UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X] Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ?40.14a-12
HIRSCH INTERNATIONAL CORP.
--------------------------
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement if other than the registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) 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):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] 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.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
HIRSCH INTERNATIONAL CORP.
(a Delaware corporation)
NOTICE OF 2004 ANNUAL
MEETING OF STOCKHOLDERS TO BE
HELD AT 10:00 A.M. ON SEPTEMBER 8, 2004
To the Stockholders of HIRSCH INTERNATIONAL CORP.:
NOTICE IS HEREBY GIVEN that the 2004 Annual Meeting of Stockholders (the
"Meeting") of HIRSCH INTERNATIONAL CORP. (the "Company") will be held on
September 8, 2004, at 10:00 A.M. at the offices of Ruskin Moscou Faltischek,
P.C., 190 EAB Plaza, East Tower, 15th Floor, Uniondale, New York 11556-0190 for
the following purposes:
1. to elect four directors;
2. to approve the Company's 2004 Non-Employee Director Stock Option Plan;
3. to ratify the appointment of BDO Seidman LLP as the Company's
independent auditors for the fiscal year ending January 31, 2005; and
4. to transact such other business as may properly come before the
Meeting and any adjournment or postponement thereof.
The Board of Directors has fixed August 4, 2004 at the close of business,
as the record date for the determination of stockholders entitled to notice of
and to vote at the Meeting, and only holders of record of shares of the
Company's Common Stock at the close of business on that day will be entitled to
vote. The stock transfer books of the Company will not be closed.
A complete list of stockholders entitled to vote at the Meeting shall be
available at the offices of the Company during ordinary business hours from
August 9, 2004 until the Meeting for examination by any stockholder for any
purpose germane to the Meeting. This list will also be available at the Meeting.
All stockholders are cordially invited to attend the Meeting in person.
However, whether or not you expect to be present at the Meeting, you are urged
to mark, sign, date and return the enclosed Proxy, which is solicited by the
Board of Directors, as promptly as possible in the postage-prepaid envelope
provided to ensure your representation and the presence of a quorum at the
Meeting. The shares represented by the Proxy will be voted according to your
specified response. The Proxy is revocable and will not affect your right to
vote in person in the event you attend the Meeting.
By Order of the Board of Directors
/s/ Beverly Eichel
Beverly Eichel, Secretary
Hauppauge, New York
August 8, 2004
HIRSCH INTERNATIONAL CORP.
200 Wireless Boulevard
Hauppauge, NY 11788
------------------------------
PROXY STATEMENT
------------------------------
2004 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD AT 10:00 A.M. ON SEPTEMBER 8, 2004
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of HIRSCH INTERNATIONAL CORP. (the "Company") of proxies
to be voted at the 2004 Annual Meeting of Stockholders and any adjournment or
postponement thereof (the "Meeting") to be held on the date, at the time and
place, and for the purposes set forth in the foregoing notice. The Board of
Directors has set August 4, 2004, at the close of business, as the record date
("Record Date") for the determination of stockholders entitled to notice of and
to vote at the Meeting. As of the record date, the Company had 5,663,611 shares
of Class A Common Stock and 2,668,139 shares of Class B Common Stock
outstanding. A stockholder executing and returning a proxy has the power to
revoke it at any time before it is exercised by filing a later proxy or other
written communication with the Secretary of the Company or by attending the
Meeting and voting in person. The proxy will be voted in accordance with your
directions as to:
(1) the election of the persons listed herein as directors of the Company;
(2) the approval of the Company's 2004 Non-Employee Director Stock Option
Plan;
(3) the ratification of the appointment of BDO Seidman LLP as the
Company's independent auditors for the fiscal year ending January 31,
2005; and
(4) the transaction of such other business as may properly come before the
Meeting and any adjournment or postponement thereof.
In the absence of direction, the proxy will be voted in favor of these
proposals.
The entire cost of soliciting proxies will be borne by the Company. The
cost of solicitation, estimated at $20,000 which represents an amount believed
to be normally expended for a solicitation relating to an uncontested election
of directors, will include the cost of supplying necessary additional copies of
the solicitation materials and the Company's 2004 Annual Report to Stockholders
(the "Annual Report") to beneficial owners of shares held of record by brokers,
dealers, banks, trustees, and their nominees, including the reasonable expenses
of such recordholders for completing the mailing of such materials and Annual
Report to such beneficial owners.
In voting at the Meeting, each stockholder of record on the Record Date of
either Class A or Class B Common Stock will be entitled to one vote on all
matters other than the election of directors. With respect to the election of
directors, the holders of the Class B Common Stock will elect two of the
directors ("Class B directors"), and the holders of Class A Common Stock will
elect two of the directors ("Class A directors"). Holders of a majority of the
outstanding shares of Common Stock must be represented in person or by proxy in
order to achieve a quorum to vote on all matters other than the election of
directors. To vote for the Class A directors, holders of a majority of the
outstanding shares of Class A Common Stock must be represented in person or by
proxy in order to achieve a quorum. To vote for the Class B directors, holders
of a majority of the outstanding shares of Class B Common Stock must be
represented in person or by proxy in order to achieve a quorum. The Proxy
Statement, the attached Notice of Meeting, the enclosed proxy card and the
Annual Report to Stockholders are being mailed to stockholders on or about
August 9, 2004.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT, AND, IF GIVEN
OR MADE, SUCH INFORMATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED AND
THE DELIVERY OF THIS PROXY STATEMENT SHALL, UNDER NO CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE OF THIS PROXY.
1. ELECTION OF DIRECTORS
Four directors are to be elected by a plurality of the votes cast at the
Meeting, each to hold office until the next Annual Meeting of Stockholders and
until his respective successor is elected and qualified.
There are four nominees for the seven Board of Director positions as fixed
by the Board of Directors, which will result in three vacancies on the Board of
Directors. Two of the Company's former directors, Ronald Krasnitz and Paul
Levine, both of whom were employee directors, resigned as of January 31 and
March 31, 2004, respectively. The third director, Herbert Gardner, an
`independent' director (as such term is defined in Rule 4200 (a) (15) of the
National Association of Securities Dealers, Inc. listing standards) resigned
effective June 24, 2004. The Company is actively seeking an `independent'
individual to fill this vacancy which will be filled in accordance with the
by-laws of the Company. Of the persons named below, who currently constitute the
entire Board of Directors, Mr. Broitman and Ms. Domuracki have been nominated
for election as Class A directors and Messrs. Arnberg and Gallagher have been
nominated for election as Class B directors. The persons named in the
accompanying Proxy have advised management that it is their intention to vote
for the election of Mr. Broitman and Ms. Domuracki as Class A directors and for
the election of Messrs. Arnberg and Gallagher as Class B directors unless
authority is withheld.
o Henry Arnberg - Class B Director
o Marvin Broitman - Class A Director
o Mary Ann Domuracki - Class A Director
o Paul Gallagher - Class B Director
Management believes that each nominee will be able to serve as a director
of the Company. All of the nominees have consented to serve as directors if
elected. If any nominee becomes unable or unwilling to serve, proxies may be
voted for the election of such person or persons as the Board of Directors
determines.
Recommendation and Vote Required
The Board of Directors recommends a vote "for" each of the nominees listed
above. Each of the nominees for Class A Directors and Class B Directors shall be
elected by a plurality of votes cast at the meeting by the holders of the
Company's Class A Common Stock and Class B Common Stock, respectively.
Information Regarding Executive Officers and Directors
The following table sets forth the names and ages of the Company's
directors and executive officers and the positions they hold with the Company:
Name Age Position
---- --- --------
Henry Arnberg....................... 61 Chairman of the Board of Directors and Chief Executive Officer
Paul Gallagher...................... 54 President, Chief Operating Officer and Director
Beverly Eichel...................... 46 Vice President - Finance and Administration, Chief Financial
Officer and Secretary
Marvin Broitman..................... 65 Director
Mary Ann Domuracki ................. 48 Director
Howard Arnberg ..................... 34 President of Hometown Threads, LLC
Henry Arnberg, has been Chief Executive Officer of the Company since 1970,
held the position of Chairman of the Board of the Board of Directors since 1980
and also served as President of the Company until December 1998. Mr. Arnberg
received a Bachelor of Science in Accounting from the University of Bridgeport
in 1965 and an MBA in Finance and Management from the Adelphi University in
1971.
Paul Gallagher, joined the Company as its Chief Operating Officer in
September 2001. In early 2003, Mr. Gallagher was also appointed the Company's
President as well as a director. 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.
Beverly Eichel, has been Vice President of Finance and Administration and
Chief Financial Officer of the Company since February 1, 2002. Ms. Eichel has
also served as the Company's Secretary since October 2002. Prior thereto, she
was Executive Vice President and Chief Financial Officer of Donnkenny, Inc. from
October 1998 to June 2001. From June 1992 to September 1998, Ms. Eichel served
as Executive Vice President and Chief Financial Officer of Danskin, Inc. and had
been its Corporate Controller from October 1987 to June 1992. Ms. Eichel is a
Certified Public Accountant in the State of New York. Ms. Eichel received a
Bachelor of Science in Accounting from the University of Maryland in 1980.
Marvin Broitman, director of the Company since April 1994, is currently
Vice President of Uniwave, Inc., a company engaged in the engineering and
manufacturing of automation accessory equipment for textile machinery since
1968. Mr. Broitman received a Bachelor of Electrical Engineering degree from
City College in 1961 and an MBA from the Harvard Business School in 1968. Mr.
Broitman serves on the Audit, Stock Option and Compensation Committees of the
Board of Directors.
Mary Ann Domuracki, director of the Company since September 2001, currently
has been managing Director of Restructuring at Financo, Inc. since September
2001. Ms. Domuracki has more than 25 years experience of accounting, advisory
and operating management services. Her industry experience includes, senior
management positions as President of Danskin, Inc., Executive Vice President of
Administration and Finance of Kasper A.S.L., and most recently, Executive Vice
President and Chief Financial Officer of Pegasus Apparel Group, Inc. Ms.
Domuracki is a CPA and a member of the AICPA, and has a Bachelor of Business
Administration from the Pennsylvania State University with a concentration in
Accounting. Ms. Domuracki serves on the Audit, Stock Option and Compensation
Committees of the Board of Directors.
Howard Arnberg, has been employed by the Company since 1995, serving in
various operational roles. Mr. Arnberg served as the Company's Vice President -
New Business Development and currently serves as the President of Hometown
Threads, LLC. Mr. Arnberg earned a Bachelor of Science in Business
Administration from the University of Florida at Gainesville in 1991 and a Juris
Doctor from Brooklyn Law School in 1994. He is a member of the New York State
Bar Association and the American Bar Association. Mr. Arnberg is the son of
Henry Arnberg, the Company's Chairman and Chief Executive Officer.
All Directors hold office until the next annual meeting of stockholders
and until their successors have been duly elected and qualified. The Company's
executive officers are elected annually by the Board of Directors and serve at
the discretion of the Board.
The Company's By-Laws provide that the Company shall indemnify each
Director and such of the Company's officers, employees and agents as the Board
of Directors shall determine from time to time to the fullest extent provided by
the laws of the State of Delaware.
The Company carries insurance providing indemnification, under certain
circumstances, to all of its directors and officers for claims against them by
reason of, among other things, any act or failure to act in their capacities as
directors or officers. The current annual premium for such insurance is
approximately $200,000, all of which is paid by the Company. To date, no sums
have been paid to any past or present director or officer of the Company under
this or any prior indemnification insurance policy.
