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:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-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):
[ ] No fee required.
[X] 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:
Common Stock of Hirsch International Corp.,
$.01 par value per share ("Common Stock")
2) Aggregate number of securities to which transaction applies:
15,046,697 shares of Common Stock
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):
The filing free of $2,355 was calculated pursuant to Exchange Act
Rule 0-11(c) and was determined by multiplying .0001177 by the
product of (a) 15,046,697 (which is the number of shares of
Common Stock being issued to the stockholders of the company
being acquired) by (b) $1.33 (which is the average of the high
and low prices for the registrant's Class A Common Stock on
September 28, 2005 as reported on the NASDAQ SmallCap Market) .
4) Proposed maximum aggregate value of transaction:
$20,012,107
5) Total fee paid:
$2,355
[ ] 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.
200 Wireless Boulevard
Hauppauge, New York 11788
___________________, 2005
Dear Stockholder:
We are writing to you regarding our proposed merger with Sheridan Square
Entertainment, Inc. ("Sheridan"). Our Board of Directors has unanimously
approved this transaction, which we believe will benefit our stockholders by
allowing you to participate in a larger, more diverse company with long-term
growth potential.
Our proposed combination with Sheridan will be effected through the merger
of a newly formed subsidiary of Hirsch into Sheridan, with Sheridan becoming our
wholly-owned subsidiary. We will issue shares of our common stock to the
stockholders of Sheridan. After the merger, the former Sheridan stockholders
will own approximately 62% of our outstanding common stock (including shares
issuable upon the exercise of vested and "in the money" options and warrants),
subject to adjustment as described in the enclosed proxy statement. Current
holders of our common stock, options and warrants will own the remaining
approximately 38% of our outstanding common stock (including shares issuable
upon the exercise of vested and "in the money" options and warrants) subject to
further dilution and adjustments as described in the enclosed proxy statement.
Based on the closing price of our common stock on the NASDAQ SmallCap
Market on July 20, 2005 of $1.10, we currently expect that the Sheridan
stockholders will receive in the merger an aggregate of approximately
$16,552,000 worth of our common stock. The actual value of the shares to be
issued to Sheridan stockholders will depend on the market value of our common
stock at the time the merger is completed. Following completion of the merger,
you will continue to be a stockholder of Hirsch and you will be asked to
exchange your shares of Class A and Class B common stock for shares of our new
common stock.
Our Board of Directors also has unanimously approved the transactions and
has determined that the transactions are advisable and in the interests of our
stockholders.
Harris Nesbitt Corp., the financial advisor to our Board of Directors, has
given its opinion to our Board of Directors that the exchange contemplated by
the merger is fair to our stockholders from a financial point of view.
We will not carry out the merger unless our stockholders give their
approval. We will ask you to consider and approve the merger at a meeting of our
stockholders, which will be in lieu of our 2005 annual meeting, and will be held
on __________, 2005 at ________________________, local time, at
____________________________________ as more fully set forth in the Proxy
Statement. You are urged to attend this meeting.
The notice of meeting, proxy statement and proxy card for the Meeting are
enclosed. In addition to our proposed merger with Sheridan, you will be asked to
act at the meeting upon proposed changes to our Restated Certificate of
Incorporation. These changes to our Restated Certificate of Incorporation are
conditions to the merger. You also will be asked to elect a new slate of
directors and to increase the number of shares of our common stock available for
issuance under our 2003 Stock Option Plan, both of which are related to and
conditions of the merger. Our Board of Directors unanimously recommends that you
(a) approve the changes to our Restated Certificate of Incorporation; (b) vote
for each director nominated; and (c) vote to increase the number of shares
available for issuance under our 2003 Stock Option Plan. An affirmative vote for
all of these matters is required for the approval of the merger.
The proxy statement includes important information. WE URGE YOU TO READ IT
CAREFULLY, INCLUDING THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 33,
BEFORE GIVING YOUR PROXY. A copy of our 2005 Annual Report to Stockholders is
also enclosed.
Your vote is important regardless of the number of shares you hold. To
ensure your representation at the meeting, please complete, sign, date and
return the enclosed proxy card in the envelope provided at your earliest
convenience or respond to your broker's request for instructions. If you choose
to attend the Meeting, you may revoke your proxy and personally vote your shares
at the Meeting.
Sincerely yours,
/s/ Paul Gallagher
- ------------------
Paul Gallagher
President, Chief Executive Officer and Chief
Operating Officer
This document is dated ____________, 2005 and is first being mailed to the
stockholders of Hirsch International Corp. on or about _____________, 2005
HIRSCH INTERNATIONAL CORP.
(a Delaware corporation)
NOTICE OF SPECIAL
MEETING OF STOCKHOLDERS TO BE
HELD AT 10:00 A.M. ON ___________, 2005
To the Stockholders of Hirsch International Corp.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"Meeting") of Hirsch International Corp., a Delaware Corporation ("we", "us",
"Hirsch" or the "Company") will be held on __ __, 2005, at 10:00 A.M. at
________for the following purposes:
1. To consider and vote on a proposal to adopt an Agreement and Plan of
Merger dated as of July 20, 2005, by and among the Company, SSE Acquisition
Corp., ("Merger Sub") and Sheridan Square Entertainment, Inc. ("Sheridan") and
the issuance of our common stock to the stockholders of Sheridan and the other
transactions described in the Agreement and Plan of Merger;
2. To consider and vote on proposals to amend our Restated Certificate of
Incorporation that would have the following effects, among others:
(a) to modify the fixed range of the number of our directors comprising
our Board and to designate our initial directors following the merger;
(b) to convert the two classes of common stock we are authorized to issue
into a single class of common stock having equal voting and other
rights;
(c) to increase the number of shares of common stock the Company is
authorized to issue to 50,000,000 shares, $.01 par value and;
(d) to adopt a Second Amended and Restated Certificate of Incorporation
that includes the foregoing changes in the event that they are
approved by the stockholders and makes the other changes set forth in
our proposed Second Amended and Restated Certificate of Incorporation
which is included as Annex C to the enclosed Proxy Statement.
3. to consider and vote upon a proposal to increase the number of shares of
our common stock available for issuance pursuant to our 2003 Stock Option Plan
from 750,000 to 5,000,000;
4. to elect a Board of Directors consisting of nine (9) directors;
5. to ratify the appointment of BDO Seidman, LLP as the Company's
independent registered public accounting firm for the fiscal year ending January
28, 2006; and
6. to transact such other business as may properly come before the Meeting
and any adjournment or postponement thereof including soliciting additional
proxies if there are not sufficient votes in favor of approving the proposed
merger, the issuance of our common stock to the stockholders of Sheridan Square
Entertainment Inc. and the proposed changes to our Restated Certificate of
Incorporation.
Approval of each of proposals 1, 2, 3 and 4 is conditioned on the approval
of all such proposals. Therefore, you should consider proposals 1, 2, 3 and 4
together. If any of proposals 1, 2, 3 or 4 is not approved, none of them will be
implemented, even, though one or more of them receive sufficient stockholder
votes for approval.
The Board of Directors has fixed the close of business on ____________,
2005 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 our
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
____________, 2005 until the Meeting for examination by any stockholder for any
purpose germane to the Meeting. This list will also be available at the Meeting.
The accompanying proxy statement provides you with a summary of proposals
on which our stockholders will vote at the Meeting. WE ENCOURAGE YOU TO READ
THIS ENTIRE DOCUMENT, PARTICULARLY THE SECTION ENTITLED "RISK FACTORS" BEGINNING
ON PAGE 33, BEFORE VOTING. OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
YOU VOTE FOR PROPOSALS 1 THROUGH 5.
Your vote is important regardless of the number of shares you hold. To
ensure your representation at the Meeting, please complete, sign, date and
return your enclosed proxy card as soon as possible in the postage-paid envelope
provided. If your shares are held in "street name" by your broker or other
nominee, only that holder can vote your shares, and the vote cannot be cast
unless you provide instructions to your broker. You should follow directions
provided by your broker regarding how to instruct your broker to vote your
shares. If you choose to attend the Meeting, you may revoke your proxy and
personally cast your votes at the Meeting.
We invite all stockholders to attend our Meeting in person. Those
stockholders who are unable to attend are urged to execute and return the
enclosed proxy card as promptly as possible. Stockholders who execute a proxy
card may nevertheless attend the meeting, revoke their proxies and vote their
shares in person.
By Order of the Board of Directors
/s/ Beverly Eichel
- ------------------
Beverly Eichel, Secretary
Hauppauge, New York
_____________, 2005
HIRSCH INTERNATIONAL CORP.
200 Wireless Boulevard
Hauppauge, NY 11788
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PROXY STATEMENT
------------------------------
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD AT 10:00 A.M. ON ___________, 2005
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Hirsch International Corp. ("we", "us", "Hirsch" or
the "Company") of proxies to be voted at a Special 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 ________, 2005, 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
7,912,010 shares of Class A Common Stock and 550,018 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 approval of the Agreement and Plan of Merger dated as of July 20,
2005 (the "Merger Agreement", by and among the Company, SSE Acquisition Corp.
