these leases, except for those providing for
month-to-month tenancy, are as follows:
Year Ending December 31,
|
|
|
|
2009
|
|
$
|
710,000
|
|
2010
|
|
573,000
|
|
2011
|
|
442,000
|
|
2012
|
|
63,000
|
|
2013
|
|
|
|
|
|
$
|
1,788,000
|
|
Rent expense was
approximately $804,000 and $548,000, for the years ended December 31, 2008
and 2007, respectively.
b. Litigation
- The Company is a defendant in various litigation matters, each 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 Companys consolidated financial position or results of
operations and cash flows.
c. Dependency
Upon Major Supplier - During the years ended December 31, 2008 and December 31,
2007, the Company made purchases of $17,892,000 and $24,644,000, respectively,
from Tajima Industries, LTD (Tajima) and Tajima USA, Inc. This amounted
to approximately 67 percent and 77 percent of the Companys total purchases for
the periods ended December 31, 2008 and December 31, 2007,
respectively. Sales of new Tajima products amount to approximately $23 million
and $37 million, for the years ended 2008 and 2007, respectively. Purchases
directly from Tajima and Tajima USA, Inc. are purchased under letters of
credit. Outstanding bankers acceptances as of December 31, 2008 are
reflected in accounts payable and accrued expenses on the balance sheet. The
Company had outstanding letters of credit of approximately $0.9 million at December 31,
2008. (See Note 2c to the Consolidated Financial Statements).
On
August 30, 2004, the Company entered into new consolidated distribution
agreements (the Consolidated Agreements) with Tajima granting the Company
certain rights to distribute the full line of Tajima commercial embroidery
machines and products.
F-23
Table of
Contents
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 non-exclusive
distributorship rights in the remaining 11 western states for the period February 18,
2008 through February 21, 2009. 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. In calendar 2008 the Company
received a waiver of the required minimum sales quota and in 2007, the Company
met its minimum sales quota. The termination of the Tajima agreements would
have a material adverse effect on the Companys business, financial condition
and results of operations.
On
August 2, 2006, the Company entered into an exclusive ten year
distribution agreement with MHM Siebdruckmaschinen Gmbh (MHM) for
distribution of MHM screenprinting equipment throughout North America. The
products will be marketed under the brand MHM North America by Hirsch.
On
January 24, 2007 the Company signed an exclusive ten year distribution
agreement with SEIT Electronica SRL to provide textile laser application
equipment. There is no purchase commitment required in the agreement.
On
February 21, 2008, the Company signed an agreement with Kornit Digital LTD
(Kornit) to distribute nationally a line of digital direct-on-garment
printers and to provide
sales and service support in thirteen states. There is no purchase commitment
required in the agreement.
On
May 16, 2008, the Company entered into a one year agreement with Mimaki
USA (Mimaki) to distribute its digital printers. There is no purchase
commitment required in the agreement.
d. Purchase
Commitments The Company entered into a three year minimum purchase commitment
with Pulse Microsystems, Ltd. (a former subsidiary) under which the Company is
obligated to purchase $100,000 of software each month. The commitment was
effective November 1, 2005 and expired on October 31, 2008. As of December 31,
2007 there was $1,000,000 remaining under this commitment. Effective November 1,
2008, the Company renewed its distribution agreement with Pulse but does not
have a minimum purchase commitment.
e. Related
Party Agreement U.S. Graphics is a party to an operating lease on its
headquarters located in Tempe, Arizona with Fresener Holdings LLC . Fresener
Holdings LLC is owned by the former owners of U.S. Graphics. The operating
lease has a term of 3 years and expires on July 31, 2010.
F-24
Table of Contents
Annex E
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June
30, 2009
OR
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to .
Commission File No.: 000-23434
HIRSCH INTERNATIONAL CORP.
(Exact name of registrant as specified in its
charter)
Delaware
|
|
11-2230715
|
(State or other
jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or
organization)
|
|
Identification
No.)
|
50 Engineers Road, Hauppauge, New
York 11788
(Address of principal executive offices)
Registrants telephone number, including area code:
(631) 436-7100
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. Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such
files). Yes
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
o
|
|
Accelerated
filer
o
|
|
|
|
Non-accelerated
filer
o
|
|
Smaller
reporting company
x
|
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
Indicate the number of shares outstanding of each of
the issuers classes of common stock, as of July 30, 2009:
Class of Common
Equity
|
|
Number of Shares
|
|
|
|
Class A Common Stock, par value $.01
|
|
9,083,065
|
Class B Common Stock, par value $.01
|
|
400,018
|
Table of
Contents
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HIRSCH INTERNATIONAL CORP. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
|
|
June 30, 2009
|
|
December 31,
2008
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,629
|
|
$
|
4,729
|
|
|
|
|
|
|
|
Accounts receivable, net of an allowance for possible losses of $667
and $479, respectively, and a sales return reserve of $50 for both periods
|
|
3,311
|
|
4,732
|
|
|
|
|
|
|
|
Inventories, net (Note 4)
|
|
5,102
|
|
7,835
|
|
|
|
|
|
|
|
Other current assets
|
|
399
|
|
223
|
|
|
|
|
|
|
|
Current assets of discontinued operations
|
|
|
|
1,079
|
|
|
|
|
|
|
|
Total current assets
|
|
12,441
|
|
18,598
|
|
|
|
|
|
|
|
Property, Plant and Equipment, net
|
|
1,495
|
|
1,553
|
|
|
|
|
|
|
|
Other Assets
|
|
56
|
|
36
|
|
|
|
|
|
|
|
Assets of discontinued operations (Note 6)
|
|
|
|
843
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
13,992
|
|
$
|
21,030
|
|
See notes to consolidated financial statements.