The Company has also entered into Indemnity Agreements with all of its
directors and executive officers. The Indemnity Agreements provide for
indemnification of the Company's directors and officers to the fullest extent
permitted by the provisions of the General Corporation Law of the State of
Delaware.
The Indemnity Agreements provide that the Company will pay any costs which
an indemnitee actually and reasonably incurs because of any claims made against
him by reason of the fact that he is or was a director or officer of the
Company, except that the Company is not obligated to make any payment which the
Company is prohibited by law from paying as indemnity, or where (a) a final
determination is rendered on a claim based upon the indemnitee's obtaining a
personal profit or advantage to which he was not legally entitled; (b) a final
determination is rendered on a claim for an accounting of profits made in
connection with a violation of Section 16(b) of the Securities Exchange Act of
1934, or similar state or common law provisions; (c) a claim where the
indemnitee was adjudged to be deliberately dishonest; or (d) a final
determination is rendered that indemnification is not lawful.
Relationships Among Directors or Executive Officers
Howard Arnberg, the President of Hometown Threads, LLC, is the son of Henry
Arnberg, the Company's Chairman of the Board and Chief Executive Officer.
Meetings and Committees of the Board of Directors
The Board of Directors has an Audit Committee, a Compensation Committee and
a Stock Option Committee. Each member of the Audit Committee as determined by
the Board is an "independent director" as defined in Rule 4200(a)(15) of the
National Association of Securities Dealers listing standards, as applicable and
as may be modified or supplemented. MaryAnn Domuracki, a member of the Audit
Committee, is a financial expert within the meaning of Item 401(h)(2) of
Regulation S-K privileged under the Act. The Audit Committee Charter is annexed
hereto as Exhibit A.
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 consideration of the nominee. Of
the four current Board members, two are "independent" under the existing
standards of NASDAQ SmallCap Market issuers. The Board generally relies on its
network of industry and professional contacts in connection with identifying
potential Board members. 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 Company's operations. At a minimum, each nominee: (i)
must be prepared to represent the best interest of all of the Company's
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.
Mr. Broitman and Ms. Domuracki serve on the Compensation Committee, the
Audit Committee, and on the Stock Option Committee. The Company is actively
seeking an additional independent director who will be appointed to the Board in
accordance with the by-laws of the Company. It is anticipated that this
individual would serve on the Audit Committee, Compensation Committee and Stock
Option Committee. The function of the Compensation Committee is to determine and
to make recommendations to the Board regarding the compensation of the Company's
executives. The Stock Option Committee administers the Company's stock option
plans and awards stock options.
The Board of Directors met on seven (7) occasions and acted five (5)
times by unanimous written consent during the last fiscal year. Each of the
Stock Option Committee and Compensation Committee held one (1) meeting during
the fiscal year and did not act by written unanimous consent.
Audit Committee Report
The current members of the Audit Committee are Marvin Broitman and Mary Ann
Domuracki. The Audit Committee held seven (7) meetings either in person or
telephonically and did not act by unanimous written consent during the fiscal
year ended January 31, 2004. The function of the Audit Committee is to recommend
annually to the Board of Directors the appointment of the independent public
accountants of the Company, discuss and review the scope and the fees of the
prospective annual audit and review the results thereof with the independent
public accountants, review and approve non-audit services of the independent
public accountants, review compliance with existing major accounting and
financial policies of the Company, review the adequacy of the financial
organization of the Company and review management's procedures and policies
relative to the adequacy of the Company's internal accounting controls. The
Audit Committee meets with the outside auditors on a quarterly basis to review
the quarterly filings with the SEC on Form 10-Q and Form 10-K, in accordance
with current regulatory requirements. The Audit Committee has adopted and has
complied with its charter in accordance with current regulatory requirements.
In fulfilling its responsibilities for the year ended January 31, 2004, the
Audit Committee:
o Reviewed and discussed the audited financial statements for the year
ended January 31, 2004 with management and BDO Seidman, LLP, the
Company's independent accountants; as appropriate, the Audit Committee
reviews, evaluates and discusses with the Company's management,
internal financial and accounting personnel and the independent
accountants, the following:
o The plan for, and the independent accountants' report on the Company's
financial statements;
o The Company's financial disclosure documents, including all financial
statements and reports filed with the SEC or sent to stockholders;
o Management's selection, application and disclosure of critical
accounting policies;
o Changes in the Company's accounting practices, principles, controls or
methodologies;
o Significant developments or changes in accounting rules applicable to
the Company; and
o The adequacy of the Company's internal controls and accounting and
financial personnel.
o Discussed with BDO Seidman, LLP the matters required to be discussed
by SAS 61. This guidance requires the Company's independent auditors
discuss with the Audit Committee, and other communication requirements
specified under rules and regulations of the SEC, ISB and NASDAQ,
among other things, the following:
o Methods to account for significant unusual transactions;
o The effect of significant accounting policies in controversial or
emerging areas for which there is a lack of authoritative guidance or
consensus;
o The process used by management in formulating particularly sensitive
accounting estimates and basis for the auditor's conclusions regarding
the reasonableness of those estimates; and
o Disagreements, of which there were none, with management over the
application of accounting principles, the basis for management's
accounting estimates and the disclosures in the financial statements.
The Company's independent auditors also provided the Audit Committee with
the written disclosures and the letter required by Independence Standards Board
Standard No. 1 (Independence Discussions with Audit Committees). Independence
Standards Board Standard No. 1 requires auditors to disclose annually in writing
all relationships that, in the auditor's professional opinion, may reasonably be
thought to bear on independence, confirm their perceived independence and engage
in a discussion of their independence. The Audit Committee also considered
whether the independent auditor's provision of the other, non-audit related
services to the Company, which are referred to in "Independent Auditor's Fees"
below, is compatible with maintaining such auditor's independence.
During the year, the Audit Committee also considered several other matters
in conjunction with management and with the Company's auditors. These included:
o Implications of the Sarbanes-Oxley legislation and the adequacy of the
Company's control and disclosure policies and procedures in light of
this legislation;
o Implications of new accounting standards for the Company's financial
statements. This included, but was not limited to new guidelines
around the use of pro forma or non-GAAP financial measures;
o The issue of impairment of tangible assets and the need to perform
periodic impairment tests to determine whether any intangible assets
being carried on the balance sheet are impaired.
Based on the Audit Committee's review of the audited financial statements,
the representations and information provided by management and the independent
auditors and discussions with management and BDO Seidman, LLP, the Audit
Committee recommended to the Board of Directors that the audited financial
statements be included in the Company's Annual Report on Form 10-K for the year
ended January 31, 2004 for filing with the Securities and Exchange Commission.
AUDIT COMMITTEE:
Mary Ann Domuracki (Chairman)
Marvin Broitman
Security Holder Communications with Board of Directors
Security holders wishing to communicate directly with the Company's Board
of Directors or specific members of the Board may direct their communications
to: Hirsch International Corp., 200 Wireless Boulevard, Hauppauge, NY 11788, to
the attention of the appropriate individual(s).
Director's Compensation
Directors who are employees of the Company or its subsidiaries receive no
compensation, as such, for service as members of the Board other than
reimbursement of expenses incurred in attending meetings. Directors who are not
employees of the Company or its subsidiaries receive an annual directors' fee of
$6,000 plus $1,250 for each board or stockholder's meeting attended and $1,000
for each meeting of an executive committee of the Board attended, and are
reimbursed for expenses incurred in attending such meetings. In addition, all
non-employee directors participate in the Company's 1994 Non-Employee Director
Stock Option Plan. In fiscal 2002, the Board approved the issuance of 50,000
warrants to each of two independent directors for services rendered to the
Company. The warrants had an exercise price of $.50 per share, which was the
fair market value on the date of grant. The directors were also granted certain
registration rights associated with the warrants. In fiscal 2004, each of the
Company's independent directors received 10,000 options under the Company's 1994
Non-Employee Stock Option Plan. The options have an exercise price of $.92 per
share, which was the fair market value as of the date of the grant.
Executive Compensation
The following table sets forth the compensation earned during the three
fiscal years ended January 31, 2004, 2003 and 2002 by the Company's Chief
Executive Officer and by the four most highly paid Company's Executive Officers
whose total compensation for such periods exceeded $100,000 (the "Named
Executives"):
SUMMARY COMPENSATION TABLE
- --------------------------
Long-Term
Annual Compensation Compensation Awards
------------------- -------------------
Other All
Name and Annual Other
Principal Position Fiscal Year Salary Bonus Compensation Options Compensation
- ------------------ ----------- ------ ----- ------------ ------- ------------
Henry Arnberg 2004 $250,000 - $ 2,060 - -
Chairman of the Board 2003 $279,166 - $ 2,060 - -
of Directors and Chief 2002 $278,462 - $ 2,031 - -
Executive Officer
Paul Levine 2004 $250,000 - $ 3,532 - -
Vice-Chairman of the 2003 $279,166 - $ 3,532 - -
Board of Directors and 2002 $278,462 - $ 3,427 - -
Chief Executive Officer
of Hometown Threads, LLC
Paul Gallagher 2004 $300,000 $140,000(3) $ 3,675 - -
President, Chief 2003 $300,000 $ 75,000 $ 3,675 300,000 -
Operating Officer and 2002 $125,000 - - 100,000 -
Director
Beverly Eichel 2004 $250,000 $82,500(3) $ 9,000 - -
Vice President - Finance, 2003 $235,000 $35,250 $ 9,000 168,000 -
Chief Financial Officer 2002 - - - 50,000 -
and Secretary
Howard Arnberg 2004 $170,000 $23,375(2) $7,200 - -
President of Hometown 2003 $169,438 $19,125(1) $7,200 72,900 -
Threads, LLC 2002 $153,635 - $7,200 - -
<FN>
(1) Bonuses were earned in fiscal 2002 but paid in fiscal 2003
(2) Bonuses were earned in fiscal 2003 but paid in fiscal 2004
(3) Bonuses were earned in fiscal 2004 but paid in fiscal 2005
</FN>
Stock Options
There were no stock options granted to the Named Executives during fiscal
2004
Option Exercises and Holdings
The following table sets forth information concerning the exercise of stock
options by the Named Executives during the Company's fiscal year ended January
31, 2004 the number of options owned by the Named Executives and the value of
any in-the-money unexercised stock options as of January 31, 2004.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
---------------------------------
Value of
Number of Unexercised
Unexercised In-the-Money
Options Options at
At Fiscal Year End (#) Fiscal Year End ($)
Shares Acquired Value Realized Exercisable/ Exercisable/
Name on Exercise (#) $ Unexercisable Unexercisable
---- --------------- -------------- ------------- -------------
Henry Arnberg 0 $0 0/0 $ 0/0
Paul Gallagher 0 $0 192,000/208,000 $ 0/56,250
Beverly Eichel 0 $0 101,000/117,000 $ 0/31,500
Howard Arnberg 0 $0 34,300/38,600 $ 0/21,055
Stock Option Plans
The Company maintains two stock option plans pursuant to which options to
purchase an aggregate of 1,984,375 shares of Class A Common Stock may be
granted.