("Merger Sub") and Sheridan Square Entertainment, Inc. ("Sheridan") and the
issuance of our common stock to the stockholders of Sheridan and the other
transactions described in the Merger Agreement;
(2) the approval of the amendment to our Restated Certificate of
Incorporation ("Restated Certificate") that would have the following effects,
among others:
(a) to modify the fixed range of the number of our directors
comprising our Board, and to designate our initial directors
following the merger;
(b) to convert the two classes of common stock we are authorized to
issue into a single class of common stock having equal voting and
other rights;
(c) increase the number of shares of common stock we are authorized
to issue to 50,000,000 shares, par value $.01 per share and;
(d) to adopt a Second Amended and Restated Certificate of
Incorporation that includes the foregoing changes in the event
that they are approved by the stockholders and make the other
changes set forth in our proposed Second Amended and Restated
Certificate of Incorporation which is included as Annex C to this
proxy statement ("Second Restated Certificate").
(3) the approval of the amendment to our 2003 Stock Option Plan which would
increase the number of shares of our common stock available for issuance
thereunder from 750,000 to 5,000,000 shares;
(4) the election of a new Board of Directors consisting of nine (9)
directors;
(5) the ratification and appointment of BDO Seidman, LLP as the Company's
independent registered public accounting firm for the fiscal year ending January
28, 2006, and;
(6) the transaction of such other business as may properly come before the
Meeting and any adjournment or postponement thereof.
If you sign, date and mail your proxy card without indicating how you wish
to vote, your vote will be counted as a vote in favor of each of these
proposals.
The entire cost of soliciting proxies will be borne by the Company. The
cost of solicitation, estimated at approximately $10,000, will include the cost
of supplying necessary additional copies of the solicitation materials and the
Company's 2005 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 per share on
all matters, other than the amendments to the Restated Certificate of
Incorporation (each of the holders of our Class A and Class B common stock will
vote separately, as a class) and the election of 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. 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 _____, 2005.
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 STATEMENT.
TABLE OF CONTENTS
PAGE
SUMMARY TERM SHEET 10
QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS 13
SUMMARY 19
HIRSCH SUMMARY SELECTED HISTORICAL FINANCIAL DATA 21
SHERIDAN SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA 23
HIRSCH INTERNATIONAL CORP. UNAUDITED SUMMARY SELECTED
PRO FORMA COMBINED FINANCIAL DATA 24
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES UNAUDITED
PRO FORMA CONSOLIDATED BALANCE SHEETS 24
HIRSCH INTERNATIONAL CORP. AND SUBSIDIAIRIES UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS 29
RISK FACTORS 33
CAUTIONARY STATEMENTS REGARD FORWARD-LOOKING STATEMENTS 49
OUR STOCKHOLDERS MEETING 51
PROPOSAL 1 - APPROVAL OF AGREEMENT AND PLAN OF MERGER 57
THE MERGER AGREEMENT 61
BUSINESS OF SHERIDAN 84
SHERIDAN SELECTED CONSOLIDATED FINANCIAL DATA 94
SHERIDAN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 96
BUSINESS OF HIRSCH 102
OUR SELECTED CONSOLIDATED FINANCIAL DATA 109
OUR MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 112
COMPARATIVE PER SHARE DATA 125
CAPITALIZATION 126
MARKET PRICE OF AND DIVIDENDS ON OUR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 128
DESCRIPTION OF OUR CAPITAL STOCK 130
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER 133
INTERESTS OF OUR DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER 133
RESTRICTIONS ON RESALE OF OUR COMMON STOCK RECEIVED IN
CONNECTION WITH THE MERGER 136
REGISTRATION RIGHTS AGREEMENT 137
DIVIDENDS 138
ANTICIPATED ACCOUNTING TREATMENT 138
REGULATORY MATTERS 138
PROPOSAL 2 - AMENDMENTS TO OUR RESTATED CERTIFICATE OF
INCORPORATION - PROPOSALS 2(a) - 2(d) 139
PROPOSAL 3 - APPROVAL OF AMENDMENT TO 2003 STOCK OPTION PLAN 143
PROPOSAL 4 - ELECTION OF DIRECTORS 146
PROPOSAL 5 - SELECTION OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM 166
OTHER BUSINESS 167
STOCKHOLDERS' PROPOSALS 167
COPY OF ANNUAL REPORT 167
WHERE YOU CAN FIND MORE INFORMATION 168
INCORPORATION BY REFERENCE 168
INDEX TO FINANCIAL STATEMENTS 170
ANNEXES
Annex A Agreement and Plan of Merger
Annex B Opinion of Harris Nesbit Corp.
Annex C Form of Second Amended and Restated Certificate of Incorporation
Annex D Form of Amended and Restated Bylaws
Annex E Voting Agreement
Annex F Proposed 2003 Stock Option Plan, as amended
Annex G Audited Financial Statements of Sheridan
Annex H Audited Financial Statements of Compendia
Annex I Audited Financial Statements of Musicrama
Annex J Audited Financial Statements of Artemis
Annex K Unaudited Financial Statements of Sheridan
SUMMARY TERM SHEET
The Merger Our wholly-owned subsidiary SSE Acquisition Corp. will merge
with and into Sheridan. As a result, Sheridan will become
our wholly owned subsidiary.
Merger Sheridan stockholders will receive approximately 15,000,000
Consideration shares of our common stock in exchange for their shares of
Sheridan capital stock. Following the merger, the former
Sheridan stockholders, together with holders of vested
options and warrants will own an aggregate of approximately
62% of our outstanding common stock (including shares
issuable upon the exercise of vested and "in the money"
options and warrants), subject to adjustment as described in
this proxy statement and current holders of our common
stock, together with holders of vested options and warrants
to purchase shares of our common stock, will own the
remaining approximately 38% of our outstanding common stock
(including shares issuable upon the exercise of vested and
"in the money" options and warrants)(the "Exchange").
Based on the July 20, 2005 closing price of our common stock
on the NASDAQ SmallCap Market and the number of shares of
common stock we currently expect to issue to the Sheridan
stockholders, the shares that Sheridan stockholders will be
entitled to receive will have an aggregate market value of
approximately $16,552,000. The market price of our common
stock will likely fluctuate, however, prior to completion of
the merger. (See "Market Price Information")
Material The material conditions to the closing of the merger
Conditions include, among other things, the approval of our
stockholders to the transactions described in the Merger
Agreement; the receipt by the parties of certain third party
consents; neither party shall be subject to a Material
Adverse Effect (as defined in the Merger Agreement; and the
execution of employment agreements with certain key members
of management.
Fairness Harris Nesbitt Corp., an investment banking firm, has given
Opinion its opinion to our Board of Directors that the Exchange
contemplated by the merger is fair to our stockholders from
a financial point of view.
Amendments Our Restated Certificate of Incorporation will be amended
to Restated and restated to provide for (a) a Board of not more than
Certificate nine (9) directors; (b) the conversion of our Class A and
of Incorporation nine (9) directors; (b) the conversion of our Class A and
Class B common stock into a single class of common stock
having equal voting and other rights; (c) an increase in the
number of shares of common stock we are authorized to issue
to 50,000,000 shares, $.01 per value per share; and (d) the
adoption of the Second Amended and Restated Certificate
which includes the forgoing amendments.
Amendment to Our Board of Directors has adopted, subject to ratification
Second Amended of the merger, our proposed Second Amended and Restated
and Restated By-Laws pursuant to which not less than 70% of the directors
By-Laws comprising the entire Board are required to approve, among
other things, (a) our annual budget; (b) the incurrence of
indebtedness in excess of $2.5 million in the aggregate
(excluding indebtedness incurred in the ordinary course of
business); (c) the issuance of any additional equity
securities or securities convertible into equity securities,
in excess of $2.5 million in the aggregate, or the granting
of any options, warrants or other rights to acquire our
equity securities; (d) the sale, lease, exchange or other
disposition of any material asset by us or any of our
subsidiaries, or the merger, consolidation or liquidation of
us or any of our subsidiaries; (e) the acquisition of any
asset or assets outside of the ordinary course of business
in one or a series of related transactions having an
aggregate purchase price in excess of $5 million; (f) the
declaration or payment of any dividend on any of our equity
securities; (g) any stock split, combination or
reclassification of any of our equity securities; (h) any
transaction between us and any of our affiliates (except as
provided in our bylaws); (i) any amendment to our
certificate of incorporation or By-Laws; (j) a change in the
number of directors that constitute our Board; and (k)
appointment or removal of any executive officer, or the
adoption or amendment of any employment contract or terms of
employment with any of the executive officers or any manager
with authority substantially equivalent to that of one of
our executive officers or that of any of our subsidiaries.
Amendment to Our 2003 Stock Option Plan will be amended to increase the
2003 Stock number of shares of our common stock available for issuance
Option Plan thereunder from 750,000 shares to 5,000,000 shares.
Required Vote (a) The affirmative vote of the holders of a majority of our
shares of Class A and Class B common stock present, in
person or by proxy, and entitled to vote, voting as one
class, is required to adopt the Merger Agreement and approve
the merger, the issuance of our common stock in connection
with the merger and the amendment to our 2003 Stock Option
Plan and the approval of BDO Seidman, LLP to audit our
financial statements for fiscal 2006; (b) the amendments to
the Restated Certificate of Incorporation must be approved
separately by a majority of the holders of each of our Class
A common stock and the Class B common stock, voting
separately as a class; and (c) the holders of a our
outstanding common stock will elect 9 directors by a
plurality of the vote.