E-3
Table of
Contents
HIRSCH INTERNATIONAL CORP. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
|
|
June 30, 2009
|
|
December 31,
2008
|
|
|
|
(unaudited)
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses (Note 5)
|
|
$
|
3,862
|
|
$
|
5,671
|
|
Customer deposits
|
|
319
|
|
737
|
|
Other current liabilities
|
|
|
|
23
|
|
Liabilities of discontinued operations
(Note 6)
|
|
1,617
|
|
1,515
|
|
|
|
|
|
|
|
Total current liabilities
|
|
5,798
|
|
7,946
|
|
|
|
|
|
|
|
Other Long Term Liabilities- less current maturities
|
|
|
|
25
|
|
|
|
|
|
|
|
Total liabilities
|
|
5,798
|
|
7,971
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
Preferred stock, $.01 par value; authorized: 1,000,000 shares;
issued: none
|
|
|
|
|
|
Class A common stock, $.01 par value; authorized: 20,000,000 shares,
issued: 10,226,000 shares for both periods
|
|
102
|
|
102
|
|
Class B common stock, $.01 par value; authorized: 3,000,000 shares,
outstanding: 400,000 for both periods
|
|
4
|
|
4
|
|
Additional paid-in capital
|
|
43,456
|
|
43,393
|
|
Accumulated deficit
|
|
(33,371
|
)
|
(28,443
|
)
|
|
|
10,191
|
|
15,056
|
|
|
|
|
|
|
|
Less: Treasury Class A Common stock at cost - 1,143,000 shares for
both periods
|
|
1,997
|
|
1,997
|
|
Total stockholders' equity
|
|
8,194
|
|
13,059
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
13,992
|
|
$
|
21,030
|
|
See notes to consolidated
financial statements.
E-4
Table of Contents
HIRSCH
INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
|
|
Three Months Ended
|
|
Six Months
Ended
|
|
|
|
June 30,
2009
|
|
June 30,
2008
|
|
June 30,
2009
|
|
June 30,
2008
|
|
Net sales
|
|
$
|
6,235
|
|
$
|
10,188
|
|
$
|
12,031
|
|
$
|
21,880
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
4,217
|
|
6,795
|
|
8,317
|
|
14,539
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
2,018
|
|
3,393
|
|
3,714
|
|
7,341
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
Selling general and
administrative
|
|
3,159
|
|
4,436
|
|
6,400
|
|
9,123
|
|
Transaction costs (Note 7)
|
|
298
|
|
|
|
298
|
|
|
|
Total operating expenses
|
|
3,457
|
|
4,436
|
|
6,698
|
|
9,123
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
(1,439
|
)
|
(1,043
|
)
|
(2,984
|
)
|
(1,782
|
)
|
|
|
|
|
|
|
|
|
|
|
Other expense (income)
|
|
|
|
|
|
|
|
|
|
Other expense (income)
|
|
14
|
|
(38
|
)
|
(8
|
)
|
(144
|
)
|
Total other expense
(income)
|
|
14
|
|
(38
|
)
|
(8
|
)
|
(144
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations before income tax benefit
|
|
(1,453
|
)
|
(1,005
|
)
|
(2,976
|
)
|
(1,638
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit)
provision
|
|
(30
|
)
|
9
|
|
(17
|
)
|
9
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations
|
|
(1,423
|
)
|
(1,014
|
)
|
$
|
(2,959
|
)
|
(1,647
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued
operations, (net of $0 taxes)
|
|
(764
|
)
|
|
|
(1,968
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,187
|
)
|
$
|
(1,014
|
)
|
$
|
(4,927
|
)
|
$
|
(1,647
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss per share Basic and
Diluted:
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations
|
|
$
|
(0.15
|
)
|
$
|
(0.11
|
)
|
$
|
(0.31
|
)
|
$
|
(0.17
|
)
|
Loss from discontinued
operations
|
|
(0.08
|
)
|
|
|
(0.21
|
)
|
|
|
Basic and Diluted Loss per
Share
|
|
$
|
(0.23
|
)
|
$
|
(0.11
|
)
|
$
|
(0.52
|
)
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
shares in the calculation of loss per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
9,483
|
|
9,483
|
|
9,483
|
|
9,478
|
|
Diluted
|
|
9,483
|
|
9,483
|
|
9,483
|
|
9,478
|
|
See notes to consolidated financial
statements.