1993 Stock Option Plan. The 1993 Stock Option Plan was adopted by the Board
of Directors in December 1993 and was approved by the stockholders of the
Company in July 1994 (the "1993 Plan"). The 1993 Plan, as amended, currently has
1,750,000 shares of Class A Common Stock reserved for issuance upon exercise of
options designated as either (i) incentive stock options ("ISOs") under the
Internal Revenue Code of 1986, as amended (the "Code"), or (ii) non-qualified
options. ISOs may be granted under the 1993 Plan to employees and officers of
the Company. Non-qualified options may be granted to consultants, directors
(whether or not they are employees), employees or officers of the Company.
The purpose of the 1993 Plan is to encourage stock ownership by certain
directors, officers and employees of the Company and certain other persons
instrumental to the success of the Company and to give them a greater personal
interest in the success of the Company. The 1993 Plan is administered by the
Stock Option Committee. The Committee, within the limitations of the 1993 Plan,
determines the persons to whom options will be granted, the number of shares to
be covered by each option, whether the options granted are intended to be ISOs,
the duration and rate of exercise of each option, the option purchase price per
share and the manner of exercise, the time, manner and form of payment upon
exercise of an option, and whether restrictions such as repurchase rights in the
Company are to be imposed on shares subject to options. Options granted under
the 1993 Plan may not be granted at a price less than the fair market value of
the Class A Common Stock on the date of grant (or 110% of fair market value in
the case of persons holding 10% or more of the voting stock of the Company). The
aggregate fair market value of shares for which ISOs granted to any person are
exercisable for the first time by such person during any calendar year (under
all stock option plans of the Company and any related corporation) may not
exceed $100,000. The 1993 Plan terminated in December 2003; however, options
granted under the 1993 Plan will expire not more than five years from the date
of grant. Options granted under the 1993 Plan are not transferable during an
optionee's lifetime but are transferable at death by will or by the laws of
descent and distribution.
1994 Non-Employee Director Stock Option Plan. The 1994 Non-Employee
Director Stock Option Plan, as amended, (the "Directors Plan") was adopted by
the Board of Directors in September 1994 and was approved by the stockholders of
the Company in June 1995. The Directors Plan has 234,375 shares of Class A
Common Stock reserved for issuance. Pursuant to the current terms of the
Directors Plan, each independent unaffiliated Director shall automatically be
granted, subject to availability, without any further action by the Board of
Directors or the Stock Option Committee: (i) a non-qualified option to purchase
10,000 shares of Class A Common Stock upon their election to the Board of
Directors; and (ii) a non-qualified option to purchase 10,000 shares of Class A
Common Stock on the date of each annual meeting of stockholders following their
election to the Board of Directors. The exercise price of each option is the
fair market value of the Company's Class A Common Stock on the date of grant.
Each option expires five years from the date of grant and vests in three annual
installments of 33 1/3% each on the first, second and third anniversary of the
date of grant. Options granted under the Directors Plan are generally not
transferable during an optionee's lifetime but are transferable at death by will
or by the laws of descent and distribution. In the event an optionee ceases to
be a member of the Board of Directors (other than by reason of death or
disability), then the non-vested portion of the option immediately terminates
and becomes void and any vested but unexercised portion of the option may be
exercised for a period of 180 days from the date the optionee ceased to be a
member of the Board of Directors. In the event of death or permanent disability
of an optionee, all options accelerate and become immediately exercisable until
the scheduled expiration date of the option. This plan has expired.
2003 Stock Option Plan. The 2003 Plan was adopted by the Board of Directors
in May 2003 and was approved by the stockholders of the Company in July 2003
(the "2003 Plan"). The 2003 Plan currently has 750,000 shares of Common Stock
reserved for issuance upon the exercise of options designated as either (i)
incentive stock options ("ISOs") under the Code or (ii) non-qualified stock
options. ISOs may be granted under the 2003 Plan to employees and officers of
the Company. Non-qualified options may be granted to consultants, directors
(whether or not they are employees), employees or officers of the Company. In
certain circumstances, the exercise of stock options may have an adverse effect
on the market price of the Company's Common Stock.
The purpose of the 2003 Plan is to encourage stock ownership by certain
directors, officers and employees of the Company and certain other persons
instrumental to the success of the Company and give them a greater personal
interest in the success of the Company. The 2003 Plan is administered by the
Stock Option Committee. The Committee, within the limitations of the 2003 Plan,
determines the persons to whom options will be granted, the number of shares to
be covered by each option, whether the options granted are intended to be ISOs,
the duration and rate of exercise of each option, the option purchase price per
share and the manner of exercise, the time, manner and form of payment upon
exercise of an option, and whether restrictions such as repurchase rights in the
Company are to be imposed on the shares subject to options. Options granted
under the 2003 Plan may not be granted at a price less than the fair market
value of the Common Stock on the date of the grant (or 110% of fair market value
in the case of persons holding 10% or more of the voting stock of the Company).
The aggregate fair market value of shares for which ISOs granted to any person
are exercisable for the first time by such person during any calendar year
(under all stock option plans of the Company and any related corporation) may
not exceed $100,000. The 2003 Plan will terminate in December, 2013 which means
no options may be granted after such date. Options granted under the 2003 Plan
will expire not more than five years from the date of grant; however, any
options outstanding on the termination date of the 2003 Plan will continue until
they expire by their terms. Options granted under the 2003 Plan are not
transferable during an optionee's lifetime but are transferable at death by will
or by the laws of descent and distribution.
2004 Non-Employee Director Stock Option Plan (proposed - see below). The
2004 Plan was adopted by the Board of Directors in August 2004. The 2004 Plan,
as proposed, reserves 148,042 shares of Class A Common Stock for issuance to the
Company's independent and unaffiliated directors. Pursuant to the terms of the
2004 Plan, as proposed each independent and unaffiliated director shall
automatically be granted, subject to availability, without any further action by
the Board of Directors or the Stock Option Committee: (i) a non-qualified option
to purchase 10,000 shares of Class A Common Stock upon their initial election or
appointment to the Board of Directors; and (ii) a non-qualified option to
purchase 10,000 shares of Class A Common Stock on the date of each annual
meeting of stockholders following their election or appointment to the Board of
Directors. The exercise price of each option is the fair market value of the
Company's Class A Common Stock on the date of grant. Each option expires five
years from the date of grant and vests in three annual installments of 33 1/3%
each on the first, second and third anniversary of the date of grant. Options
granted under the 2004 Plan would generally not be transferable during an
optionee's lifetime but would be transferable at death by will or by the laws of
descent and distribution. In the event an optionee ceases to be a member of the
Board of Directors (other than by reason of death or disability), then the
non-vested portion of the option would immediately terminate and become void and
any vested but unexercised portion of the option may be exercised for a period
of 180 days from the date the optionee ceased to be a member of the Board of
Directors. In the event of death or permanent disability of an optionee, all
options accelerate and become immediately exercisable until the scheduled
expiration date of the option.
Stock Performance Graph/Table
The Company believes that it is the only publicly-held firm in the
embroidery equipment industry, and therefore does not believe that it can
reasonably identify an embroidery industry-based peer group. The Company has
elected to define a peer group based on a group of six industrial distributors,
trading in similar SIC Codes, with relatively low market capitalization for a
benchmark. The following graph and table compares the change in the cumulative
total stockholder return for the five-year period beginning on January 31, 2000,
and ending on January 31, 2004, based upon the market price of the Company's
Class A Common Stock, with the cumulative total return of the NASDAQ Composite
Index and the defined Peer Group. The Peer Group includes the following
companies: Lancer Corp.; Quipp Inc.; Paul Mueller Company; Oilgear Company; and
Key Technology Inc. The graph assumes a $100 investment on January 31, 2000 in
each of the indices and the reinvestment of any and all dividends.
[GRAPHIC OMITTED]
Comparison of Five-Year Cumulative Total Return Among Hirsch International Corp.,
NASDAQ Composite Index and an Industry-based Market Capitalization-Based Peer Group
1/31/00 1/31/01 1/31/02 1/31/03 1/31/04
------- ------- ------- ------- -------
Hirsch International Corp. $100 $77 $38 $32 $172
NASDAQ Composite Index 100 70 49 34 52
Peer Group 100 115 86 91 122
Employment Agreements
Paul Gallagher
As of September 11, 2001, Mr. Gallagher entered into a three-year
employment agreement to serve as the Company's President, Chief Operating
Officer and a director.
Mr. Gallagher's employment agreement provides for the payment of an annual
base salary of $300,000. In December, 2002 the Compensation Committee approved
an amendment to the employment agreement to provide for annual bonus payments as
follows: $75,000 for fiscal year 2003 and for each of fiscal 2004 and fiscal
2005, a minimum bonus payment of 50% of Mr. Gallagher's annual base salary,
provided the Company achieves a pre-tax profit of between $400,000 and
$2,999,999. Additional incremental increases in the bonus payment can be earned
based upon the achievement of a pre-tax profit in excess of $3,000,000 up to a
maximum additional bonus payment of 50% of annual base salary. In addition, the
employment agreement provides for the reimbursement of certain business
expenses, the provision of health insurance and the use of a Company automobile.
The agreement requires Mr. Gallagher to devote his entire business time and
attention to the Company and provides for termination upon his death or
disability (defined as the inability to perform duties for three (3) consecutive
months or six (6) months in any twelve (12) month period), or for cause (as
defined in the Gallagher Agreement).
In the event the Company terminates the employment agreement other than for
cause or materially breaches its obligations there under, Mr. Gallagher is
entitled to receive payment of his salary for up to six months plus a pro-rata
of his bonus payment that would have become due. The employment agreement also
provides that Mr. Gallagher shall not compete with the Company during the term
of the agreement and for a period of two (2) years thereafter. There is no
change of control provision contained in the employment agreement.
In addition, in connection with the execution of the employment agreement,
Mr. Gallagher also received options to purchase 100,000 shares of the Company's
Class A Common Stock.
Beverly Eichel
As of February 1, 2004, Ms. Eichel entered into a two-year employment
agreement to serve as the Company's Vice-President-Finance, Chief Financial
Officer and Secretary.
Ms. Eichel's employment agreement provides for the payment of an annual
salary of $265,000. The employment agreement provides for annual bonus payments
as follows: 35% of annual Base Compensation for the achievement of a minimum
target level pre-tax profit, 70% of annual Base Compensation for the achievement
of a "stretch" target level pre-tax profit set by the Board. If pre-tax profit
is greater than minimum target level but less than stretch target level, the
bonus payment shall be equal to the percentage of base compensation (greater
than 35% but less than 70%) which is directly proportional to the amount pre-tax
profits exceed the minimum target level over the difference between the stretch
target level and the minimum target level. In addition, Ms. Eichel's employment
agreement provides for the reimbursement of business expenses including an
automobile and cellular phone allowance, the provision of health insurance and
related benefits.
The agreement requires Ms. Eichel to devote her entire business time and
attention to the Company and provides for termination upon her death or
disability (defined as the inability to perform duties for three (3) consecutive
months or six (6) months in any nine (9) month period), or for cause (as defined
in the employment agreement). The employment agreement also provides that Ms.
Eichel shall not compete with the Company during the term of the agreement and
for a period of two (2) years thereafter. There is no change of control
provision contained in the employment agreement.
The agreement also grants Mrs. Eichel the right to participate in the
Company's 2003 Stock Option Plan upon the terms and conditions and the the
extent determined by the Board of Directors.