QUESTIONS AND ANSWERS ABOUT THE MERGER AND RELATED TRANSACTIONS
Q: Why am I receiving this document?
A: We have agreed to combine our existing embroidery machine distribution
and services business with Sheridan's music production and
distribution business under the terms of the Merger Agreement that is
described in this document. A copy of the Merger Agreement is attached
to this document as Annex A. In order to complete the merger
transaction, our stockholders must vote to adopt the Merger Agreement
and approve the merger, the issuance of our common stock in the
merger, the proposed changes to our certificate of incorporation and
to our 2003 Stock Option Plan and to elect nine (9) directors to our
board of directors. We will ask our stockholders for these approvals
at our special stockholders meeting. This document contains important
information about the merger, our new certificate of incorporation and
bylaws, and the election of our board of directors consisting of nine
(9) members and the amendment of our 2003 Stock Option Plan and the
election of our board of directors. You should read it carefully. The
enclosed voting materials allow you to vote your shares without
attending the Meeting.
Your vote is important. We encourage you to vote as soon as possible.
Q: Why are we proposing the merger?
A: Our board of directors unanimously recommends that our stockholders
vote in favor of all of the transactions proposed for approval in this
document as it is in the best interest of the Company and our
stockholders. The reasons why our Board of Directors recommends the
merger transaction are discussed in greater detail in the section
titled "The Merger - Proposals - Recommendation of the Board of
Directors and Its Reasons for the Transaction," beginning on page 61.
Q: When and where is the Meeting of stockholders?
A: The Meeting of our stockholders will take place at 10:00 a.m. local
time, on _____________, 2005,
at________________________________________________.
Q: What stockholder approvals are required to approve the merger and
related transactions?
A: The affirmative vote of holders of a majority of our shares of Class A
and Class B common stock present, in person or by proxy, at the
Meeting and entitled to vote as of the record date, voting as a single
class, is required to adopt the Merger Agreement, approve the merger
and the issuance of our common stock in connection with the merger and
the proposed amendment to our 2003 Stock Option Plan. The affirmative
votes of holders of a majority of each of our shares of Class A and
Class B common stock, voting as separate classes, are required to
approve the proposed amendments to our Restated Certificate of
Incorporation.
Q: What will happen in the merger?
A: Prior to entering into the Merger Agreement, we formed SSE Acquisition
Corp ("Merger Sub"), as our wholly owned subsidiary. On the effective
date of the merger, Merger Sub will merge with and into Sheridan, and
Sheridan will continue as the surviving company. The surviving company
will be our wholly owned subsidiary. Upon completion of the merger,
each share of common stock of Merger Sub outstanding will be converted
into one share of newly issued common stock of Sheridan. Each
outstanding share of common and preferred stock of Sheridan will be
canceled and converted into the right to receive shares of our common
stock determined in accordance with the exchange ratio set forth in
the Merger Agreement. In addition, as of the date hereof, we own
approximately $1,000,000 worth of Sheridan's Series B Preferred Stock
all of which, upon the closing of the merger, would be cancelled and
will be of no effect. As a result, we will own all the outstanding
capital stock of Sheridan.
At the same time, the Company will contribute the assets comprising
our embroidery machine distribution and services business to a newly
formed wholly-owned subsidiary. At this point, the Company would
become a holding company with two operating subsidiaries, one
containing our embroidery machine distribution and services business
and the other containing the music production and distribution
business of Sheridan.
Following the merger, the former Sheridan stockholders, together with
holders of vested options and warrants will own an aggregate of approximately
62% of our outstanding common stock (including shares issuable upon the exercise
of vested and "in the money" options and warrants), subject to adjustment as
described in this proxy statement and current holders of our common stock,
together with holders of vested options and warrants to purchase shares of our
common stock, will own the remaining approximately 38% of our outstanding common
stock (including shares issuable upon the exercise of vested and "in the money"
options and warrants).
The merger will be accounted for using purchase accounting. Generally
accepted accounting principles require that one of the two companies
in the transaction be designated as the acquiror for accounting
purposes. Sheridan has been designated as the acquiror because
immediately after the merger, its stockholders will hold more than 50%
of our common stock on a fully diluted basis. The market value of the
Company on July 20, 2005, the date of the announcement, was $9.3
million. The purchase price will be allocated to our identifiable
assets and liabilities based on their estimated fair market values at
the date of the completion of the Merger and any excess of our cost
over those fair market values will be accounted for as negative
goodwill. The results of final valuations of property, plant and
equipment and intangible and other assets, and the finalization of any
potential plans of restructuring, have not yet been completed. We will
revise the allocation of the purchase price when additional
information becomes available.
Q: What will be the composition of our Board of Directors and Management
after the merger?
A: Immediately following the merger, our Board of Directors will consist
of nine directors, two of whom have been nominated by Sheridan, two of
whom have been nominated by our Board of Directors and five whom shall
be jointly nominated by our Board of Directors and Sheridan. Our
nominees shall be Henry Arnberg, our current Chairman of the Board and
our largest single stockholder, and Paul Gallagher, our current Chief
Executive Officer, President, Chief Operating Officer and a director.
The two Sheridan nominees shall be Joseph Bianco the current Co-Chief
Executive Officer of Sheridan and a director of Sheridan, and Robert
E. Michalik, the current Chairman of the Board of Directors of
Sheridan. The five jointly nominated directors are MaryAnn Domuracki,
Marvin Broitman, Kammy Moalmzadeh, Edward J. Tobin and Jose Axtmayer.
Mr. Gallagher will become our President and Chief Operating Officer,
and Joseph Bianco will become our Chief Executive Officer following
the merger. Henry Arnberg will remain Chairman of our Board of
Directors while Anil Narang, the current Co-Chief Executive Officer of
Sheridan, will be appointed to the position of Vice Chairman. Beverly
Eichel, our present Executive Vice President - Finance, Chief
Financial Officer and Secretary will remain in those offices.
Concurrently, with the consummation of the merger, Messers Bianco,
Gallagher and Narang, and Ms. Eichel will enter into new employment
agreements with us. See "Interests of our directors and executive
officers in the merger" beginning on page 133.
Q: Who will be our largest stockholders after the merger?
A: After the merger, the following persons will be our largest
stockholders: Kinderhook Capital, 41.2%, Henry Arnberg, 6.3%, Redux
Records, 6.3% and Music Holdings, 5.5%. For the percentage ownership
our largest existing stockholders will have in the combined company,
see "Security Ownership of Certain Beneficial Owners and Management,"
beginning on page 154.
Q: What will be our name after the merger?
A: Upon completion of the merger, our name will remain "Hirsch
International Corp."
Q: What will I receive for my shares in the merger?
A: You will not be receiving any payment or other consideration for your
shares in the merger. Upon completion of the merger, you will continue
to own the same number of shares of our common stock that you owned
just prior to the merger. Since our Class A and Class B common stock
will be converted into a single class of stock, following the
completion of the merger, you will be asked to exchange your old
shares of Class A or Class B common stock for an equal number of newly
issued shares of common stock. Because we will issue approximately
15,000,000 shares of our common stock to the former Sheridan
stockholders, the percentage ownership that your shares represent in
the combined company will be substantially reduced.
Q: What are my U.S. federal tax consequences as a result of the merger
and sale transactions?
A: We and Sheridan intend for the merger to qualify as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code. As
a result, the merger will have no tax consequences for our current
stockholders.
Q: Why are there changes being made to our bylaws?
A: The Board of Directors has approved, subject to the consummation of
the merger and the transactions contemplated in the merger agreement,
our Second Amended and Restated Bylaws. These amendments require the
approval by a super-majority of not less than seventy (70%) percent of
our directors of certain significant corporate actions. A copy of our
proposed Second Amended and Restated Bylaws is annexed hereto as Annex
D. Our stockholders will not be voting on the proposed changes to our
bylaws.
Q: Why am I being asked to approve changes to the Restated Certificate of
Incorporation?
A: The changes to our Restated Certificate of Incorporation are being
proposed to you solely in connection with the merger. If we do not
complete the merger, we will not make these changes, and if our
stockholders do not approve the changes, we cannot complete the
merger.
Q: Why am I being asked to approve changes to our 2003 Stock Option Plan?
A: Upon the closing of the merger, we will be required to issue options
to purchase 3,000,000 shares of our common stock to certain of our
executive officers and an additional 924,000 options to the former
holders of Sheridan options. Our 2003 Stock Option plan, in effect at
present, does not have sufficient shares reserved for issuance
thereunder. If we do not complete the merger, we will not make these
changes. If our stockholders do not approve the changes, we will not
complete the merger.
Q: Are there risks I should consider in deciding whether to vote for the
merger and sale transactions?
A: Yes. In evaluating the merger, you should carefully consider the
factors discussed in the "Risk Factors" section, beginning on page 33,
and the other matters discussed in this document.
Q: How do I cast my vote?