E-5
Table of
Contents
HIRSCH INTERNATIONAL CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CASH FLOWS
(IN THOUSANDS)
(Unaudited)
|
|
Six Months
|
|
|
|
Ended
|
|
|
|
June 30,
2009
|
|
June 30, 2008
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
Net loss
|
|
$
|
(4,927
|
)
|
$
|
(1,647
|
)
|
Loss from discontinued
operations
|
|
(1,968
|
)
|
|
|
Loss from continuing
operations
|
|
(2,959
|
)
|
(1,647
|
)
|
|
|
|
|
|
|
Adjustments to reconcile
net loss to net cash used in operating activities:
|
|
|
|
|
|
Depreciation and
amortization
|
|
249
|
|
138
|
|
Unrealized gain on
accounts denominated in yen
|
|
|
|
(119
|
)
|
Provision for reserves
|
|
224
|
|
73
|
|
Stock option expense (Note
3)
|
|
64
|
|
162
|
|
|
|
|
|
|
|
Changes in assets and
liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
1,262
|
|
786
|
|
Inventories
|
|
2,669
|
|
(5,045
|
)
|
Other assets
|
|
(206
|
)
|
(52
|
)
|
Accounts payable and
accrued expenses
|
|
(2,015
|
)
|
254
|
|
|
|
|
|
|
|
Net cash used in operating
activities of continuing operations
|
|
(712
|
)
|
(5,450
|
)
|
|
|
|
|
|
|
Net cash used in operating
activities of discontinued operations
|
|
(205
|
)
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
(917
|
)
|
(5,450
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
Capital expenditures
|
|
(183
|
)
|
(608
|
)
|
Net cash used in investing
activities
|
|
(183
|
)
|
(608
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
9
|
|
Net cash provided by
financing activities
|
|
0
|
|
9
|
|
|
|
|
|
|
|
Decrease in cash and cash
equivalents
|
|
(1,100
|
)
|
(6,049
|
)
|
Cash and cash equivalents,
beginning of period
|
|
4,729
|
|
14,422
|
|
Cash and cash equivalents,
end of period
|
|
$
|
3,629
|
|
$
|
8,373
|
|
|
|
|
|
|
|
Supplemental disclosure of
cash flow information:
|
|
|
|
|
|
Interest paid
|
|
$
|
|
|
$
|
|
|
Income taxes paid
|
|
7
|
|
98
|
|
See notes to consolidated financial statements.
E-6
Table
of Contents
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Three and Six Months Ended June 30, 2009 and June 30,
2008
1.
Summary of Significant Accounting
Policies
a) Business Organization and Basis of Presentation
In the opinion of management, the accompanying
unaudited consolidated financial statements contain all the adjustments,
consisting of normal accruals, necessary to present fairly the results of
operations for the three and six months ended June 30, 2009 and June 30, 2008,
the financial position at June 30, 2009 and December 31, 2008 and cash flows
for the six months ended June 30, 2009 and June 30, 2008. Such adjustments consisted only of normal
recurring items. On August 4, 2008, the Company acquired 80% of the outstanding
equity interest in U.S. Graphic Arts, Inc. The Company included 100% of the
current period net loss for U.S Graphic Arts, Inc. in this presentation due to
the accumulated loss. The consolidated financial statements and notes thereto
should be read in conjunction with the Companys Annual Report on Form 10-K for
the calendar year ended December 31, 2008 as filed with the Securities and
Exchange Commission.
Our accompanying
unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnote disclosures required by accounting principles generally accepted in
the United States for complete financial statements.
In the second quarter of calendar
2009, the Company determined that its U.S. Graphics subsidiary could not
continue as a going concern and discontinued its 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.
The preparation of the
financial statements in conformity with accounting principles generally
accepted in the United States requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company operates as
one segment.
The interim
financial results are not necessarily indicative of the results to be expected
for the full year. Certain amounts from
prior periods have been reclassified to conform to the current periods
presentation.
The Company
incurred a significant loss in 2008 and in the first six months of 2009 and has
not during that time frame generated positive cash flows from operations. As a
consequence, substantial doubt exists as to the Companys 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 adjustments that might result from the uncertainty discussed above.
The Company
evaluated subsequent events through the date the accompanying financial statements
were issued which was August 14, 2009.
E-7
Table
of Contents
b) New Accounting Standards
In December 2007, the
Financial Accounting Standards Board (FASB) issued SFAS No. 141 (revised
2007), Business Combinations (SFAS 141R), which requires an acquirer to do
the following: expense acquisition related costs as incurred; to record
contingent consideration at fair value at the acquisition date with subsequent
changes in fair value to be recognized in the income statement; and recognize
adjustments to the purchase price allocation as a period cost in the income
statement. SFAS 141R applies prospectively to business combinations for which
the acquisition date is on or after the first annual reporting period beginning
on or after December 15, 2008. Earlier application is prohibited. The adoption
of SFAS 141R will affect the accounting for future acquisitions, if any.
In December, 2007, the FASB issued Statement No. 160,
Noncontrolling Interests in Consolidated Financial Statementsan amendment of
ARB No. 51. (SFAS 160).This statement establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. This statement is effective prospectively,
except for certain retrospective disclosure requirements, for fiscal years
beginning after December 15, 2008. The adoption of SFAS 160 did not have any
impact on our results of operations or our financial position.
In
March
2008,
the
FASB
issued
SFAS
No.
161,
Disclosures
about
Derivative
Instruments
and
Hedging
Activities
-
an
amendment
of
FASB
Statement
No.