Howard Arnberg
As of February 1, 2002, Mr. Arnberg entered into a two-year employment
agreement to serve as President of Hometown Threads, LLC ("Hometown Threads").
Mr. Arnberg's employment agreement provides for the payment of an annual
base salary of $170,000. In addition, Mr. Arnberg is entitled to receive certain
quarterly and annual performance based bonus and incentive payments. Mr.
Arnberg's employment agreement provides for the reimbursement of business
expenses (including up to $25,000 in relocation expenses), an automobile and
cellular phone allowance, the provision of health insurance and related benefits
and a relocation package.
The agreement requires Mr. Arnberg to devote his entire business time and
attention to the Company and provides for termination upon his death or
disability (defined as the inability to perform duties for three (3) consecutive
months or six (6) months in any nine (9) moth period), or for cause (as defined
in the employment agreement). The employment agreement also provides that Mr.
Arnberg shall not compete with the Company during the term of the agreement and
for a period of one (1) year thereafter.
The agreement further states a change of control provision which is
triggered upon the sale or change in control of Hometown Threads, as well as a
severance provision which entitles Mr. Arnberg to the payment of an amount equal
to six (6) months base annual salary plus a pro-rata of his bonus if his
employment is terminated other than for cause or if the Company materially
breaches the terms of the employment agreement provided that if such termination
or material breach occurs within two (2) years following Mr. Arnberg's
relocation to the State of Florida, he shall be entitled to his base annual
salary for a twelve (12) month period.
In addition, in connection with the execution of the employment agreement,
Mr. Arnberg received options to purchase 20,000 shares of the Company's Class A
Common Stock. This agreement has expired.
401(k) Plan
The Company sponsors a voluntary contribution plan qualified under Section
401(k) of the Code (the "401(k) Plan"). Employees of the Company who have
attained the age of 21 and who complete one year of continuous service are
eligible to participate in the 401(k) Plan. Effective August 1, 2004 the
continuous service eligibility requirement was reduced to six months. Under the
401(k) Plan, an employee may elect to contribute annually on a pre-tax basis to
a retirement account a specified percentage of his or her compensation. Each
employee is fully vested at all times with respect to his or her contributions.
Within certain limits prescribed by the 401(k) Plan and applicable law, the
Board of Directors may authorize discretionary matching contributions by the
Company up to a maximum of two percent of an eligible employee's annual
compensation. The Company elected not to make a matching contribution for the
fiscal years ended January 31, 2004, 2003 and 2002, respectively.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The Company's Compensation Committee of the Board of Directors consists of
Marvin Broitman and Mary Ann Domuracki, both of which are independent outside
directors of the Company. The Compensation Committee's primary responsibility is
for reviewing the Company's compensation practices for executive officers and
key employees.
The Compensation Committee has furnished the following report on executive
compensation.
Compensation Committee Report
The Compensation Committee of the Board of Directors (the "Committee") is
currently composed of two independent outside directors of the Company.
The Committee focuses on compensating Company executives on a competitive
basis with other comparably sized and managed companies in a manner consistent
and supportive of overall Company objectives and through a compensation plan
which balances the long-term and short-term strategic initiatives of the
Company. The Committee intends that the Company's executive compensation program
will:
(1) reward executives for strategic management, the achievement of key
business objectives and enhancement of stockholder value;
(2) reflect each executive's success at resolving key operational issues;
(3) facilitate both the short-term and long-term planning process; and
(4) attract and retain key executives believed to be critical to the
long-term success of the Company.
The Company's compensation program for executive officers generally
consists of (i) a fixed base salary, (ii) performance-related annual bonus
awards and (iii) long-term incentive compensation in the form of stock options.
In addition, Company executives are able to participate in various benefit plans
generally available to other full-time employees of the Company. Each executive
officer's compensation package is designed to provide an appropriately weighted
mix of these elements, which in the aggregate provide a level of compensation
the committee believes is approximately equal to those provided by comparatively
sized and managed companies.
In reviewing the Company and executives' performance, the Committee takes
into consideration, among other things, the following performance factors in
making its compensation recommendations: revenues, net income and cash flow. The
Committee has received outside guidance from compensation consultants in its
efforts to have comparability and fairness in their determinations.
Base Salary
Base salary for the Company's executives is intended to provide competitive
remuneration for services provided to the Company over a one-year period. Base
salaries are set at levels designed to attract and retain the most appropriately
qualified individuals for each of the key management level positions within the
Company.
Short-Term Incentives
Short-term incentives are paid primarily to recognize specific operating
performance achieved within the last fiscal year. Since such incentive payments
are related to a specific year's performance, the Committee understands and
accepts that such payments may vary considerably from one year to the next. The
Company's bonus program generally ties executive compensation directly back to
the annual performance of both the individual executive and the Company overall.
Those executives not signatory to an employment agreement are able to earn a
percentage of their base salary as a performance-related bonus. Where there is
an employment agreement, an executive may earn a percentage of their base salary
based upon the entity's pre-tax profits as a performance-related bonus. The
bonuses paid during fiscal 2004 relate to such employment agreements, as
amended, with Paul Gallagher the Company's President and Chief Operating Officer
and Beverly Eichel, its Vice President - Finance, Chief Financial Officer and
Secretary.
Long-Term Incentives
In order to align long-term executive compensation with long-term
stockholder value improvements, the Committee has from time to time awarded
stock option grants to executives of the Company in recognition of the value of
these grants in motivating long-term strategic decision making. The Company's
long-term performance ultimately determines compensation from stock options
because stock option value is entirely dependent on the long-term growth of the
Company's Common Stock price. During the fiscal year ended January 31, 2004, no
stock options were granted to the Company's senior executive officers.
Chief Executive Officer
Mr. Arnberg's base salary and long-term incentive compensation are
determined by the Compensation Committee, based upon the same factors as those
used by the Compensation Committee for executives in general. Effective
September 1, 2002, Mr. Arnberg agreed to a voluntary reduction of his annual
base salary from $300,000 to $250,000.
In addition to his base salary, Mr. Arnberg is eligible to participate in
the short-term and long-term incentive programs outlined above for the other
Named Executives. Mr. Arnberg did not receive a short-term incentive bonus
payment or any long-term incentive stock options from the Company for fiscal
2004.
COMPENSATION COMMITTEE:
Marvin Broitman (Chairperson)
Mary Ann Domuracki
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of shares of Class
A Common Stock and Class B Common Stock as of July 30, 2004, 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:
Amount and Nature of Percent
Name and Address of Beneficial Owner (1) Title of Class (2) Beneficial Ownership of Class
- ---------------------------------------- ------------------ -------------------- --------
Henry Arnberg................... Class A 13,158 *
Class B 1,368,578 (3) 51.3%
Paul Levine.................... Class A - -
Class B 1,099,621 (4) 41.2%
Marvin Broitman................ Class A 80,104 (5) 1.4%
Class B - -
Mary Ann Domuracki............. Class A 26,666 (6) *
Class B - -
Paul Gallagher................. Class A 578,332 (7) 9.7%
Class B - -
Beverly Eichel................. Class A 182,666 (8) 3.1%
Class B - -
Howard Arnberg................. Class A 51,200 (9) *
Class B 25,000 *
All Officers and Directors as a group
(six persons) Class A 932,126 14.9%
Class B 1,393,578 52.2%
<FN>
* Less than one percent
(1) All addresses are c/o Hirsch International Corp., 200 Wireless Boulevard,
Hauppauge, New York 11788.
(2) The Company's outstanding Common Stock consists of two classes. Class A
Common Stock and Class B Common Stock. The Class A Common Stock and the
Class B Common Stock are substantially identical except that two-thirds of
the directors of the Company will be elected by Messrs. Arnberg and Levine,
the holders of most of the Class B Common Stock, as long as the number of
outstanding Shares of Class B Common Stock equals or exceeds 400,000
shares.
(3) Includes 968,518 shares of Class B Common Stock held by an estate planning
entity for the benefit of Mr. Arnberg's children. Mr. Arnberg exercises
voting control over these shares.
(4) Includes 100,000 shares of Class B Common Stock owned by his wife and
100,000 shares of Class B Common Stock owned by trusts created for the
benefit of his minor children as to which he disclaims beneficial
ownership.
(5) Includes options to purchase 10,000 shares of Class A Common Stock at an
exercise price of $0.96 and 11,666 shares of Class A Common Stock at an
exercise price of $0.27 and 6,666 shares of Class A Common Stock at an
exercise price of $0.92 per share. Also includes warrants to purchase
50,000 shares of Class A Common Stock at $0.50 per share. Does not include
options to purchase 834 shares of Class A Common Stock at an exercise price
of $0.27 and options to purchase 3,334 shares of Class A Common Stock at an
exercise price of $0.92 per share.
(6) Includes options to purchase 10,000 shares of Class A Common Stock at an
exercise price of $0.89; 10,000 shares of Class A Common Stock at an
exercise price of $0.27 and 6,666 shares of Class A Common Stock at an
exercise price of $0.92 per share. Does not include options to 3,334 shares
of Class A Common Stock at an exercise price of $0.92 per share.
(7) Includes options to purchase 100,000 and 183,332 shares of Class A Common
Stock at an exercise price of $0.95 and $0.27 per share respectively. Does
not include options to purchase 116,668 shares of Class A Common Stock at
an exercise price of $0.27 per share.
(8) Includes options to purchase 50,000 and 102,666 shares of Class A Common
Stock at an exercise price of $0.52 and $0.27 per share respectively. Does
not include options to purchase 65,334 shares of Class A Common Stock at an
exercise price of $0.27 per share.
(9) Includes options to purchase 20,000 shares of Class A Common Stock at an
exercise price of $1.00 per share, options to purchase 13,334 shares of
Class A Common Stock at $0.52 per share and options to purchase 15,266
shares of Class A Common Stock at an exercise price of $0.27 per share.
Does not include options to purchase 10,000 shares of Class A Common Stock
at an exercise price of $1.00 per share, options to purchase 6,666 shares
of Class A Common Stock at an exercise price of $0.52 per share and options
to purchase 7,634 shares of Class A Common Stock at an exercise price of
$0.27 per share.
</FN>
The Company is unaware of any arrangements that may result in a change in
control of the Company.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive, officers and directors, and persons who own more than ten percent of
a registered class of the Company's 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 Company's review of the copies of such forms
received by it during its fiscal year ended January 31, 2004, the Company
believes that the Reporting Persons complied with all filing requirements
applicable to them.
Certain Relationships and Related Transactions
Effective October 31, 2002, the Company completed the sale of all of the
outstanding equity interests in its Pulse Microsystems Ltd. subsidiary ("Pulse")
to an entity affiliated with Tas Tsonis, a former director of the Company and
Chief Executive Officer of Pulse, and Brian Goldberg, a former Vice President of
the Company and President of Pulse. The consideration received by the Company
was approximately equal to Pulse's net asset value. The terms of the transaction
were the product of an extensive arms-length negotiation between Management and
the purchaser and were approved by the Board of Directors after presentation by
and consultation with Management. Management and the Board believe that the
consideration received by the Company for the transferred equity interests to be
within a range of value that was fair to the Company.
The Company executed an Purchase and Sale Agreement with Tajima Industries,
Ltd. ("Tajima") and the Company's Tajima USA, Inc. subsidiary ("TUI") pursuant
to which the Company sold and Tajima purchased all of the common stock (the
"Shares") owned by the Company, constituting a 55% equity interest, in TUI, upon
the terms and conditions set forth in the Purchase and Sale Agreement. The sale
was effective as of January 31, 2004. Upon the consummation of the sale, Tajima
owned 100% of TUI.