A: After carefully reading and considering the information contained in
this document, if you are a holder of record, you may vote in person
at the Meeting or by submitting a proxy for the meeting. You can
submit your proxy by completing, signing, dating and returning the
enclosed proxy card in the accompanying pre-addressed, postage-paid
envelope. If you sign, date and send your proxy and do not indicate
how you want to vote, your proxy will be voted "for" each proposal
described in this document, including adoption of the Merger Agreement
and approval of the merger, the issuance of our common stock in the
merger, and the changes to our certificate of incorporation.
Q: If my shares are held in "street name" by my broker, will my broker
vote my shares for me?
A: If you hold your shares in "street name," which means your shares are
held of record by a broker, bank or nominee, you must provide the
record holder of your shares with instructions on how to vote your
shares. If you do not provide your broker, banker or nominee with
instructions on how to vote your shares, it will not be permitted to
vote your shares in connection with the matters covered by this proxy
statement which relate to the merger. Please refer to the voting
instruction card used by your broker, bank or nominee to see if you
may submit voting instructions using the Internet or telephone. If you
fail to cast your vote by proxy or give voting instructions to your
broker, those votes will not be counted as voting or abstaining with
respect to such matters, however, an abstention or failure to vote
will have the same effect as a vote against the merger.
Q: Can I change my vote after I have delivered my proxy?
A: Yes. If you are a record holder, you can change your vote at any time
before your proxy is voted at the Meeting by delivering a later-dated,
signed proxy card to our company secretary prior to the meeting or by
attending the meeting in person and voting. You also may revoke your
proxy by delivering, prior to the date of the meeting, a notice of
revocation to our company secretary at the address under "The
Stockholders Meeting - Revocation of Proxies" on page 54.
Q: What will happen if I abstain from voting or fail to vote?
A: An abstention or failure to vote will have the same effect as a vote
against the merger.
Q: What should I do if I receive more than one set of voting materials?
A: You may receive more than one set of voting materials, including
multiple copies of this document and multiple proxy cards or voting
instruction cards. Please complete, sign, date and return EACH proxy
card and voting instruction card that you receive. For example, if you
hold your shares in more than one brokerage account, you will receive
a separate voting instruction card for each brokerage account in which
you hold shares. If you are a holder of record and your shares are
registered in more than one name, you will receive more than one proxy
card.
Q: Where will my shares of common stock be listed after completion of the
merger?
A: We do not know if the listing of our common stock for quotation on the
NASDAQ SmallCap Market will be permitted to continue after the merger.
If NASDAQ does not continue to list our common stock after the merger,
we may apply for listing on the American Stock Exchange and if our
listing is not accepted, we expect to list or to seek to have our
common stock listed on the OTC Bulletin Board.
Q: When do you expect to complete the merger?
A: We currently expect to complete the merger shortly after the Meeting.
Q: Should I send in my share certificates?
A: Yes. Following the completion of the merger, you will be asked to
exchange your old shares of Class A or Class B common stock. This will
be done on a share for share basis so you will own the same number
shares following the merger that you owned prior to the merger.
Q: Do I have appraisal rights?
A: No. Our stockholders will not have appraisal rights under Delaware law
in connection with the merger.
Q: Who can help answer my questions?
A: If you have any questions about the merger, the amendments to the
certificate of incorporation or any of the other proposals, or about
how to submit your proxy, or if you need additional copies of this
document or the enclosed proxy card, you should contact:
Hirsch International Corp.
200 Wireless Boulevard
Hauppauge, New York 11788
Attention: Paul Gallagher or
Beverly Eichel
(631) 701-2211 or (631)701-2169
Email: paulg@hirschintl.com or beichel@hirschintl.com
Q: Where can I find more information about you and Sheridan?
A: You can find more information about us from various sources described
under "Where You Can Find More Information" on page 168. Because
Sheridan is a private company that does not file reports with
Securities and Exchange Commission, there is limited information
available about Sheridan other than what has been provided in this
proxy statement.
SUMMARY
This proxy statement is being provided to you, as a stockholder of Hirsch,
in connection with a proposed merger between a wholly-owned subsidiary of Hirsch
and Sheridan.
During the past several fiscal years, Hirsch has noted a decline in the
market for the embroidery equipment which it sells and, in order to sharpen its
focus on that market, Hirsch has disposed of ancillary operations related to the
embroidery equipment business. This effort resulted in improved operations and a
significant amount of available cash.
Since Hirsch has not been able to materially expand its sales of embroidery
equipment, it began searching for acquisitions which it hoped would be of
benefit to the Hirsch stockholders.
After reviewing a significant number of potential candidates, management
identified Sheridan as an acquisition candidate with long-term growth potential
and hence would benefit the Hirsch stockholders. Sheridan is a publisher and
distributor of music and as such, its business is significantly different from
that of Hirsch. The synergies that Hirsch anticipates are in management and
controls rather than in operations and Hirsch sees the significant growth
potential of Sheridan as providing a deployment of available assets of Hirsch in
a way which is believed to be beneficial to the Hirsch stockholders.
Following the merger, the former Sheridan stockholders, together with
holders of vested options and warrants will own an aggregate of approximately
62% of our outstanding common stock (including shares issuable upon the exercise
ofvested and "in the money" options and warrants), subject to adjustment as
described in this proxy statement and current holders of our common stock,
together with holders of vested options and warrants to purchase shares of our
common stock, will own the remaining approximately 38% of our outstanding common
stock (including shares issuable upon the exercise ofvested and "in the money"
options and warrants).
The merger will be accounted for using purchase accounting. Generally
accepted accounting principles require that one of the two companies in the
transaction be designated as the acquiror for accounting purposes. Sheridan has
been designated as the acquiror because immediately after the merger, its
stockholders will hold more than 50% of our common stock on a fully diluted
basis. The market value of the Company on July 20, 2005, the date of the
announcement, was $9.3 million. The purchase price will be allocated to our
identifiable assets and liabilities based on their estimated fair market values
at the date of the completion of the Merger and any excess of our cost over
those fair market values will be accounted for as negative goodwill. The results
of final valuations of property, plant and equipment and intangible and other
assets, and the finalization of any potential plans of restructuring, have not
yet been completed. We may revise the allocation of the purchase price when
additional information becomes available.
The managements of Hirsch and Sheridan will be combined and representatives
of both companies will sit on the Board of Directors (together with five (5)
independent members who will be jointly nominated by Hirsch and Sheridan) and be
senior managers.
Harris Nesbitt, Corp., the financial advisor to the Hirsch Board of
Directors, has given its opinion that the Exchange contemplated by the merger is
fair to Hirsch stockholders from a financial point of view.
The purpose of this proxy statement is to solicit the votes of the holders
of the outstanding common stock of Hirsch to approve the merger with Sheridan. A
Meeting for this purpose has been called for _____, 2005 at ____ local time at
_______. The Meeting will also serve as the 2005 annual meeting of Hirsch
stockholders.
The matters to be considered at the Meeting include (a) approving the
merger with Sheridan; (b) approving amendments to our Restated Certificate of
Incorporation including notably the conversion of our two classes of common
stock into one class of common stock in place thereof and increasing the
authorized shares of common stock of Hirsch to 50 million shares, (c) approving
an increase in the shares of common stock available for issuance pursuant to the
our 2003 Stock Option Plan from 750,000 to 5 million shares, (d) electing a new
Board of Directors consisting of nine directors, two of whom are nominated by
Hirsch, two of whom are nominated by Sheridan, and the other five of whom are
"independent", (e) approving BDO Seidman, LLP as our independent registered
public accounting firm and to transact such other businesses that come before
the meeting.
Upon approval of the merger, Hirsch will continue as a publicly traded
holding company with two operating groups, one of which would consist of the
present Hirsch embroidery equipment business and the other of which would
consist of Sheridan music business. Future determinations concerning the
continuances of all or any part of these businesses will depend upon the
judgment of management concerning growth and profitability potential and a
deployment of assets in a manner designed to effect long-term growth in revenues
and income.
HIRSCH SUMMARY SELECTED HISTORICAL FINANCIAL DATA
We are providing the following financial information to assist you in the
analysis of the financial aspects of the merger. Our summary selected financial
data have been derived from our audited consolidated financial statements and
the related notes for each of the last five years and our unaudited consolidated
financial statements for the six months ended July 30, 2005 and July 31, 2004.
The unaudited consolidated interim financial statements of Hirsch, in the
opinion of management, reflect all material adjustments, which consists only of
normal recurring adjustments, necessary for a fair presentation of such data.
This information is only a summary. You should read this summary selected
information in conjunction with our historical audited and unaudited
consolidated financial statements and the related notes contained in the annual
reports and other information that we have previously filed with the SEC.