133,
(SFAS
161)
which
changes
the
disclosure
requirements
for
derivative
instruments
and
hedging
activities.
Entities
are
required
to
provide
enhanced
disclosures
about
(a)
how
and
why
an
entity
uses
derivative
instruments,
(b)
how
derivative
instruments
and
related
hedged
items
are
accounted
for
under
SFAS
No.
133
and
its
related
interpretations,
and
(c)
how
derivative
instruments
and
related
hedged
items
affect
an
entitys
financial
position,
financial
performance,
and
cash
flows.
SFAS
161
is
effective
for
financial
statements
issued
for
fiscal
years
and
interim
periods
beginning
after
November
15,
2008.
The
adoption
of
SFAS
161
did
not
have
any
impact
on
our
results
of
operations
or
financial
position.
We adopted Financial Accounting Standards No. 165,
Subsequent Events
(SFAS 165), in the
second quarter of 2009. SFAS 165 establishes the accounting for and disclosure
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. It requires the disclosure
of the date through which an entity has evaluated subsequent events and the
basis for that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. See
Principles of consolidation and basis of presentation
included in Note 1 The Company and Summary of Significant Accounting
Policies for the related disclosure. The adoption of SFAS 165 did not have a
material impact on our consolidated financial statements.
In June 2009, the FASB issued Statement of Financial
Accounting Standard (SFAS) No. 168,
The FASB
Accounting Standard Codification and the Hierarchy of the Generally Accepted
Accounting Principles a replacement of SFAS No. 162
(SFAS 168),
to become the source of authoritative U.S. generally accepted accounting
principles (GAAP) recognized by the FASB to be applied by nongovernmental
entities. SFAS 168 is effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The adoption of SFAS 168 will
not have an impact on our consolidated financial statements as the codification
does not change GAAP.
2.
Fair Value Measurements
Effective January 1, 2008, we adopted FASB Statement No. 157, Fair
Value Measurements (SFAS 157), for financial assets and liabilities. This
statement defines fair value, establishes a framework for measuring fair value
and expands the related disclosure requirements. The statement indicates, among
other things, that a fair value measurement assumes a transaction
E-8
Table of Contents
to
sell an asset or transfer a liability occurs in the principal market for the
asset or liability or, in the absence of a principal market, the most advantageous
market for the asset or liability. The
Company adopted the provisions of SFAS 157 with respect to its non-financial
assets and liabilities during the first quarter 2009.
In order to increase consistency and comparability in fair value
measurements, SFAS 157 establishes a hierarchy for observable and unobservable
inputs used to measure fair value into three broad levels, which are described
below:
·
Level 1: Quoted prices (unadjusted) in active
markets that are accessible at the measurement date for assets or liabilities.
The fair value hierarchy gives the highest priority to Level 1 inputs.
·
Level 2: Observable prices that are based on inputs
not quoted on active markets, but corroborated by market data.
·
Level 3:
Unobservable inputs are used when little or no market data is available.
The fair value hierarchy gives the lowest priority to Level 3 inputs.
In determining fair value, the Company utilizes valuation techniques
that maximize the use of observable inputs and minimize the use of unobservable
inputs to the extent possible as well as considers counterparty credit risk in
its assessment of fair value.
Additionally, on a nonrecurring basis, the Company uses fair value
measures when analyzing asset impairment. Long-lived tangible assets are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If it is determined such
indicators are present and the review indicates that the assets will not be
fully recoverable, based on undiscounted estimated cash flows over the
remaining amortization periods, their carrying values are reduced to estimated
fair value. In accordance with the provisions of FAS 144, the Company had fixed
assets at U.S. Graphic Arts, Inc. which
were written down to their fair value, resulting in an impairment charge of
$300,000 during the six months ended June 30, 2009 which was recorded in
discontinued operations. The Company
also has intangible assets relating to US Graphics that get reviewed for
impairment when impairment indicators are present. These intangible assets were written down to
their fair value, resulting in an impairment charge of $492,000 during the
three and six months ended June 30, 2009 which was recorded as discontinued
operations. The methods used to test for impairment for the patents, tradename
and non-compete are derived from undiscounted and discounted cash flow
analysis.
Non-financial assets measured at fair value on a non-recurring basis
include the following as of June 30, 2009:
|
|
Fair Value Measurement at
|
|
Total
|
|
|
|
June 30, 2009 (unaudited) Using
|
|
Losses from
|
|
|
|
Quoted
|
|
Significant
|
|
|
|
Discontinued
|
|
|
|
Prices in
|
|
Other
|
|
Significant
|
|
Operations
|
|
|
|
Active
|
|
Observable
|
|
Unobservable
|
|
for the six
|
|
|
|
Markets
|
|
Inputs
|
|
Inputs
|
|
months ended
|
|
(In thousands)
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Assets
|
|
$
|
|
|
$
|
|
|
$
|
1,495
|
|
$
|
(300
|
)
|
Tradename & Patents
|
|
|
|
|
|
|
|
(324
|
)
|
Non-Compete Agreement
|
|
|
|
|
|
|
|
(168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
E-9
Table of Contents
The following table provides a reconciliation of the beginning and
ending balances of assets and liabilities valued using significant unobservable
inputs (level 3):
|
|
Fair Value
Measurements
Using Significant
Unobservable
Inputs (Level 3)
|
|
|
|
|
|
Beginning balance January 1, 2009
|
|
$
|
2,287
|
|
Total losses included in discontinued operations
first quarter
|
|
(300
|
)
|
Ending Balance March 31, 2009
|
|
$
|
1,987
|
|
Total losses included in discontinued operations
second quarter
|
|
(492
|
)
|
Ending Balance June 30, 2009
|
|
$
|
1,495
|
|
Total losses for the three and six months ended June 30, 2009 are
included in discontinued operations.