The purchase price (the "Purchase Price") for the Shares was equal to the
Book Value (as defined in the Agreement), calculated in accordance with
generally accepted accounting principles. At the closing, Tajima paid the
Company the sum of $500,000 (the "Initial Payment") in partial payment of the
Purchase Price. The remaining balance due on the Purchase Price was determined
on April 30, 2004, and was paid promptly thereafter in accordance with the terms
of the Agreement.
In addition, the Company agreed to repay TUI the sum of $7,182,002,
representing amounts owed by the Company to TUI as of January 31, 2004 (the "Net
Intercompany Payable"). The Net Intercompany Payable shall be paid as follows:
(a) the Initial Payment ($500,000) was paid by Tajima to TUI on behalf of
the Company
(b) assignment by the Company to TUI of its right to receive the sum of
$2,200,000 from Tajima upon payment of the balance due on the Purchase
Price, and
(c) the payment by the Company of the sum of $4,482,000 in five (5) equal
monthly installments of $735,167 each and a sixth payment of $806,165,
commencing February 29,2004 and continuing through and including July
31, 2004.
Prior to the enactment of Sarbanes-Oxley legislation, the Company advanced
approximately $496,000 for premiums on split dollar life insurance for Henry
Arnberg, the Company's Chairman and Chief Executive Officer and Paul Levine, the
Vice-Chairman of the Board and Chief Executive Officer of Hometown Threads, LLC.
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 $681,000 at
January 31, 2004 for both policies. The premiums for these policies are
currently being paid out of the accumulated dividends for the policies.
Howard Arnberg, the President of Hometown Threads, LLC ("Hometown Threads")
and the son of Henry Arnberg, the Company's Chairman of the Board and Chief
Executive Officer entered into a two-year employment agreement, as amended, with
the Company and Hometown Threads, commencing February 1, 2002. The employment
agreement provides for the payment to Mr. Arnberg of an annual base salary of
$170,000. In addition, Mr. Arnberg is entitled to receive certain quarterly and
annual performance based bonus and incentive payments. Mr. Arnberg's employment
agreement provides for the reimbursement of business expenses (including up to
$25,000 in relocation expenses), an automobile and cellular phone allowance, the
provision of health insurance and related benefits and a relocation package. The
employment agreement requires Mr. Arnberg to devote his entire business time and
attention to the Company and provides for termination upon his death or
disability (defined as the inability to perform duties for three (3) consecutive
months or six (6) months in any nine (9) month period), or for cause (as defined
in the employment agreement). The employment agreement also provides that Mr.
Arnberg shall not compete with the Company during the term of the agreement and
for a period of one (1) year thereafter. The employment agreement contains a
change of control provision which is triggered upon the sale or change in
control of Hometown Threads, as well as a severance provision which entitles Mr.
Arnberg to the payment of an amount equal to six (6) months base annual salary
plus a pro-rata portion of his bonus if his employment is terminated other than
for cause or if the Company materially breaches the terms of the employment
agreement provided that if such termination or material breach occurs within two
(2) years following Mr. Arnberg's relocation to the State of Florida, he shall
be entitled to his base annual salary for a twelve (12) month period. Mr.
Arnberg also received options to purchase 20,000 shares of the Company's Class A
Common Stock. This agreement has expired.
Marc Arnberg, the son of Henry Arnberg, the Company's Chairman of the Board
and Chief Executive Officer, is employed by the Company as the Product Director.
Mr. Arnberg receives a base salary as well as the opportunity to earn a
performance based bonus based on criteria established by management for
employees of a similar level of responsibility.
Henry Arnberg, the Company's Chairman of the Board and Chief Executive
Officer, together with his wife and Paul Levine, the Company's Vice Chairman of
the Board and President of Hometown Threads, LLC, had owned a travel agency
which had been located on the premises of the Company's corporate headquarters
in Hauppauge, New York. The Company would pay this entity customary fees for any
travel and related services provided to the Company. During fiscal 2004, this
entity closed its business.
2. APPROVAL OF 2004 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
At the Meeting, the Company's stockholders will be asked to approve the
terms of the Company's 2004 Non-Employee Director Stock Option Plan (the "2004
Plan"). The 2004 Plan was adopted by the Board of Directors of the Company in
August 2004.
The Company's 1994 Non-Employee Director Stock Option Plan, which has
234,375 shares reserved for issuance, expired in August 2004. In the event a
replacement plan is not adopted by the Company, the Company's independent and
unaffiliated directors will not receive their automatic annual stock option
grants on the date of the Company's Annual Meeting nor will newly appointed or
elected independent and unaffiliated directors receive their initial grant of
options to purchase 10,000 shares of Class A Common Stock. The Board believes
that in light of the recent restructuring of the Company's business and
operations and the additional demands and responsibilities which recent
regulatory and legal changes have placed on its independent and unaffiliated
directors, in order to enable the Company to continue to attract and retain
independent and unaffiliated directors of the highest caliber, which the Board
believes will be instrumental to the future success of the Company, and to
continue to promote the well-being of the Company, it is in the best interests
of the Company and its stockholders to provide to such persons, through the
granting of stock options, the opportunity to participate in the value and/or
appreciation in value of the Company's Common Stock. The Board has historically
found that the grant of options has proven to be a valuable tool in attracting
and retaining qualified independent and unaffiliated directors, who do not
receive any payment for their services, other than the directors' fees described
above (see above - "Directors Compensation"). The Board believes that such
authority, in view of the factors described above and the impending expiration
of the 1994 Plan, should be continued through the adoption of the 2004 Plan.
As of July 30, 2004, the closing price of the Company's Class A Common
Stock on the NASDAQ SmallCap Market was $ 0.93 per share.
If the 2004 Plan is approved by the stockholders, additional options will
be granted under the 2004 Plan, the timing, amounts and specific terms of which
are described below. Such options are separate and apart from options granted
pursuant to the 1994 Plan, which as of July 30, 2004 numbered approximately
83,333 outstanding.
The following summary of the 2004 Plan does not purport to be complete,
and is subject to and qualified in its entirety by reference to the full text of
the 2004 Plan, set forth as Exhibit "A" to this Proxy Statement.
Summary of the 2004 Plan
2004 Non-Employee Director Stock Option Plan. The 2004 Plan was adopted by
the Board of Directors in August 2004. The 2004 Plan, as proposed, reserves
148,042 shares of Class A Common Stock for issuance to the Company's independent
and unaffiliated directors. Pursuant to the terms of the 2004 Plan, as proposed
each independent and unaffiliated director shall automatically be granted,
subject to availability, without any further action by the Board of Directors or
the Stock Option Committee: (i) a non-qualified option to purchase 10,000 shares
of Class A Common Stock upon their initial election or appointment to the Board
of Directors; and (ii) a non-qualified option to purchase 10,000 shares of Class
A Common Stock on the date of each annual meeting of stockholders following
their election or appointment to the Board of Directors. The exercise price of
each option is the fair market value of the Company's Class A Common Stock on
the date of grant. Each option expires five years from the date of grant and
vests in three annual installments of 33 1/3% each on the first, second and
third anniversary of the date of grant. Options granted under the 2004 Plan are
generally not transferable during an optionee's lifetime but are transferable at
death by will or by the laws of descent and distribution. In the event an
optionee ceases to be a member of the Board of Directors (other than by reason
of death or disability), then the non-vested portion of the option immediately
terminates and becomes void and any vested but unexercised portion of the option
may be exercised for a period of 180 days from the date the optionee ceased to
be a member of the Board of Directors. In the event of death or permanent
disability of an optionee, all options accelerate and become immediately
exercisable until the scheduled expiration date of the option.
Certain Federal Income Tax Consequences of the 2004 Plan
The following is a brief summary of the Federal income tax aspects of stock
options to be granted under the 2004 Plan based upon statutes, regulations and
interpretations in effect on the date hereof. This summary is not intended to be
exhaustive, and does not describe state or local tax consequences.
The stock options granted pursuant to the 2004 Plan will be non-qualified
stock options under the Internal Revue Code. Except as noted below, with respect
to non-qualified stock options in general (i) upon grant of the option, the
participant will recognize no income (and the Company will not be entitled to a
deduction); (ii) upon exercise of the option (if the shares of Common Stock are
not subject to a substantial risk of forfeiture), the participant will recognize
ordinary compensation income in an amount equal to the excess, if any, of the
fair market value of the shares on the date of exercise over the exercise price,
and the Company will qualify for a deduction in the same amount, subject to the
requirement that the compensation be reasonable; (iii) the Company will be
required to comply with applicable Federal income tax withholding requirements
with respect to the amount of ordinary compensation income recognized by the
participant; and (iv) on a sale of the shares, the participant will recognize
gain or loss equal to the difference, if any, between the amount realized and
the sum of the exercise price and the ordinary compensation income recognized.
Such gain or loss will be treated as capital gain or loss if the shares are
capital assets and as short-term or long-term capital gain or loss, depending
upon the length of time that the participant held the shares.
The following table illustrates the benefits that will be received by or
allocated to each of the following persons or groups under the terms of the 2004
Plan, as proposed had the 2004 Plan been in effect during the Company's last
fiscal year:
New Plan Benefits
2004 Non-Employee Director Stock Option Plan
Name and Position Dollar Value Number of Options
- ----------------- ------------ -----------------
Henry Arnberg $0 0
Paul Gallagher $0 0
Beverly Eichel $0 0
Executive Group $0 0
Non-Executive Director Group (1) 10,000 per director per year
Non-Executive Officer Group $0 0
<FN>
(1) Exercise price of options granted would be fair market value of the
Company's Class A Common Stock, which was $.92 per share, which was the
closing price of the Class A Common Stock on the NASDAQ SmallCap Market on
the date of the 2003 Annual Meeting.
</FN>
Recommendation and Vote Required
The Board of Directors recommends that the stockholders approve the
adoption of the 2004 Plan. The vote of the holders of a majority of the shares
of the Company's Common Stock present in person or represented by proxy at the
Meeting is required to adopt the 2004 Plan.
3. SELECTION OF AUDITORS
Services Provided by the Company's Auditors
The following table sets forth the fees paid to BDO Seidman, LLP for
professional services for each of the two fiscal years ended January 31, 2004
and 2003:
2004 2003
---- ----
Audit Fees $175,000 $154,000
Audit-Related Fees 29,000 29,000
Tax Fees 55,000 48,000
------------------ ------------------
$259,000 $231,000
================== ==================
Audit fees include fees billed for (a) the audit of Hirsch International
Corp. and its consolidated subsidiaries, (b) the review of quarterly financial
information, (c) attendance at the annual stockholders' meeting and (d) the
statutory audit for one subsidiary.
Audit-Related Fees include fees billed for (a) consultation on accounting
matters and (b) the audit of an employee benefit plan.
Tax Fees include fees billed for the preparation of tax returns and
consulting on tax examinations and planning matters.
The Audit Committee negotiates the annual audit fee directly with the
Company's independent auditors. The Audit Committee has also established
pre-approved services for which the Company's management can engage the
Company's independent auditors. Any work in addition to these pre-approved
services in a quarter requires the advance approval of the Audit Committee. The
Audit Committee considers whether the provision of permitted non-audit services
is compatible with maintaining BDO Seidman, LLP's independence. On a regular
basis, all services under arrangements not in existence on May 6, 2003 were
pre-approved by the Audit Committee.