Year Ended Six Months Ended
- ------------------------------------ ------------------------------------------------------------- -----------------------
January January January January January July July
29, 31, 31, 31, 31, 30, 31,
- ------------------------------------ ---------- ---------- -------- --------- --------- --------- ----------
Hirsch International Corp. and 2005 2004 2003 2002 2001 2005 2004
Subsidiaries (3) (1,3,4) (3) (2,3) (2,3)
- ------------------------------------ ---------- ---------- -------- --------- --------- --------- ----------
(in thousands of dollars, except per share amounts)
Statement of Operations Data:
Net sales............................... $43,641 $46,449 $42,723 $50,156 $63,980 $25,890 $20,004
Cost of sales........................... 29,574 31,120 29,490 36,876 44,992 17,679 13,356
Operating expenses...................... 15,874 17,488 16,793 24,925 34,378 7,956 8,210
Income (loss) from continuing (2,139) (2,025) (3,451) (16,990) (15,346) 623 (1,548)
operations before income tax
provision (benefit)
Income tax provision (benefit)......... 9 25 (504) (5,881) -- 30 16
---------- ---------- -------- --------- --------- --------- ----------
Income (loss) from continuing
operations............................. (2,148) (2,050) (2,947) (11,109) (15,346) 593 (1,564)
Income (loss) from discontinued
operations............................. 376 2,494 (2,603) (7,216) (323) - (193)
---------- ---------- -------- --------- --------- --------- ----------
Net Income (loss)..................... $ (1,772) $ 444 $(5,550) $(18,325) $(15,669) $593 $ (1,757)
========== ========== ======== ========= ========= ========= ==========
Basic earnings (loss) per share:
Earnings (loss) from continuing
operations............................. $(0.26) $(0.24) $(0.34) $(1.25) $ (1.68) $ 0.07 $ (0.19)
Loss (income) from discontinued
operations............................. $ 0.05 $ 0.29 $(0.30) $(0.81) $ (0.04) $ 0.00 $ (0.02)
Net income (loss)...................... $(0.21) $ 0.05 $(0.64) $(2.06) $ (1.72) $ 0.07 $ (0.21)
========== ========== ======== ========= ========= ========= ==========
Diluted earnings (loss) per share:
Earnings (loss) from continuing
operations............................. $(0.26) $(0.24) $(0.34) $(1.25) $ (1.68) $ 0.06 $ (0.19)
Loss (income) from discontinued
operations............................. $0.05 $ 0.29 $(0.30) $(0.81) $ (0.04) $ 0.00 $ (0.02)
Net income (loss)...................... $(0.21) $ 0.05 $(0.64) $(2.06) $ (1.72) $ 0.06 $ (0.21)
========== ========== ======== ========= ========= ========= ==========
Weighted average number of shares
used in the calculation of
earnings (loss) per share..............
Basic 8,351 8,571 8,789 8,894 9,112 8,455 8,339
Diluted 8,351 8,571 8,789 8,894 9,112 9,401 8,339
(1) In fiscal year 2004, the Company completed its plan of restructuring
and reversed, as a reduction of operating expenses, $716,000 of
restructuring costs that had been previously provided for facilities
and severance costs.
(2) Fiscal year 2002 operating expenses included a write-down of impaired
goodwill of $3.5 million and restructuring costs of $2.7 million and
Fiscal 2001 includes a write-down of impaired goodwill of $7.6
million.
(3) Fiscal years 2005, 2004, 2003, 2002 and 2001 have been restated to
reflect the discontinued operations of HTT, TUI, HAPL and Pulse.
(4) In fiscal year 2004, the Company reversed $2.0 million of reserves
associated with the UNL lease portfolio which was sold to Beacon
Funding in September 2003.
SHERIDAN SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Sheridan Consolidated Financial Statements and the Notes
thereto included in Annex G. The consolidated financial statement data as of
December 31, 2004 and for the period July 29, 2003 (inception) through December
31, 2003 for Sheridan are derived from, and qualified by reference to, the
audited Consolidated Financial Statements included in Annex G. For Musicrama,
the audited Consolidated Financial Statements the period January 1, 2003 through
July 31, 2003 and the year ended December 31, 2002 included in Annex I as well
as the unaudited Consolidated Financial Statements for the years ended December
31, 2001 and 2000, are derived from, and qualified by reference to, the
financial statements and should be read in conjunction with those Consolidated
Financial Statements and the Notes thereto. We have also provided Sheridan's
unaudited consolidated financial statements for the six months ended June 30,
2005 and 2004 in Annex K. The unaudited consolidated financial statements of
Sheridan, in the opinion of management, reflect all material adjustments, which
consists of normal recurring adjustments necessary for a fair presentation of
such data.
Sheridan Square Musicrama (4) Sheridan Square
Entertainment Entertainment (5)
Year Ended July 31 - January 1- Year Ended Year Ended Year Six Months Ended
Ended
December December July 31, December December December
31, 31, 31, 31, 31, June 30,
- ------------------- --------- --------- -------- --------- --------- --------- --------------
Sheridan Square 2004 2003 2003 2002 2001 2000 2005 2004
Entertainment and (1)
subsidiaries --------- --------- -------- --------- --------- --------- --------------
(in thousands)
Statement of
Operations Data:
Net sales $ 37,991 $ 17,279 $ 13,199 $ 26,024 $ 20,765 $ 18,308 $ 19,013 $ 16,960
Cost of sales 24,762 10,605 8,705 18,141 15,458 12,842 9,846 10,944
Operating expenses 18,352 5,933 2,866 5,515 5,146 5,402 10,301 8,042
Other Expenses
(income) (2,3) 859 934 81 104 (8) - 889 247
Income (loss) from
operations before
income tax
provision (benefit)
(2,3) (5,982) (193) 1,547 2,264 169 64 (2,023) (2,273)
Income tax
provision - - 34 141 16 37 - -
-------- -------- -------- -------- -------- -------- -------- --------
Net Income (loss) $ (5,982) $ (193) $ 1,513 $ 2,123 $ 153 $ 27 $ (2,023) $ (2,273)
========= ======== ======== ======== ======== ======== ======== ========
(1) Represents period from July 2003 (inception) through December 31,
2003.
(2) Includes $194,000 in abandoned acquisition expenses for 2004.
(3) Includes $760,000 in lease settlement charges associated with the
closure of a facility in California for 2003.
(4) Represents historical financial statement data for the existing entity
of Musicrama prior to its acquisition by Sheridan.
(5) From July 31, 2003 (the date of inception for Sheridan), Musicrama is
included in Sheridan's financial results.
HIRSCH INTERNATIONAL CORP.
UNAUDITED SUMMARY SELECTED
PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma condensed consolidated statements of
operations for the six months ended July 30, 2005 and the year ended January 29,
2005 for Hirsch and the six months ended June 30, 2005 and the year ended
December 31, 2004 for Sheridan assumes the business combination between Hirsch
and Sheridan occurred on February 1, 2004. The unaudited profroma condensed
consolidated balance sheet combines Hirsch's balance sheet as of July 30, 2005
with Sheridan's balance sheet as of June 30, 2005 as if the merger occurred as
of July 30, 2005. The proforma financial information assumes that the merger is
accounted for using the purchase method of accounting and represents a current
estimate based on available information of the combined company's results of
operations. The proforma financial information includes adjustments to record
the assets and liabilities of Hirsch at their estimated fair value and is
subject to further adjustment as additional information becomes available and as
additional analyses are performed. The estimated fair value was based upon the
closing stock price at the date the merger was announced ($1.10 per share).
Included on page 29 are unaudited pro forma statements of operations of Hirsch
for the year ended January 29, 2005, Sheridan for the year ended December 31,
2004 and Compendia for the period January 1, 2004 through December 10, 2004.
Compendia was acquired by Sheridan on December 11, 2004 and the stub period is
presented to reflect the activity of Compendia as if it had been consolidated
with Sheridan for the entire year.
Operating results are not intended to reflect actual results of the two
businesses as if combined for the periods noted.