At June 30, 2009 and December 31, 2008, the carrying amount of the
Companys cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities, approximated fair value because of their short-term
maturity.
3. Share-Based
Compensation / Diluted Loss per Share
The Company recognized
$30,000 and $64,000 of non-cash compensation expense for the three and six
months ended June 30, 2009 and $81,000 and $162,000 for the three and six
months ended June 30, 2008 (included in Operating Expenses in the unaudited
Consolidated Statement of Operations) attributable to stock options granted or
vested. The Company used the Black-Scholes valuation model and straight-line
amortization of compensation expense over the requisite service period of the
grant.
A reconciliation of shares
used in calculating basic and diluted loss per common share for the three and
six months ended June 30, 2009 and June 30, 2008 follows:
|
|
Three
months
ended
|
|
Six
months
ended
|
|
Three
months
ended
|
|
Six
months
ended
|
|
|
|
June 30, 2009
|
|
June 30, 2008
|
|
Basic
|
|
9,483,420
|
|
9,483,420
|
|
9,483,420
|
|
9,478,420
|
|
|
|
|
|
|
|
|
|
|
|
Effect of assumed
conversion of employee stock options
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
9,483,420
|
|
9,483,420
|
|
9,483,420
|
|
9,478,420
|
|
No options were excluded
from the computation of diluted loss per share for the three and six months
ended June 30, 2009 and 188,480 and 200,912 options were excluded from the
computation of diluted loss per share for the three and six months ended June 30,
2008 because they were anti-dilutive.
E-10
Table
of Contents
4. Inventories
|
|
(Numbers in thousands)
|
|
|
|
June 30, 2009
|
|
December 31, 2008
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
New Machines
|
|
$
|
4,558
|
|
$
|
6,954
|
|
Used Machines
|
|
181
|
|
153
|
|
Parts and supplies
|
|
2,334
|
|
2,634
|
|
|
|
7,073
|
|
9,741
|
|
Less: Reserve for slow moving inventory
|
|
(1,971
|
)
|
(1,906
|
)
|
|
|
|
|
|
|
Inventories, net
|
|
$
|
5,102
|
|
$
|
7,835
|
|
5. Warranty Reserve
The warranty
reserve included in Accounts Payable and Accrued Expenses was $581,000 at June
30, 2009 and $694,000 at December 31, 2008.
The Company adjusted its reserve by approximately $113,000 for the six
months ended June 30, 2009 and recorded $36,000 in warranty expense for the six
months ended June 30, 2009.
6. Discontinued Operations
On August 4,
2008, the Company acquired 80% of the outstanding equity interest in U. S.
Graphic Arts, Inc. (U.S. Graphics) pursuant to a Share Purchase and Sale
Agreement, dated as of August 4, 2008 (the Purchase Agreement), among the
Company, U.S. Graphics, Scott O. Fresener, Patricia Fresener, Scott M.
Fresener, Mishelle Fresener (collectively, the Seller) and Fresener Holdings,
LLC. In connection with and as a condition
to this acquisition, Graphic Arts Acquisition Corporation,
(Acquisition Corp.)
a wholly-owned subsidiary of the Company, purchased
certain outstanding indebtedness of U.S. Graphics and agreed, under certain
circumstances, to make further advances to U. S. Graphics.
In addition to the
standard and customary representations, warranties, covenants and indemnities
contained in the Purchase Agreement, the Sellers have agreed not to compete
with U.S. Graphics through August 4, 2010.
U.S. Graphics was primarily engaged in developing and
manufacturing printers for the decorative apparel industry. The assets of U.S. Graphics included
inventory of printers and ink, equipment, intellectual property and other
intangibles.
On
April 15, 2009, Acquisition Corp.
declared an event of default with respect to a loan made to U.S.
Graphics pursuant to the Amended and Restated Business Loan Agreement, dated
August 4, 2008, by and between Acquisition Corp. and U.S. Graphics, for U.S.
Graphics failure to make payments to Acquisition Corp. as such payments became
due. The loan is secured by assets of U.S. Graphics, including, without
limitation, machinery, equipment, inventory and intellectual property of U.S.
Graphics, and Acquisition Corp. has seized this collateral.
In the
second quarter of 2009, the Company determined that its U.S. Graphics could not
continue as a going concern and discontinued its operations. Accordingly, the
Company reported its operations as discontinued operations in accordance with
SFAS 144. The consolidated financial
statements have segregated the assets, liabilities and operating results of
these discontinued operations for the three and six months ended June 30, 2009.