The Board of Directors recommends that the stockholders ratify the
appointment of BDO Seidman LLP, independent auditors, which served as the
Company's independent auditors for the fiscal year ended January 31, 2004, as
independent auditors to audit the Company's Consolidated Financial Statements
for the fiscal year ending January 31, 2005. A representative of BDO Seidman LLP
is expected to be present at the Meeting and will be given the opportunity to
make a statement and to answer any questions any stockholder may have with
respect to the Consolidated Financial Statements of the Company for the year
ended January 31, 2004.
Recommendation and Vote Required
The Board of Directors recommends voting "for" the ratification and
appointment of BDO Seidman, LLP. The affirmative vote of a majority of the
holders of the Company's Common Stock present in person or represented by proxy
at the Meeting is required for the adoption of the foregoing proposal.
4. OTHER BUSINESS
The Board of Directors has no knowledge of any other business that may come
before the Meeting and does not intend to present any other business. However,
if any other business shall properly come before the Meeting or any adjournment
thereof, the persons named as proxies will have discretionary authority to vote
the shares of Class A Common Stock represented by the accompanying proxy in
accordance with their best judgment.
Stockholder's Proposals
Any stockholder of the Company who wishes to present a proposal to be
considered at the next annual meeting of stockholders of the Company and who
wishes to have such proposal presented in the Company's proxy statement for such
Meeting must deliver such proposal in writing to the Company at 200 Wireless
Boulevard, Hauppauge, New York 11788, on or before January 31, 2005. In order to
curtail controversy as to the date on which the proposal was received by the
Company, it is suggested that proponents submit their proposals by certified
mail, return receipt requested.
By Order of the Board of Directors
/s/ Beverly Eichel
Beverly Eichel, Secretary
The Company will furnish without charge to each person whose proxy is being
solicited by this proxy statement, on the written request of such person, a copy
of the Company's Annual Report on Form 10-K, for its fiscal year ended January
31, 2004. Such request should be addressed to Stockholder Relations, Hirsch
International Corp., 200 Wireless Boulevard, Hauppauge, New York 11788.
Dated: August 8, 2004
EXHIBIT "A"
Hirsch International Corp.
Audit Committee Charter
I. Purpose
The principal purpose of the Audit Committee (the "Committee") is to assist the
Board of Directors (the "Board") of Hirsch International Corp. (the "Company")
in fulfilling its responsibilities to the stockholders, potential stockholders
and investment community relating to the corporate accounting and reporting
practices of the Company and its subsidiaries, the quality and integrity of the
Company's consolidated financial statements, the Company's compliance with
applicable legal and regulatory requirements, the performance, qualifications
and independence of the Company's external auditors and the performance of the
Company's internal audit function.
In discharging its oversight role, the Committee is granted the authority to
adopt policies and procedures to ensure that the accounting and reporting
practices of the Company are of the highest quality and integrity, including the
authority to investigate any matter brought to its attention, with full access
to all books, records, facilities and personnel of the Company, and the
authority to engage independent counsel and other advisers as it determines
necessary to carry out its duties.
It shall also be the responsibility of the Committee to maintain free and open
means of communication among the Board and the Company's external auditors,
internal audit function and management. Through these lines of communication,
the Committee shall monitor any issues or areas that fall within the scope of
its duties, purpose or responsibilities that require special attention. The
Company's external auditors are ultimately accountable to the Committee and the
Board.
II. Membership
1. The Committee will have at least three members, each of whom shall be
appointed by the Board. Each member of the Committee shall be financially
literate (i.e., able to read and understand financial statements and aware
of the functions of auditors for a Company) as affirmatively determined by
the Board in connection with such member's appointment to the Committee.
2. The Committee shall be composed solely of "independent" directors who have
no employment or professional relationship with the Company, who are
independent of the Company's management and who comply with the
requirements for serving on audit committees as set forth in the corporate
governance standards, as amended from time to time, of the Nasdaq Stock
Market, Inc. ("NASDAQ") and all other applicable laws, rules and
regulations. The definition of "independent" requires that the Board
affirmatively determine that a director to be appointed to the Committee
not have any material relationship with the Company or any of its
subsidiaries. In addition, the independence of each member of the Committee
shall be reviewed on an annual basis by the Board or more frequently as the
circumstances dictate. For purposes of eligibility to serve on the
Committee, a director is not independent if:
(a) the director receives, directly or indirectly, any consulting,
advisory or other compensatory fees from the Company, other than fees
for serving in his or her capacity as a member of the Board and as a
member of the Board's committees;
(b) the Board determines that the director has a material relationship
with the Company (either directly or as a partner, stockholder or
officer of an organization that has a relationship with the Company)
or is otherwise an affiliate of the Company;
(c) the director is a former employee of the Company, unless a
"cooling-off' period of at least five years after the termination of
such employment has elapsed;
(d) the director is, or in the past five years has been, affiliated with
or employed by a present or former auditor of the Company or an
affiliate thereof, unless a "cooling-off' period of at least five
years after the termination of either the affiliation or employment
with the auditor or the auditing relationship has elapsed;
(e) the director is, or in the past five years has been, part of an
interlocking directorate in which an executive officer of the Company
serves on the compensation committee of the board of directors of
another company that employs such director; or
(f) the director has an immediate family member in any of the categories
listed in (d) or (e) above, unless a "cooling-off period of at least
five years has elapsed since the termination of the applicable
relationship or until after such family member is deceased or becomes
incapacitated.
3. A director appointed to the Committee may not serve on more than two
additional audit committees for publicly listed companies, unless the Board
has made an affirmative determination that such director is able
effectively to undertake the responsibilities of serving on the Company's
Audit Committee in addition to his or her positions on other such audit
committees.
4. The Board shall appoint one member of the Committee to save as the Chairman
and shall affirmatively determine at the time of such appointment that such
member possesses accounting or related financial management expertise.
III. Responsibilities, and Duties
A. Financial and Related Reporting
1. The Committee shall, prior to each filing by the Company of a Quarterly
Report on Form 10-Q (the "Form 10-Q") with the Securities and Exchange
Commission (the "SEC"), review with the Company's management and external
auditors the interim financial information to be included in the Form 10-Q
and review the matters described in Statement on Auditing Standards No. 61,
as it may be modified or supplemented, of the American Institute of
Certified Public Accountants, Communication with Audit Committees ("SAS
61"). In connection therewith, the Committee shall review any matters of
significance, including significant adjustments, management judgments and
accounting estimates, significant reserves and/or accruals, significant new
accounting principles, disagreements between management and the external
auditors and their effect, if any, on the Company's consolidated financial
statements and recent or proposed requirements of the SEC, the Financial
Accounting Standards Board (the "FASB") or other similar governing bodies.
2. The Committee shall, prior to each filing by the Company of an Annual
Report on Form 10-K (the "Form 10-K") with the SEC, review with the
Company's management and external auditors the audited financial statements
to be included in the Form 10-K and in the Company's annual report to
stockholders (the "Annual Report") and review and consider the matters
described in SAS 61. In connection therewith, the Committee shall review
significant adjustments, management judgments and accounting estimates,
significant reserves and/or accruals, significant new accounting
principles, disagreements between management and the external auditors and
their effect, if any, on the Company's consolidated financial statements
and recent or proposed requirements of the SEC, the FASB, other similar
governing bodies or any off-balance sheet structures, if any. Following
such review, the Committee shall recommend to the Board whether the audited
financial statements should be included in the Annual Report or the Form
10-K.
3. The Committee shall meet with the Company's Chief Executive Officer and
Chief Financial Officer, prior to their certification of each Form 10-Q or
Form 10-K filed with the SEC, and review with such officers their
disclosures relating to (a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data and
identify any material weakness in internal controls (b) any fraud, whether
or not material, that involves the Company's management or other employees
who have a significant role relating to the Company's internal controls and
(c) the quality of the Company's earnings.
4. In connection with its review of each Form l0-Q and Form 10-K and prior to
issuance of any earnings press release by the Company, the Committee shall
review with the Company's management and external auditors the consolidated
statements of operations, earnings guidance and other financial information
to be included in such earnings press release. Prior to issuance of any
release of financial information or earnings guidance to analysts or rating
agencies, the Committee shall review with the Company's management and
external auditors the financial information or earnings guidance to be
included in such release to be provided to analysts or rating agencies.
5. The Committee shall annually issue a written report to the Board, a copy of
which shall be included or summarized in the Company's proxy statement
related to the annual meeting of stockholders, stating whether the
Committee has (a) reviewed and discussed the audited financial statements
with the Company's management, (b) discussed with the Company's external
auditors the matters required to be discussed by SAS 61, (c) received from
the Company's external auditors disclosures regarding such auditors'
independence required by Independence Standards Board 1 and discussed with
such auditors their independence, (d) recommended to the Board that the
audited financial statements of the Company be included in the Annual
Report and the Form 10-K and (e) reviewed such other information as may be
required, from time to time, by the rules and/or regulations of the NASDAQ,
the SEC, the FASB or other similar governing bodies.
6. The Committee shall periodically discuss with the Company's external
auditors such auditors' judgments about the quality, not just the
acceptability, of the Company's accounting principles as applied in its
consolidated financial statements. The discussion should include such
issues as the clarity of the Company's financial disclosures, the degree of
aggressiveness or conservatism of the Company's accounting principles and
the underlying estimates and other significant decisions made by the
Company's management in preparing the financial disclosures.
7. The Committee shall obtain and review, on an annual basis, a report
prepared by the Company's management and/or external auditors setting forth
all significant financial reporting issues and judgments made in connection
with the preparation of the Company's financial statements, including an
analysis of the effects on the financial statements of the Company of any
alternative generally accepted accounting principle ("GAAP") methods
adopted by the Company, any regulatory and/or accounting initiatives and
any off-balance sheet structures and all critical accounting policies and
practices the Company uses or expects to use.
B. Controls and Compliance
8. The Committee shall periodically review with the Company's management,
external auditors and internal accounting personnel (a) the adequacy and
effectiveness of the Company's system of internal accounting controls, (b)
any recommendations of such external and/or internal accounting personnel
with respect to any material weaknesses in the Company's system of internal
controls, (c) any material matters or problems with respect to accounting,
records, procedures or operations of the Company which have not been
resolved to the satisfaction of the external auditors and/or internal
accounting personnel after having been brought to the attention of
management and (d) any material matters or problems with respect to the
safeguarding of the Company's assets and limitations on authority of the
Company's management relating to, among other things, investments,
borrowings and derivative instruments. Such review should also consider the
impact of the adequacy and effectiveness of the Company' s system of
internal accounting controls on the Company's financial reporting on both
an annual and quarterly basis.
9. The Committee shall discuss and review policies with respect to risk
assessment and risk management, including, but not limited to, (a)
guidelines and policies to govern the process by which risk assessment and
risk management is undertaken by the Company and its management, (b) the
adequacy of the Company's insurance coverage, (c) any uninsured or
commercially uninsurable risks, (d) the Company's interest rate risk
management, (e) the Company's counter-party and credit risks and (f) any
material environmental risks relating to the Company.
10. The Committee shall review with the Company's management and tax advisors
the status of all tax returns, including open years and potential disputes.