Pursuant to the Merger Agreement, Sheridan will merge with our wholly owned
subsidiary, Merger Sub, with Sheridan surviving. As a result of the merger, each
share of the common stock of Merger Sub outstanding just before the merger will
be converted into one share of common stock of Sheridan. Sheridan will then
become our wholly owned subsidiary.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET
July 30, 2005
(in thousands)
Historical Historical Pro-Forma Pro-Forma
Hirsch Sheridan Adjustments (1) Hirsch
------ -------- ----------- -------
Assets
Current Assets
Cash and Cash Equivalents $3,320 $323 - $3,643
Restricted Cash 4,900 - - 4,900
Accounts Receivable-Net 4,802 11,725 - 16,527
Inventories, Net 8,083 7,187 - 15,270
Other Current Assets 384 996 - 1,380
Advances to Artists - 2,868 - 2,868
Net Assets of Discontinued
Operations 610 - - 610
------- --------- ----------- ---------------
Total Current Assets 22,099 23,099 - 45,198
------- --------- ----------- ---------------
Property, Plant and Equipment,
Net 1,737 386 (1,737)(2) 386
Music Catalogs, Net - 14,460 - 14,460
Goodwill - 2,590 - 2,590
Non-contractual
customer obligations - 8,643 - 8,643
Deferred Financing Fees - 2,349 - 2,349
Other Assets, Net 1,521 358 (1,521)(2) 358
------- ------ ------ ------
Total Assets $25,357 $51,885 (3,258) $73,984
======= ======= ====== =======
Liabilities and
Stockholders' Equity
Current Liabilities
Accounts Payable & Accrued
Expenses $6,914 $10,094 450 (2) $17,458
Capitalized Lease
Obligation - Current 161 - - 161
Deferred Gain - Current 120 - (120)(2) -
Customer Deposits 334 - - 334
Royalties Payable - 2,385 - 2,385
Reserve for Returns - 1,512 - 1,512
Notes Payable - Current - 829 - 829
Other current liabilities - 2,293 - 2,293
Net Liabilities of Discontinued
Operations 1,440 - - 1,440
------- ------ ------ ------
Total Current Liabilities 8,969 17,113 330 26,412
------- ------ ------ ------
Capitalized Lease Obligations,
less current maturities 1,185 - - 1,185
Deferred Gain 549 - (549) (2) -
Notes Payable, less current portion - 9,338 - 9,338
Revolving credit facility - 9,526 - 9,526
Other long term liabilities - 180 - 180
Deferred Tax liability - 2,590 - 2,590
------- ------ ------ ------
Total Liabilities 10,703 38,747 (219) 49,231
------- ------ ------ ------
Minority Interest - 96 - 96
Stockholder's Equity
--------------------
Preferred Stock, $1.00 par value - 1 (1) (3) -
Class A Common Stock, $.01 par value 90 1 (91) (3) -
Class B Common Stock, $.01 par value 6 - (6) (3) -
Common Stock, $0.01 par value - - 234 (4) 234
Additional Paid In Capital 41,471 21,238 (31,993) (3) 30,716
Accumulated Deficit (24,896) (8,198) 26,801 (3) (6,293)
Treasury Stock (2,017) - 2,017 (3) -
------- ------ ------ ------
Total Stockholder's Equity 14,654 13,042 (3,039) 24,657
------- ------ ------ ------
Total Liabilities &
Stockholders' Equity $25,357 $51,885 (3,258) $73,984
======= ======= ====== =======
(1) The pro forma financial information assumes that the merger is accounted for
using the purchase method of accounting and represents a current estimate of
Hirsch's fair value. The determination of the fair values of Hirsch's assets and
liabilities is subject to further adjustments as additional information becomes
available and additional analyses are performed.
(2) These adjustments reflect a preliminary allocation of the purchase price to
the identifiable net assets acquired and the excess to negative goodwill:
(A) Issuance of 8,462,000 common shares to Hirsch shareholders at $1.10
per share (Stock price on date of announcement of merger July 20,
2005)
Common Stock ($0.01 par value) $ 85
Additional paid in capital 9,223
-----
Total Value 9,308
(B) Transaction costs incurred by Hirsch
through July 30, 2005 402
(C) Additional estimated transaction
costs to be incurred by Hirsch 450
---
Estimated Total Consideration 10,160
(D) Book value of Hirsch's net assets acquired
by Sheridan 25,357
(E) Preliminary estimate of Hirsch's assumed
liabilities before adjustments (10,703)
Adjustments:
Adjustment to write-off deferred gain
on building
Short term gain 120
Long term gain 549
---
Net Assets Acquired 15,323
------
(F) Preliminary estimate of excess of net
assets acquired over total consideration (5,163)
(G) Writedown property, plant and equipment of
Hirsch to zero (1,737)
(H) Writedown of remaining other assets to zero (1,521)
------
(I) Negative goodwill to be recorded in income
in connection with the acquisition $ (1,905)
========
(3) Represents the purchase price adjustments related to the merger as follows:
(A) Elimination of Sheridan's preferred stock (1)
(B) Elimination of Hirsch's and Sheridan's Class A
common stock (91)
(C) Elimination of Hirsch's Class B common stock (6)
(D) Elimination of Treasury stock 2,017
(E) Elimination of Hirsch's accumulated deficit 24,896
(F) Creation of newly issued common stock at
par value 234
(G) Adjustment for negative goodwill as calculated
in note 2 above 1,905
(H) Elimination of other assets 1,521
(I) Elimination of Property, Plant and Equipment 1,737
(J) Elimination of deferred gain on sale of building (669)
(K) Adjustment for accrued transaction costs not
yet received 450
-----
Net adjustment to additional paid in capital 31,993
======
(4) The pro-forma balance sheet gives effect to the Hirsch acquisition of
Sheridan as if such transaction occurred on July 30, 2005. It also reflects the
issuance of common stock of Hirsch to Sheridan as set forth in the following
table:
Number of newly issued shares of common stock to Sheridan 15,047,000
Number of newly issued shares of common stock to Hirsch 8,462,000
Total number of new issued shares of common stock 23,509,000
Par value of newly issued shares of common stock $0.01
Newly issued shares of common stock at par 234
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY, 29, 2005
Historical Historical Historical Pro-Forma
Hirsch Compendia (2) Compendia Sheridan (1) Hirsch
------ ------------- --------- ------------ Pro- ----------
Year ended January 1 thru Pro-Forma Year ended Forma Year ended
January 29, December 10, Adjust- December 31, Adjust- January 29,
2005 2004 ments 2004 ments 2005
-------------------------------------------------------------------------------------
(In thousands)
NET SALES $43,641 $6,114 - $37,991 - $87,746
COST OF SALES 29,574 3,990 - 24,762 - 58,326
-------------- ---------- ------ ------------ --------- -----------
GROSS PROFIT 14,067 2,124 - 13,229 - 29,420
-------------- ---------- ------ ------------ --------- -----------
OPERATING EXPENSES 15,874 7,002 469 (4) 18,352 (786) (3) 40,911
-------------- ---------- ------ ------------ --------- -----------
OPERATING LOSS (1,807) (4,878) (469) (5,123) 786 (11,491)
-------------- ---------- ------ ------------ --------- -----------
OTHER EXPENSE
Interest expense 185 2,507 - 645 897 (5) 4,234
Other expense (income) - net 147 (3) - 214 - 358
-------------- ---------- ------ ------------ --------- -----------
Total other expense 332 2,504 - 859 897 4,592
-------------- ---------- ------ ------------ --------- -----------
LOSS FROM OPERATIONS BEFORE
PROVISION FOR INCOME TAXES,
AND DISCONTINUED OPERATIONS (2,139) (7,382) - (5,982) (111) (16,083)
INCOME TAX PROVISION 9 - - - - 9
-------------- ---------- ------ -------- --------- ----------
LOSS FROM CONTINUING OPERATIONS (2,148) (7,382) (469) (5,982) (111) (16,083)
INCOME FROM DISCONTINUED OPERATIONS 376 - - - 376
-------------- ---------- ------- ------- --------- ----------
(Includes $943,000 gain on sale of
Hometown Threads for fiscal 2005)
-------------- ---------- ------ ------------ --------- ----------
NET LOSS ($1,772) ($7,382) ($469) ($5,982) (111) ($15,716)
============== ========== ====== ============ ========= ===========
LOSS PER SHARE:
Basic and diluted:
Loss from continuing operations ($0.26) ($0.68)
Income from discontinued
operations 0.05 0.02
-------------- ----------
Net income (loss) ($0.21) ($0.66)
============== ==========
WEIGHTED AVERAGE NUMBER OF SHARES IN
THE CALCULATION OF
LOSS PER SHARE
Basic and diluted 8,351 23,509
============== ==========
(1) Additional acquisitions occurred in fiscal 2004 by Sheridan but were not
material to the pro-forma financial statements.
(2) Compendia was acquired by Sheridan on December 11, 2004. Its proforma
statement of operations is being presented as if the acquisition occurred
on January 1, 2004
(3) Represents a reduction to depreciation and amortization expense of $786,000
for Hirsch due to its property, plant and equipment and other long term
assets having been reduced to zero in order to reflect the application of
negative goodwill as a result of purchase accounting.
(4) Represents an addition to depreciation and amortization expense of $469,000
for Sheridan to reflect the amortization of the Compendia music catalog as
if the acquisition had occurred on January 1, 2004.
(5) Represents an addition to interest expense of $897,000 for interest on the
debt related to the Compendia acquisition that would have been incurred as
if it occurred on January 1, 2004.
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
UNAUDITED PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 30, 2005
Historical Historical Pro-Forma
Hirsch Sheridan Hirsch
Six months Six months Pro- Six months
ended ended Forma ended
July 30, June 30, Adjust- July 30,
2005 2005 ments 2005
---------------- ---------------- ------------ ------------
(in thousands)
(unaudited)
NET SALES $25,890 $19,013 - $44,903
COST OF SALES 17,679 9,846 - 27,525
---------------- ---------------- ------------ ------------
GROSS PROFIT 8,211 9,167 17,378
---------------- ---------------- ------------ ------------
OPERATING EXPENSES 7,956 10,301 (334) (1) 17,923
---------------- ---------------- ------------ ------------
OPERATING INCOME (LOSS) 255 (1,134) (334) (545)
---------------- ---------------- ------------ ------------
OTHER EXPENSE
Interest income (expense) (78) (813) (891)
Other income (expense) - net 446 (76) - 370
---------------- ---------------- ------------ ------------
Total other income (expense) 368 (889) - (521)
---------------- ---------------- ------------ ------------
INCOME (LOSS) FROM OPERATIONS
BEFORE PROVISION FOR INCOME TAXES 623 (2,023) (334) (1,066)
INCOME TAX PROVISION 30 - - 30
---------------- ---------------- ------------ ------------
NET INCOME (LOSS) $593 ($2,023) (334) ($1,096)
================ ================ ============ ============
LOSS PER SHARE:
Basic:
Net income (loss) $0.07 ($0.05)
================ ============
Diluted:
Net income (loss) $0.06 ($0.05)
================ ============
Weighted Average Number of
Shares used in the calculation
of income (loss) per share
Basic 8,455 23,509
================ ============
Diluted 9,401 23,509
================ ============
(1) Represents adjustment to depreciation and amortization expense for Hirsch
due to its property, plant and equipment having been reduced to zero in
order to reflect the application of negative goodwill as a result of
purchase accounting.