E-11
Table of Contents
Assets and liabilities of
discontinued operations of U. S. Graphics are as follows (in thousands):
|
|
June 30,
2009
(unaudited)
|
|
December 31,
2008
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Cash
|
|
|
|
$
|
124
|
|
Accounts Receivable
|
|
|
|
228
|
|
Inventory
|
|
|
|
692
|
|
Property, Plant and Equipment
|
|
|
|
362
|
|
Intangible Assets
|
|
|
|
481
|
|
Other
|
|
|
|
35
|
|
Total Assets
|
|
|
|
$
|
1,922
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,403
|
|
$
|
1,400
|
|
Customer deposits
|
|
193
|
|
115
|
|
Other long term liabilities
|
|
21
|
|
|
|
Total Liabilities
|
|
$
|
1,617
|
|
$
|
1,515
|
|
Summary operating results of
the discontinued operations of U.S. Graphics are as follows (in thousands):
|
|
Six
months
ended
|
|
Three
months
ended
|
|
|
|
June 30,
2009
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
959
|
|
|
|
Gross profit
|
|
(57
|
)
|
|
|
Impairment loss
|
|
(792
|
)
|
(492
|
)
|
Loss from discontinued operations
|
|
$
|
(1,968
|
)
|
$
|
(764
|
)
|
|
|
|
|
|
|
|
|
Acquisition
Corp. has retained Lowery Machine & Supply, based in Greenville, South
Carolina, to assist the Company in securing its collateral.
7. Subsequent Events
On June 12, 2009,
the special committee of the board of directors of Hirsch International
Corp. (the Company) received a letter
from Paul Gallagher, President, Chief Executive Officer and Chief Operating
Officer of the Company, proposing to acquire, through a new corporation to be
formed by Mr. Gallagher (Newco) and a subsidiary thereof (Acquisition Co),
all of the Companys outstanding shares of Class A and Class B common stock for
$0.28 per share in cash, other than any shares owned by Newco. Mr. Gallaghers letter provided that his
offer was contingent upon the satisfaction of customary conditions, including
Newco and Acquisition Co. obtaining sufficient financing to complete the
transaction and operate the Company after the closing of such transaction. Mr. Gallaghers letter indicated that he has
entered into a commitment letter with a financial institution which he
anticipates will provide sufficient funds for these purposes.
The Special Committee, which is comprised of three
independent directors, was
E-12
Table of Contents
established on February 12,
2009 by the board of directors of the Company and at such time was given full
authority to consider the Companys strategic alternatives. The Special Committee has previously retained
Thompson Hine LLP as its legal counsel and Burnham Securities as its financial
advisor.
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 Companys Chief Executive Officer, President and Chief
Operating Officer.
Under the
terms of the merger agreement, the Companys stockholders, other than Mr. Gallagher
and certain related parties, will receive $0.31 per share in cash for each of
the Companys common stock that they hold upon the consummation of the Merger.
The transaction is expected to be completed in the third quarter of 2009 and is
subject to Mr. Gallaghers receipt of debt financing, the approval of the
merger agreement by a majority of the outstanding shares of the Companys
common stock, receipt of consent to the Merger from a significant supplier, as
well as other customary closing conditions. The merger agreement also includes
a $300,000 termination fee in the event the transaction does not close.
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. Gallaghers former employment agreement to, among other
things, extend the term of Mr. Gallaghers 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 Companys
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
Companys voting stock.
The
Company has been served a stockholder lawsuit, dated July 14, 2009, filed
in connection with the proposed Merger.
The lawsuit, which names the Company and its directors, Parent and
Merger Sub, as defendants, was filed by Anthony Chiarenza, an individual who
claims to be a stockholder of the Company, in the Supreme Court of the State of
New York, County of Suffolk (Index No. 09-26487). The complaint contends that the proposed
price of $0.31 per share, to be paid to holders of shares of the Companys
common stock if the merger is consummated, is an unfair price in light of the
value of the Company. The complaint
further alleges terms of the merger agreement are unfair because (a) the
Company is required to notify Parent and Merger Sub before a recommendation to
accept a superior proposal, (b) the merger agreement defines a superior
proposal solely as one that is more favorable from a financial point of view
and (c) the merger agreement includes a $300,000 termination fee. The complaint asserts claims of breach of
fiduciary duty against the individual defendants, and claims of aiding and
abetting breach of fiduciary duty against the Company, Parent and Merger Sub.
It seeks as relief, among other things, an order enjoining the proposed
transaction as well as damages and fees and expenses, including the plaintiffs
attorneys fees.
The Company believes these
allegations are without merit.
E-13
Table of
Contents
ITEM 2:
|
MANAGEMENTS 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 Companys 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 Companys Form 10K for
the year ending December 31, 2008 and in the Companys 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 Companys 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 Companys 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 Companys embroidery machines are purchased in,
has affected and is likely to continue to affect the Companys 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,
E-14
Table of
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operating expenses were $6.7
million, a decrease of $2.4 million, or 26.4%, as compared to $9.1 million for
the six months ended June 30, 2008. Included in operating expenses for the
three and six month ended June 30, 2009 was $0.3 million in transaction
costs of which approximately $147,000 related to severance costs for the former
Chief Financial Officer. The decrease in operating expenses for the three and
six months ended June 30, 2009 is a result of decreased marketing and
selling costs in the current period along with an overall cost reduction plan
implemented by the Company.