The Committee shall review with the Company's external auditors the
adequacy of tax reserves included in the Company's consolidated financial
statements.
11. On at least an annual basis, the Committee shall review with the Company's
legal counsel, (a) any legal or regulatory matters that could have a
significant impact on the Company's financial statements, (b) the Company's
compliance with applicable laws and regulations and (c) inquiries received
from regulators or governmental agencies.
12. The Committee shall review the status of significant litigation with the
Company's legal counsel and external auditors, if appropriate, and whether
reserves, if any, in connection with actual and/or potential litigation are
appropriate.
13. The Committee shall monitor and review the Company's compliance with all
applicable SEC and NASDAQ rules and regulations.
C. Internal Audit
14. To the extent applicable, the Committee shall review the operation of the
Company's internal accounting and audit functions, its budget,
organization, activities, independence and authority of its reporting
obligations. The Committee shall, on a regular basis, review the compliance
by the Company's internal audit and accounting functions with applicable
standards, any significant findings on internal audits and management's
responses thereto and any difficulties encountered during the course of the
internal audit. The Committee shall also review the appointment and
replacement of the Company's senior internal auditing executive if any and
the coordination of such activities with the Company's external auditors.
15. The Committee shall meet regularly, but in no event less than once every
six months, with the Company's internal accounting personnel in executive
sessions without the Company's management present.
D. External Audit
16. The Committee shall hire and fire (subject if applicable, to stockholder
ratification) the external auditors to be used to audit the consolidated
financial statements of the Company and review with the full Board any
proposed discharge of the external auditors.
17. The Committee shall review and pre-approve the engagement fees and the
terms of all auditing and non-auditing services to be provided by the
Company's external auditors and evaluate the effect thereof on the
independence of the external auditors. The Committee shall also review and
evaluate the scope of all non-auditing services to be provided by the
Company' s external auditors in order to confirm that such services are
permitted by the rules and/or regulations of the NASDAQ, the SEC, the FASB
or other similar governing bodies. As necessary, the Committee shall
consult with the Company's management regarding the engagement fees or
terms of any such auditing or non-auditing services.
18. The Committee shall, at least annually, evaluate the Company's external
auditors' qualifications, performance and independence and present a
written report to the Board of its conclusions with respect to such
evaluation. In connection with this evaluation, the external auditors shall
provide a written annual report to the Committee describing: (a) such
external auditors' internal quality-control procedures; (b) in general
terms any material issues raised by the most recent internal
quality-control review, or peer review, of such external; and (c) in order
to assess such external auditors' independence, all relationships between
such external auditors and the Company. The Committee shall consult with
the Company's management, its external auditors and/or personnel
responsible for its internal accounting function, as necessary, regarding
this evaluation.
19. The Committee shall review and evaluate the qualifications, performance and
independence of the lead partner of the external auditors, ensure that
neither the lead partner nor the concurring partner of the external
auditors serves, respectively, in that capacity for more than five years
(or such other period as may be prescribed by rules and/or regulations of
the NASDAQ, the SEC, the FASB or other similar governing bodies) and
present its conclusions with respect to the independent auditors, including
whether the audit firm itself should be changed periodically, to the Board.
20. The Committee shall meet with the Company's management and external
auditors prior to commencement of the annual audit by such external
auditors for the purpose of reviewing the scope and audit procedures of
such audit, including special audit risk areas and materiality. The
Committee shall also meet with the Company's external auditors subsequent
to completion of that audit for the purpose of reviewing the results.
21. The Committee shall obtain and review any written reports issued by the
Company's external auditors regarding all critical accounting policies and
practices the Company uses or expects to use, all alternative treatments of
financial information within GAAP that have been discussed with the
Company' s management, the ramifications of the use of such alternative
disclosures and treatments and the treatment preferred by the external
auditors.
22. The Committee shall meet regularly, but in no event less than once every
six months, with the Company's external auditors in executive sessions
without the Company's management present. Among the items to be discussed
at these meetings are the auditors' evaluation of the Company's accounting
personnel and the cooperation that the auditors received during the course
of the audit, including any audit problems or difficulties, together with
the responses of the Company' s management thereto, any restrictions on the
scope of such external auditors' activities and any disagreements with the
Company' s management. If applicable, such review may also include any
accounting adjustments that were noted or proposed by such auditors but
were passed (including similar adjustments that were passed because
individually they were not material), any communications between the audit
team and the audit firm's national office respecting auditing or accounting
issues presented by the engagement, any "management" or "internal control"
letter issued, or proposed to be issued, by such auditors to the Company
and all other material written communications between the external auditors
and the management of the Company.
E. Other Committee Activities
23. The Committee shall report to the Board on a regular basis.
24. The Committee shall serve as liaison between the Company's management,
external auditors and accounting personnel, on the one hand, and the Board,
with respect to all matters within the scope of the Committee's duties.
25. In accordance with the applicable rules and/or regulations of the NASDAQ,
the SEC, the FASB or other similar governing bodies, the Committee shall
set clear policies for the Company's hiring of employees or former
employees of the Company's external auditors. In addition, the Committee
shall also conduct exit interviews with departing executive officers
(senior vice president or above) in order to evaluate the Company's
corporate accounting and reporting practices.
26. The Committee shall establish, review and update periodically an
orientation and training program for new Committee members, based upon new
member orientation guidelines developed by the Committee, and ensure
continuing education and training for current Committee members.
27. The Committee shall conduct an annual evaluation of its own performance,
including the performance of individual members, and confirm annually that
all of the Committee's responsibilities set forth in this Charter have been
performed.
28. The Committee shall annually review and assess this Charter. This Charter
may be amended by the recommendation of the Committee and the approval of
the independent members of the Board. All amendments will be reported to
the Board.
29. The Committee shall annually review and assess the Company's Code of
Conduct and recommend changes thereto to the Board.
IV. Complaint Procedures
Any issue of significant financial misconduct shall be brought to the attention
of the Committee for its consideration. In this connection, the Committee shall
establish procedures for (a) the receipt, retention and treatment of complaints
received by the Company, employees and stockholders regarding accounting,
internal accounting controls or auditing matters and (b) the confidential,
anonymous submission by employees of the Company of concerns regarding
questionable accounting or auditing matters. The Committee shall investigate all
matters brought to its attention within the scope of its duties, including the
review of any significant fraudulent or illegal activities that may be
discovered and any preventative action taken in response to such activities.
V. Committee Powers
In the course of fulfilling its responsibilities and duties, the Committee shall
be empowered (a) to initiate, if warranted, an investigation of any special
situation, (b) to retain outside legal, accounting or other advisors and
consultants without seeking approval from the Board if, in the Committee's
judgment, it is appropriate and (c) to delegate to one or more of its members
any responsibility or duty of the Committee, which by its nature is not required
to be performed by the entire Committee. The Company shall provide appropriate
funding, as determined by the Committee in its capacity as a committee of the
Board, for payment of compensation to any external auditors employed to audit
the Company's consolidated financial statements and any legal, accounting or
other advisors and consultants employed by the Committee in carrying out its
duties.
VI. Meetings
The Committee shall meet at least four times annually or more frequently as the
circumstances dictate. For each Committee meeting, the Committee will appoint a
secretary to keep minutes of such meeting. After approval of each set of minutes
by the Committee, the Committee will submit such minutes to the Board for review
and will cause such minutes to be filed with the minutes of the Board.
VII. Limitations on Scope
The Committee members shall serve on the Committee subject to the understanding
on their part and on the part of the Company's management and external auditors
that:
1. The Committee members are not employees or officers of the Company and are
not directly involved in the Company's daily operations, and they will not
serve as members of the Committee on a full-time basis.
2. The Committee members expect the Company's management, external auditors
and internal accounting functions to provide the Committee with prompt and
accurate information, so that the Committee can discharge its duties
properly.
3. To the extent permitted by law, the Committee shall be entitled to rely on
the information and opinions of the persons and entities noted above in
carrying out its responsibilities.
The Committee members, in adopting this Charter and in agreeing to serve on the
Committee, do so in reliance on, among other things, the provisions of the
Company's Amended and Restated Certificate of Incorporation which:
1. Together with the Company's By-laws, provide indemnification for their
benefit, and,
2. To the fullest extent provided by law, provide that no director shall be
liable to the Company or its stockholders for monetary damages for breach
of fiduciary duty as a director.
EXHIBIT "B"
HIRSCH INTERNATIONAL CORP.
2004 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. PURPOSE.
This Non-Qualified Stock Option Plan, to be known as the 2004 Non-Employee
Director Stock Option Plan (the "Plan"), is intended to promote the
interests of Hirsch International Corp., a Delaware corporation (the
"Company"), by providing an inducement to obtain and retain the services of
qualified persons who are independent directors (as such term is defined in
the applicable rules of the NASDAQ Stock Exchange) of the Company (an
"Independent Director") to serve as members of its Board of Directors (the
"Board").
2. AVAILABLE SHARES.
The total number of shares of Class A Common Stock, par value $.01 per
share, of the Company (the "Common Stock"), for which options may be
granted under the Plan shall not exceed 148,042 shares, subject to
adjustment in accordance with Paragraph 10 of the Plan. Shares of Common
Stock subject to the Plan are authorized but unissued shares of Common
Stock or shares of Common Stock that were once issued and subsequently
reacquired by the Company. If any options granted under the Plan are
surrendered before exercise or lapse without exercise, in whole or in part,
the shares of Common Stock reserved therefore shall continue to be
available under the Plan.
3. ADMINISTRATION.
The Plan shall be administered by the Board or by a committee appointed by
the Board (the "Committee"). In the event the Board fails to appoint or
refrains from appointing a Committee, the Board shall have all power and
authority to administer the Plan. In such event, the word "Committee"
wherever used shall be deemed to mean the Board. The Committee shall,
subject to the provisions of the Plan, have the power to construe the Plan,
to determine all questions hereunder, and to adopt and amend such rules and
regulations for the administration of the Plan as it may deem desirable.
4. GRANTING OF OPTIONS.
(a) On the date of adoption of the Plan by the Company's stockholders (the
"Effective Date"), each Independent Director shall automatically be
granted, subject to availability, without any further action by the
Board, an option to purchase 10,000 shares of Common Stock (the
"Initial Grant").
(b) On the date of each annual meeting of stockholders following the
Effective Date, each Independent Director shall automatically be
granted, subject to availability, without any further action by the
Board, an option to purchase 10,000 shares of Common Stock (the
"Annual Grant"). In the event a person becomes an Independent Director
after the Effective Date, such person shall automatically receive an
Initial Grant on the date such person becomes an Independent Director.
(c) Except for the specific options referred to above, no other options
shall be granted under the Plan. Options granted under the Plan are
not intended to be treated as incentive stock options are defined in
Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").
5. EXERCISE PRICE.
The purchase price of the Common Stock covered by an option granted
pursuant to the Plan shall be 100% of the fair market value per share of a
share of Common Stock on the day the option is granted (the "Exercise
Price"). The Exercise Price will be subject to adjustment in accordance
with the provisions of Paragraph 10 of the Plan. For purposes of the Plan,
"fair market value" shall be (i) the closing price of the Company's Common
Stock appearing on a national securities exchange if the Company's Common
Stock is listed on such an exchange, or if not listed, the closing bid
price appearing on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ"); or (ii) if the Shares are not listed on
NASDAQ, then the closing bid price for the Company's Common Stock as listed
in the National Quotation Bureau's pink sheets; or (iii) if there are no
listed bid prices published in the pink sheets, then the market value shall
be based upon the closing bid price as determined following a polling of
all dealers making a market in the Company's Common Stock.