RISK FACTORS
You should carefully consider the risk factors set forth below as well as
the other information contained in this proxy statement in evaluating the
proposed merger and the other proposals related to the merger. Any of the
following risks could materially and adversely affect our business, financial
condition results of operations or prospects. In such event, you may lose all or
part of your original investment.
Risks Relating To The Merger
The value of shares of our common stock after the merger will fluctuate and may
be less than the value of shares of our common stock as of the date of the
Merger Agreement, the date of this proxy statement or on the date of the
Meeting.
Upon completion of the merger, shares of Sheridan common stock and
preferred stock (other than shares of Series B Preferred Stock owned by us) will
be converted into the right to receive shares of our common stock. The ratios at
which the shares will be converted will not be adjusted for changes in the
values of Sheridan common or preferred stock or in the market price of our
common stock since the date of the Merger Agreement. Neither company may abandon
the merger, nor can't we re-solicit the vote of our stockholders, solely because
of changes in the value or market price of either company's capital stock.
There may be some lapse of time between the date when you vote on the
merger at the meeting and the date when the merger is completed. The price of
shares of our common stock may vary significantly between the dates of the
Merger Agreement, this document and the completion of the merger. These
variations may be caused by, among other factors, changes in our businesses,
operations, results and prospects, market expectations of the likelihood that
the merger will be completed and the timing of its completion, the market's
perception of the merits of the merger, the prospects for our post-merger
operations, and general market and economic conditions. Accordingly, neither the
value of the Sheridan common and preferred stock nor the trading price of our
common stock on the dates of the Merger Agreement, this document or the Meeting
may be indicative of the price of our common stock after the merger is
completed.
Our operations and those of Sheridan have generally resulted in losses.
For the five years ended January 29, 2005, our operations resulted in a
cumulative net loss of $40,872,000, and during the two years ended December 31,
2004, Sheridan's operations resulted in a cumulative net loss of $6,175,000. The
history of our operating losses and those of Sheridan suggests that the combined
companies after the merger will require very significant funding while they
attempt to effect profitable earnings. There is no assurance that such funding
can be obtained, on terms acceptable to us and if obtained, that profitable
operations can be achieved. If funding is not available or if profitable
operations are not achieved, our business and operations together with the price
of our common stock could be materially, adversely affected.
Certain of our directors, officers and stockholders may have interests in the
merger that are different from, or in addition to, the interests of Hirsch's
stockholders generally.
Some of the directors who are recommending that you vote in favor of the
merger may have interests in that transaction that differ from that of our
stockholders generally. Those interests could have affected their decision to
vote in favor of the proposals to be voted on at the Meeting. Four of our
directors will remain on our Board of Directors following the merger and two of
our executive officers will become executive officers of the combined company.
All of our directors will be entitled to the continuation of indemnification
arrangements on the terms specified in the Merger Agreement following completion
of the merger. In addition Paul Gallagher, our present Chief Executive Officer,
President and Chief Operating Officer and Beverly Eichel, our present Executive
Vice President of Finance, Chief Financial Officer and Secretary will be
entering into new employment agreements. In addition, in conjunction with the
merger, we are proposing that our stockholders approve an amendment to our 2003
Stock Option Plan under which certain of our senior executives, including Mr.
Gallagher and Ms. Eichel, will receive additional stock option grants. These
interests, which may cause their interests to differ from yours, may have
influenced these parties to support, advocate or recommend the merger.
Our ability to complete the merger is subject to numerous contingencies, the
failure of any one of which could prevent the merger from being completed.
Under the Merger Agreement, numerous conditions must be satisfied before we
and/or Sheridan are required to complete the merger. See "The Merger
Agreement-Conditions to Completion of the merger." These conditions include, but
are not limited to, the following:
o the approval of our stockholders to the merger, the Merger Agreement and
the transactions contemplated therein;
o the accuracy of the representations and warranties made by each party to
the Merger Agreement provided that any inaccuracy does not have a Material
Adverse Effect (as defined in the Merger Agreement) on the representing party;
o approval from any required governmental entity and any necessary third
party consents;
o our entry into a registration rights agreement with respect to certain of
the shares to be issued pursuant to the merger; and
o the amendment of the Management Service's Agreement between Kinderhook
Industries, LLC and Musicrama (the "Kinderhook Agreement").
We will incur significant costs in connection with the merger, whether or not we
complete it.
We and Sheridan expect to incur significant costs related to the merger.
These expenses include financial advisory, legal and accounting fees and
expenses, severance/employee benefit-related expenses, filing fees, printing
expenses, proxy solicitation and other related charges. The companies may also
incur additional unanticipated expenses in connection with the merger. A portion
of the costs related to these transactions will be incurred regardless of
whether the transactions are completed.
Integration following the merger will present significant challenges that may
result in the combined companies not operating as effectively as expected or in
a failure to achieve the anticipated potential benefits of the merger.
The integration of two independent companies is a complex, costly and
time-consuming process and may disrupt both companies' businesses if not
completed in a timely and efficient manner. The difficulties of combining the
operations of the companies include, among others:
- retaining and assimilating key officers and employees;
- consolidating administrative infrastructures;
- transitioning to common information technology systems; and
- coordinating geographically separate organizations.
Certain contracts with customers, suppliers, licensors, lenders, lessors and
other business counterparties require us or Sheridan to obtain consent from
these parties in connection with the merger and some of these parties may
terminate or otherwise reduce the scope of their relationship with the combined
companies in anticipation, or as a result of, the merger.
Both we and Sheridan have contracts with certain suppliers, customers,
licensors, lenders, lessors and other third parties. Some of these contracts
require us, Sheridan or our respective subsidiaries to obtain consent from these
other parties in connection with the merger. If consents cannot be obtained, the
combined company may suffer a loss of potential future revenue or may have
certain of our or Sheridan's debts accelerated prior to their stated maturities.
For example, the consummation of the merger may give Tajima Industries
("Tajima") the right to terminate our distribution agreements if they do not
consent to the merger transaction, and approximately 75% of our present revenues
are derived directly from the sale of embroidery machines supplied by Tajima.
Additional stock offerings may dilute current stockholders.
As a result of acquisitions, additional capital raising, management stock
option programs, or the future conversion or exercise of other convertible
securities, we may issue additional shares of capital stock or securities
convertible or exercisable for shares of capital stock, including junior
preferred stock, options or warrants. The issuance of additional capital stock
may further dilute the ownership of our current stockholders.
After the merger, ownership of our common stock will be concentrated among a
small number of major stockholders who will have the ability to exercise
significant control over us, and whose interests may differ from the interests
of other stockholders.
As a result of the merger, major stockholders of Sheridan will become major
holders of our common stock. These stockholders will have the practical ability
to control, or significantly influence, the outcome of stockholder votes. The
interests of these stockholders may differ from the interests of our other
stockholders. These stockholders acting alone or collectively will be able to
determine, or exert significant influence over, the outcome of future matters
submitted to our stockholders, including the terms of any post-merger proposal
to acquire our Company. Each of these stockholders will cause its respective
shares of our Common Stock to be voted on matters on which it is entitled to
vote in a manner that it believes to be in its best interests. These interests
may be different from your interests and may not conform to our strategy or
business goals.
Concentrated ownership of large blocks of our common stock after the merger may
affect the value of shares held by others and the Company's ability to access
public equity markets.
Large blocks of our common stock will be concentrated among a few major
stockholders after the merger. Such share ownership concentration may reduce the
market value of the common stock held by other investors for several reasons,
including:
o the perception of a "market overhang," that is, the existence of a large
block of shares readily available for sale that could lead the market to
discount the value of shares held by other investors; or
o the perception that these stockholders will control, either directly or
indirectly, the outcome of all significant decisions regarding the operations
and direction of our company.
o We may desire to access the public equity markets to secure additional
capital to pursue acquisition or other investment opportunities that may arise.
Our registration rights obligations to our significant stockholders could limit
our ability or make it more difficult for us to raise funds through common stock
offerings upon desirable terms or when required.
Our common stock does not have significant trading volume and its trading price
may continue to be volatile.