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 Companys 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
Companys 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
Companys 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.
E-15
Table of
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Revolving
Credit Facility and Borrowings
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 Companys 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 Companys 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 customers
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 Companys
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 Companys Chief Executive Officer, President and Chief Operating Officer.
Under the terms of the merger agreement, the
Companys stockholders, other than Mr. Gallagher and certain related
parties, will receive $0.31 per share in cash for each of the Companys
E-16
Table of
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common stock that they hold upon the consummation of the Merger. The
transaction is expected to be completed in the third quarter of 2009 and is
subject to Mr. Gallaghers receipt of debt financing, the approval of the
merger agreement by a majority of the outstanding shares of the Companys
common stock, receipt of consent to the Merger from a significant supplier, as
well as other customary closing conditions. The merger agreement also includes
a $300,000 termination fee in the event the transaction does not close.
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. Gallaghers
former employment agreement to, among other things, extend the term of Mr. Gallaghers
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 Companys 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
Companys voting stock.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of
the Companys management, including the Chief Executive Officer and Corporate
Controller, 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
Companys Chief Executive Officer and Corporate Controller concluded that the
Companys 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
Commissions rule and forms, including ensuring that such material
information is accumulated and communicated to the Companys management,
including the Companys Chief Executive Officer and Corporate Controller, as
appropriate to allow timely decisions regarding required disclosure.
Managements assessment of and conclusion of the
effectiveness of internal control over financial reporting did not include the
internal controls of U.S. Graphics, which was acquired on August 4, 2008,
and which is included in the statements of operations and cash flows for the
six months ended June 30, 2009.
Additional information regarding the acquisition of U.S. Graphics is
available in the Notes to the Consolidated Financial Statements included in
this Form 10-Q for the three and six months ended June 30, 2009. Management did not assess the effectiveness
of internal control over financial reporting of U.S. Graphics because of the
discontinuance of its operations.
There have been no individual changes in the
Companys internal controls over financial reporting that occurred during the
quarter ended June 30, 2009 that have materially affected, or are
reasonably likely to materially affect, the Companys internal controls over
financial reporting.
E-17
Table of
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PART II-OTHER INFORMATION
Item 1.
Legal Proceedings
The Company is involved in lawsuits, claims and
proceedings which arise in the ordinary course of business. Other than as set
forth in the following paragraphs, the Company is not presently involved in any
material litigation.
On July 30, 2009, Graphic Arts Acquisition
(Graphic Arts), a wholly-owned subsidiary of the Company, filed a lawsuit in
the United States District Court for the Eastern District of New York, against
Lowery Machine & Supply, LLC (LMS) and Robert Barnes (Barnes). The
lawsuit stems from a business and contractual relationship between Graphic Arts
and LMS by which LMS agreed to serve as Graphis Arts agent in the extractment,
movement, management, marketing and sale of certain intellectual and real
property belonging to Graphic Arts. The lawsuit seeks judgement against LMS for
breach of contract, breach of fiduciary duty, and conversion of judgment
against both LMS and Barnes for domain name infringement.
The Company has been served
a stockholder lawsuit, dated July 14, 2009, filed in connection with the
proposed Merger. The lawsuit, which
names the Company and its directors, Parent and Merger Sub, as defendants, was
filed by Anthony Chiarenza, an individual who claims to be a stockholder of the
Company, in the Supreme Court of the State of New York, County of Suffolk
(Index No. 09-26487). The complaint
contends that the proposed price of $0.31 per share, to be paid to holders of
shares of the Companys common stock if the merger is consummated, is an unfair
price in light of the value of the Company.
The complaint further alleges terms of the merger agreement are unfair
because (a) the Company is required to notify Parent and Merger Sub before
a recommendation to accept a superior proposal, (b) the merger agreement
defines a superior proposal solely as one that is more favorable from a
financial point of view and (c) the merger agreement includes a $300,000
termination fee. The complaint asserts
claims of breach of fiduciary duty against the individual defendants, and
claims of aiding and abetting breach of fiduciary duty against the Company,
Parent and Merger Sub. It seeks as relief, among other things, an order
enjoining the proposed transaction as well as damages and fees and expenses,
including the plaintiffs attorneys fees.
The Company believes these allegations are without merit.
Item 1A.
Risk Factors
There were no material changes from the risk factors
previously disclosed in our Report on Form 10-K for the year ended December 31,
2008. For a full description of these risk factors, please refer to Item 1A
(Risk Factors) in the Companys Report on Form 10-K for the year ended December 31,
2008.
Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
None.
Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Submission of Matters to a Vote of Security Holders
None.
Item 5.
Other Information
None.
Item
6.