6. PERIOD OF OPTION.
Unless sooner terminated in accordance with the provisions of Paragraph 8
of the Plan, an option granted hereunder shall be for a term of five (5)
years.
7. VESTING OF SHARES AND NON-TRANSFERABILITY OF OPTIONS.
(a) Vesting. Options granted under the Plan shall not be exercisable until
they become vested. Options granted shall vest in the optionee and
become exercisable immediately by the optionee in three annual
installments of 33 ?% each on the date of grant first and second
anniversary of the date of grant.
(b) Legend on Certificates. The certificates representing such shares of
Common Stock shall carry such appropriate legends, and such written
instructions shall be given to the Company's transfer agent, as may be
deemed necessary or advisable by counsel to the Company in order to
comply with the requirements of the Securities Act of 1933 or any
state securities laws.
(c) Non-Transferability. Any option granted pursuant to the Plan shall not
be assignable or transferable other than by will or the laws of
descent and distribution or pursuant to a qualified domestic relations
order as defined by the Code, or Title I of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or the rules
thereunder, and shall be exercisable during the optionee's lifetime
only by him or her.
8. TERMINATION OF OPTION RIGHTS.
(a) In the event an optionee ceases to be a member of the Board for any
reason other than death or permanent disability, any then unexercised
portion of options granted to such optionee shall, to the extent not
then vested, immediately terminate and become void; any portion of an
option which is then vested but has not been exercised at the time the
optionee so ceases to be a member of the Board may be exercised, to
the extent it is then vested, by the optionee within 180 days of the
date the optionee ceased to be a member of the Board; and all such
options shall terminate after such 180 days have expired.
(b) In the event that an optionee ceases to be a member of the Board by
reason of his or her death or permanent disability, any option granted
to such optionee shall be immediately and automatically accelerated
and become fully vested and all unexercised options shall be
exercisable by the optionee (or by the optionee's personal
representative, heir or legatee, in the event of death) until the
schedules expiration date of the option.
9. EXERCISE OF OPTION.
Subject to the terms and conditions of the Plan and the option agreements,
an option granted hereunder shall, to the extent then exercisable, be
exercisable in whole or in part by giving written notice to the Company by
mail or in person addressed to Hirsch International Corp., 200 Wireless
Boulevard, Hauppauge, New York 11788, Attention: Chief Financial Officer,
stating the number of shares of Common Stock with respect to which the
option is being exercised, accompanied by payment in full for such shares
of Common Stock. Payment may be:
(a) in United States dollars in cash or by check; or
(b) in whole or in part of Common Stock of the Company already owned by
the person or persons exercising the option, valued at fair market
value determined in accordance with the provisions of Paragraph 5; or
(c) by a combination of cash or check and Common Stock as provided in (a)
and (b) above.
The Company's transfer agent shall, on behalf of the Company, prepare a
certificate or certificates representing such shares of Common Stock
acquired pursuant to exercise of the option, shall register the optionee as
the owner of such shares of Common Stock on the books of the Company and
shall cause the fully executed certificate(s) representing such shares of
Common Stock to be delivered to the optionee as soon as practicably after
payment of the option price in full.
The holder of an option shall not have any rights of a stockholder with
respect to the shares of Common Stock covered by the option, except to the
extent that one or more certificates for such shares of Common stock shall
be delivered to him or her upon the due exercise of the option.
10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION AND OTHER MATTERS.
Upon the occurrence of any of the following events, an optionee's rights
with respect to options granted to him or her hereunder shall be adjusted
as hereinafter provided:
(a) Stock Dividends and Stock Splits. If the shares of Common Stock shall
be subdivided or combined into a greater or smaller number of shares
or if the Company shall issue any shares of Common stock as a stock
dividend on its outstanding Common Stock, the number of shares of
Common Stock deliverable upon the exercise of options shall be
appropriately increased or decreased proportionately, and appropriate
adjustments shall be made in the purchase price per share to reflect
such subdivision, combination or stock dividend.
(b) Merger; Consolidation; Liquidation; Sale of Assets. In the event the
Company is merged into or consolidated with another corporation under
circumstances where the Company is not the surviving corporation, or
if the Company is liquidated or sells or otherwise disposes of all or
substantially all of its assets to another corporation while
unexercised options remain outstanding under the Plan.
i. subject to the provisions of clauses (iii), (iv) and (v) below,
after the effective date of such merger, consolidation or sale,
as the case may be, each holder of an outstanding option shall be
entitled, upon exercise of such option, to receive in lieu of
shares of Common Stock, shares of such stock or other securities
as the holders of the shares of Common Stock received pursuant to
the terms of the merger, consolidation or sale; or
ii. the Committee may waive any discretionary limitations imposed
with respect to the exercise of the option so that all options
from and after a date prior to the effective date of such merger,
consolidation, liquidation or sale, as the case may be, specified
by the Committee, shall be exercisable in full; or
iii. all outstanding options may be cancelled by the Committee as the
effective date of any such merger, consolidation, liquidation or
sale, provided that notice of such cancellation shall be given to
each holder of an option, and each holder thereof shall have the
right to exercise such option in full (without regard to any
discretionary limitations imposed with respect to the option)
during a 30-day period preceding the effective date of such
merger, consolidation, liquidation or sale; or
iv. all outstanding options may be cancelled by the Committee as of
the date of any such merger, consolidation, liquidation or sale,
provided that notice of such cancellation shall be given to each
holder of an option and each such holder thereof shall have the
right to exercise such option but only to the extent exercisable
in accordance with any discretionary limitations imposed with
respect to the option prior to the effective date of such merger,
consolidation, liquidation or sale; or
v. the Committee may provide for the cancellation of all outstanding
options and for the payment to the holders of some part or all of
the amount by which the value thereof exceeds the payment, if
any, which the holder would have been required to make to
exercise such option.
(c) Issuance of Securities. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number
or price of shares subject to options, provided, however, in the event
the Company issues or sells any Common Stock or Common Stock
Equivalents without consideration or for consideration per share less
than the current fair market value per share (as defined in Paragraph
5 below) on the date of such issuance or sale, or fixes a record date
for the issuance of subscription rights, options or warrants to all
holders of Common Stock entitled them to purchase Common Stock (or
Common Stock Equivalents) at a price per share (or having an exercise
or conversion price per share) less than the then current fair market
value per share, the Exercise Price shall be adjusted so that it will
equal the price determined by multiplying the Exercise Price in effect
immediately prior to the adjustment by a fraction, of which the
numerator shall be (i) the number of shares outstanding on the record
date for such sale or issuance, plus (ii) the number of additional
shares which the aggregate consideration received by the Company upon
such issuance or sale (plus the aggregate of any additional amount to
be received by the Company upon the exercise of such subscription
rights, options or warrants) would purchase at the fair market value,
and of which the denominator shall be (x) the number of shares
outstanding on the record date for such issuance or sale, plus (y) the
number of additional shares offered for subscription or purchase (or
into which the Common Stock Equivalents so offered are exercisable or
convertible). Each adjustment shall become effective retroactively
immediately after the record date for the issuance. To the extent that
Common Stock (or Common Stock Equivalents) are not delivered after the
expiration of such subscription rights, options or warrants, the
Exercise Price shall be readjusted to the Exercise Price which would
then be in effect had the adjustments made upon the issuance of such
rights, options or warrants been made upon the basis of delivery of
only the number of shares (or Common Stock Equivalents) actually
delivered. No adjustments shall be made for dividends paid in cash or
in property other than securities of the Company.
(d) Adjustments. Upon the happening of any of the foregoing events, the
class and aggregate number of shares set forth in Paragraph 2 of the
Plan that are subject to options which previously have been or
subsequently may be granted under the Plan shall also be appropriately
adjusted to reflect such events. The Committee shall determine the
specific adjustments to be made under this Paragraph 10 and its
determination shall be conclusive.
11. RESTRICTIONS ON ISSUANCE OF SHARES.
Notwithstanding the provisions of Paragraphs 4 and 9 of the Plan, the
Company shall not be obligated to deliver any Common Stock unless and
until, in the opinion of the Company's counsel, all applicable federal and
state laws and regulations have been complied with, nor, if the outstanding
Common stock is at the time listed on any securities exchange, unless and
until the Common Stock to be delivered has been listed (or authorized to be
added to the list upon official notice of issuance) upon such exchange, nor
unless or until all other legal matters in connection with the issuance and
delivery of the Common Stock have been approved by the Company's counsel.
12. REPRESENTATION OF OPTIONEE.
If requested by the Company, the optionee shall deliver to the Company
written representations and warranties upon exercise of the option that are
necessary to show compliance with Federal and state securities laws,
including representations and warranties to the effect that a purchase of
shares under the option is made for investment and not with a view to their
distribution (as that term is used in Securities Act of 1933).
13. OPTION AGREEMENT.
Each option is granted under the provisions of the Plan shall be evidenced
by an option agreement, which agreement shall be duly executed and
delivered on behalf of the Company and by the optionee to whom such option
is granted. The option agreement shall contain such terms, provisions and
conditions not inconsistent with the Plan as may be determined by the
officer executing it.
14. TERMINATION AND AMENDMENT OF PLAN.
Options may no longer be granted under the Plan after September 8, 2014,
and the Plan shall terminate on such date provided that all options
previously granted shall continue to remain outstanding in accordance with
their terms. The Committee may at any time terminate the Plan or make such
modification or amendment thereof as it deems advisable; provided, however,
that the Committee may not, without approval by the affirmative vote of the
holders of a majority of the shares of Common Stock present in person or by
proxy and entitled to vote at the meeting:
(a) increase the maximum number of shares for which options may be granted
under the Plan (except by adjustment pursuant to Section 10);
(b) materially modify the requirements as to eligibility to participate in
the Plan;
(c) materially increase benefits accruing to option holders under the
Plan; or
(d) amend the Plan in any manner which would cause Rule 16b-3 to become
inapplicable to the Plan;
and provided further that the provisions of the Plan specified in Rule
16b-3(c)(2)(ii)(A) (or any successor or amended provision thereof) under
the Securities Exchange Act of 1934 (including, without limitation,
provisions as to eligibility, amount, price, and timing of awards) may not
be amended more than once every six month, other than to comport with
changes in the Internal Revenue Code, ERISA, or the rules thereunder.
Termination or any modification or amendment of the Plan shall not, without
consent of a participant, affect his or her rights under an option
previously granted to him or her.
15. WITHHOLDING OF INCOME TAXES.
Upon the exercise of an option, the Company, in accordance with Section
3402(a) of the Internal Revenue Code, may require the optionee to pay
withholding taxes in respect of amounts considered to be compensation
includible in the optionee's gross income.
16. COMPLIANCE WITH REGULATIONS.
It is the Company's intent that the Plan comply with all respects with Rule
16b-3 under the Securities Act of 1934 (or any successor or amended version
thereof) and any applicable Securities and Exchange Commission
interpretations thereof. If any provision of the Plan is deemed not be in
compliance with Rule 16b-3, the provision shall be null and void.
17. GOVERNING LAW.
The validity and construction of the Plan and the instruments evidencing
options shall be governed by the laws of the State of Delaware, without
giving effect to the principles of conflicts of law thereof.