Exhibits
(a)
Exhibits
+
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2.1
|
Agreement
and Plan of Merger, dated as of July 2, 2009, by and among the
Registrant, HIC Acquisition Company and Hirsch Holding, Inc.
|
E-18
Table of
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*
|
|
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.
|
|
|
|
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****
|
|
10.1
|
Second
Amended and Restated Employment Agreement amended and restated as of
June 15, 2009, by and between the Registrant and Beverly Eichel.
|
|
|
|
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*****
|
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10.2
|
Second
Amended and Restated Employment Agreement, amended and restated as of
July 2, 2009, by and between the Registrant and Paul Gallagher.
|
|
|
|
|
|
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31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a 14(a) or
Rule 15d 14(a)
|
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31.2
|
Certification
of Corporate Controller pursuant to Rule 13a 14(a) or
Rule 15d 14(a)
|
|
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|
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32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act
of 2002.
|
|
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|
|
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32.2
|
Certification
of Corporate Controller pursuant to Section 906 of Sarbanes-Oxley Act of
2002.
|
+
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Incorporated
by reference from the Registrants Form 8-K filed on July 2, 2009.
|
*
|
|
Incorporated by reference
from the Registrants Form 10-Q filed for the quarter ended
July 31, 1997.
|
**
|
|
Incorporated by reference
from the Registrants Form 10-Q filed for the quarter ended
October 31, 1997.
|
***
|
|
Incorporated
by reference from the Registrants Registration Statement on Form S-1,
Registration Number 33-72618.
|
****
|
|
Incorporated
by reference from the Registrants From 8-K filed on June 15, 2009.
|
*****
|
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Incorporated
by reference from the Registrants Form 8-K filed on July 9, 2009.
|
E-19
Table of
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
HIRSCH INTERNATIONAL CORP.
|
|
Registrant
|
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By: /s/ Paul Gallagher
|
|
Paul
Gallagher,
|
|
President,
Chief Executive Officer and Chief Operating Officer
|
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By: /s/ Dan Vasquez
|
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Dan
Vasquez,
|
|
Corporate
Controller and Secretary
|
|
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Dated:
August 14, 2009
|
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E-20
|
0 14475 PRELIMINARY HIRSCH INTERNATIONAL CORP. THIS PROXY IS
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned, revoking all
previous proxies, hereby appoints Chris Davino and Dan Vasquez, and each of
them, proxies each with full power of substitution, to vote all of the shares
of Class A Common Stock and Class B Common Stock (the "common
stock") of Hirsch International Corp. of the undersigned at the special
meeting of stockholders of Hirsch International Corp. to be held on , 2009,
at A.M., New York time at the offices of Bryan Cave LLP, 1290 Avenue of the
Americas, New York, New York 10104 and/or at any adjournment or postponement
of the special meeting, in the manner indicated on the reverse side, all in
accordance with and as more fully described in the Notice of special meeting
and accompanying Proxy Statement for the special meeting, receipt of which is
hereby acknowledged. PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR A SPECIAL
MEETING , 2009. PLEASE SIGN, DATE
AND RETURN THIS PROXY IN THE ENCLOSED POSTAGE PRE-PAID ENVELOPE. (Continued
and to be signed on the reverse side)
|
|
SPECIAL MEETING OF STOCKHOLDERS OF HIRSCH INTERNATIONAL
CORP. , 2009 Please sign, date and mail your proxy card in the envelope
provided as soon as possible. Signature of Stockholder Date: Signature of
Stockholder Date: Note: Please sign exactly as your name or names appear on
this Proxy. When shares are held jointly, each holder should sign. When
signing as executor, administrator, attorney, trustee or guardian, please
give full title as such. If the signer is a corporation, please sign full
corporate name by duly authorized officer, giving full title as such. If
signer is a partnership, please sign in partnership name by authorized
person. To change the address on your account, please check the box at right
and indicate your new address in the address space above. Please note that
changes to the registered name(s) on the account may not be submitted via
this method. 1. Proposal to approve the Agreement and Plan of Merger, dated
as of July 2, 2009, among Hirsch International Corp., Hirsch Holdings, Inc.,
HIC Acquisition Company, and approve the merger of HIC Acquisition Company
with and into Hirsch International Corp., as a result of which (a) Hirsch
International Corp. will be the surviving corporation in the merger and will
be wholly-owned by Hirsch Holdings, Inc. and (b) each share of Hirsch
International Corp. common stock (other than shares of our common stock owned
Hirsch Holdings, Inc., HIC Acquisition Company and Paul Gallagher, shares
owned by stockholders who properly exercise dissenters rights of appraisal
under Delaware law or shares of our common stock held in treasury by us) will
be cancelled and converted into the right to receive $0.31 in cash, without
interest. 2. Motion to adjourn the special meeting to a later date, if
necessary or appropriate, to solicit additional proxies if there are
insufficient votes at the time of the special meeting to approve proposal
number 1. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER(S). IF NO DIRECTION IS MADE
THIS PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2. FOR AGAINST ABSTAIN THE BOARD
OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1 AND 2. PLEASE SIGN, DATE AND
RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR
BLACK INK AS SHOWN HERE x Please detach along perforated line and mail in the
envelope provided. IMPORTANT Your vote is important. Regardless of the number
of shares of Hirsch International Corp. common stock that you own, please
sign, date and promptly mail the enclosed proxy in the accompanying
postage-paid envelope or return it to Hirsch International Corp., c/o
American Stock Transfer & Trust Company, LLC, 6201 15th Avenue, Brooklyn,
New York 11219.
|
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