Our common stock has not had significant trading volume over the past
several years, and its trading price has been highly volatile. For example,
between May 1, 2003 and May 1, 2005, our stock price ranged from a low of $0.65
to a high of $3.12 per share. In addition, the trading volume has averaged only
31,000 shares per day during that period. Accordingly, trades of only a small
number of shares can have a significant impact on our stock price. We expect
this situation to persist until our public float increases through sales of
large numbers of shares we are obligated to register for the Sheridan
stockholders who will be receiving our common stock in the merger. The
registration and sale, or perceived availability for sale, of the large number
of shares of stock we will be obligated to register following the merger may
also contribute to the volatility of our stock or depress its trading price. In
addition, the market for stocks of companies with lower market capitalizations,
such as us, have from time to time experienced and likely will again experience
significant price and volume fluctuations that are unrelated to the operating
performance of a particular company. These broad fluctuations may adversely
affect the market price of our common stock.
As a result of the merger, the market for our common stock will likely change,
which may have a materially adverse effect on your ability to sell shares of our
common stock.
Our common stock is presently listed on the NASDAQ SmallCap Market. We
anticipate that upon the Merger we will be required to, but will not meet, the
qualifications for a new listing on the NASDAQ SmallCap Market which may result
in the delisting of our common stock from the NASDAQ SmallCap Market.
Accordingly, we may file an application for listing of our common stock on the
American Stock Exchange. Our present common stock price does not qualify us for
such listing, and we may need to seek a waiver of this requirement. If the
waiver is not granted, and our common stock is not listed on the American Stock
Exchange, we anticipate the same will be listed on the OTC Bulletin Board. That
marketplace does not have the liquidity and reputation of the NASDAQ SmallCap
Market or the American Stock Exchange, which could have a materially adverse
effect on the quoted prices for our common stock.
Sales of stock by certain stockholders who hold registration rights may
negatively affect the market price of our common stock.
We have granted certain stockholders of Sheridan certain registration
rights pursuant to which we may become obligated to file registration statements
with the SEC to register significant numbers of shares proposed to be issued in
the merger to holders of Sheridan's capital stock. These stockholders will not
be restricted as to the prices at which they may offer these shares. Shares sold
below the current level at which the shares of our common stock are trading may
adversely affect the market price of our common stock.
Assuming exercise of all currently outstanding warrants by these
stockholders, these registrable shares will represent approximately 53.1% of our
outstanding common stock immediately following the merger. The availability of
this large amount of stock, or actual sales of this stock, either all at once or
in blocks, could have a negative effect on the market price of our common stock.
Our current Restated Certificate of Incorporation as well as our proposed Second
Restated Certificate of Incorporation, contain provisions that may prevent
changes in control, even if in the best interest of the stockholders.
Our Restated Certificate of Incorporation contains provisions that may have
the effect of discouraging, delaying or preventing a change in control,
including transactions in which our stockholders might otherwise receive a
premium for their shares over then current market prices, and may limit the
ability of the stockholders to approve transactions that they may deem to be in
their best interests. For instance, our Restated Certificate of Incorporation
authorizes two classes of common stock, Class A and Class B. The holders of
Class B common stock, presently Henry Arnberg and his family members, are
permitted to elect up to two-thirds of our Board of Directors.
In addition, our Restated Certificate of Incorporation permits our Board of
Directors to issue up to 1,000,000 shares of preferred stock and to determine
the price, rights, preferences and privileges of those shares without any
further vote or action by the stockholders. The rights of holders of our common
stock will be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that we may issue in the future. If we issue
preferred stock, it could be more difficult for a third party to acquire a
majority of our outstanding voting stock. We have no present plans to issue
additional shares of preferred stock.
Non-Merger Risks related to Sheridan's business
If sales in the recorded music industry continue to decline, Sheridan's revenues
may decline as well.
Recorded music sales have steadily declined over the last several years due
to a number of factors including, among others:
o illegal downloading of music from the internet;
o bankruptcies of record wholesalers and retailers and growing
competition, discretionary spending and retail shelf space.
Additionally, the period of growth in recorded music sales driven by the
introduction and penetration of the CD format has ended. While DVD-Audio, Super
Audio CD, DualDisc and downloadable digital files represent potential new
avenues for growth, no significant new audio format has yet emerged to take the
place of the CD. If the recorded music industry continues to decline, Sheridan's
recorded music sales may decline, and Sheridan's revenues will decline as well.
In addition, since most sales of prerecorded music are made with a right of
return of unsold goods, Sheridan's profitability may decrease if returns of
Sheridan's products are higher than what Sheridan has historically experienced.
Catalog sales represent a portion of Sheridan's business, so Sheridan's revenues
may decline if the market for catalog sales continues to decline.
While recorded music sales have steadily declined over the last several
years, the decline has been very dramatic in the catalog sales area. As catalog
sales represent a significant portion of Sheridan's revenues, Sheridan's
revenues will decline if the market for catalog sales continues to decline.
Piracy is still a significant problem impacting the music industry and may
impact Sheridan's ability to generate revenues.
The combined effect of the decreasing cost of electronic and computer
equipment and related technology, such as CD burners and the conversion of music
into digital formats, have made it easier for consumers to create unauthorized
copies of recordings, for example, in the form of CDs and MP3 files. There is a
continued risk that piracy will continue to restrict the growth of the music
industry and contribute to a continuing decline in recorded music sales which
would adversely affect Sheridan's ability to generate revenues. If Sheridan's
industry fails to obtain appropriate relief through the judicial process or the
complete enforcement of judicial decisions, or (if judicial decisions are not in
its favor) if it is unsuccessful in its efforts to lobby governments to enact
and enforce stronger legal penalties for copyright infringement, or if it fails
to develop effective means of protecting intellectual property (whether
copyrights or other rights such as patents, trademarks and trade secrets) for
entertainment-related products or services, Sheridan's revenues will suffer.
Retail shelf space for catalog products may shrink which could adversely impact
Sheridan's revenues and profitability.
The impact of digital distribution and the greater retail profitability of
other products may lead to a shift in retail shelf space away from recorded
music goods. It is likely that slower moving product will be the first to be
eliminated from retail shelves and catalog titles are by nature slower turning
product as compared to new releases. As a result, in the event that retailers
decrease the amount of shelf space available for Sheridan's products, especially
as the number of catalog titles offered by Sheridan grows, Sheridan's revenues
and profitability would be adversely affected.
Sheridan's existing indebtedness and any future incurred indebtedness may
adversely affect Sheridan's ability to obtain additional funds and may increase
Sheridan's vulnerability to economic or business downturns.
Sheridan's indebtedness aggregated approximately $20,694,000 as of June 30,
2005. Sheridan has entered into a financing arrangement in the amount of $10
million primarily to provide financing for the Compendia acquisition of which $7
million has been drawn down as of June 30, 2005. In addition, Sheridan intends
to borrow additional funds in connection with future acquisitions. As a result,
Sheridan is subject to the risks associated with significant indebtedness,
including:
o Sheridan must dedicate a portion of its cash flows from operations to
pay debt service costs and, as a result, Sheridan may have less funds
available for operations and other purposes;
o it may be more difficult and expensive to obtain additional funds
through financings, if available at all;
o Sheridan is more vulnerable to economic downturns and fluctuations in
interest rates, less able to withstand competitive pressures and less
flexible in reacting to changes in Sheridan's industry and general
economic conditions; and
o if Sheridan defaults under any of its existing credit facilities or
loans or if Sheridan's creditors demand payment of a portion or all of
Sheridan's indebtedness, Sheridan may not have sufficient funds to
make such payments and may be forced out of business.
Sheridan has pledged substantially all of its assets to secure certain of its
borrowings and is subject to covenants that may restrict its ability to operate
its business.
A large portion of Sheridan's indebtedness is secured by substantially all
of Sheridan's assets. If Sheridan defaults under the indebtedness secured by
Sheridan's assets, those assets will be available to the secured creditor(s) to
satisfy Sheridan's obligations to the secured creditor(s).
In addition, Sheridan's credit facilities impose certain restrictive
covenants, including financial, ownership, operational and net worth covenants.
Failure to satisfy any of these covenants could result in all or any of the
following:
o acceleration of the payment of Sheridan's outstanding indebtedness;
o Sheridan's inability to borrow additional amounts under Sheridan's
existing financing arrangements; and
o Sheridan's inability to secure financing on favorable terms or at all
from alternative sources.
Any of these consequences could significantly reduce the amount of cash and
financing available to Sheridan, which in turn would adversely affect its
ability to operate its business, including financing its working capital needs
and acquisitions.
The music industry may be subject to pricing pressure that may reduce the retail
price point of catalog products, thereby reducing Sheridan's profitability.
Although the retail price point of recorded music catalogs has held steady
over the past several years, the appeal of the downloadable digital format and
constricting retail shelf space may reduce the demand for physical recorded
media. If the demand for physical recorded music catalog product decreases,
Sheridan may need to offer retail discounts to maintain or increase sales of its
products. However, we cannot be assured that a reduction in the sales price of
its products would result in increased unit sales volume, that would maintain
Sheridan's revenues. In addition, unless Sheridan was able to reduce the cost of
producing its products, any decrease in the sales price of Sheridan's products
would adversely affect Sheridan's profitability.
Sheridan's strategy of acquiring catalog assets or other complementary
businesses for growth may not succeed, which could adversely affect Sheridan's
financial condition, results of operations and cash flows.
A significant aspect of Sheridan's business strategy is to acquire catalogs
of master recordings or other complementary businesses and Sheridan is
constantly searching for such acquisitions. This strategy of growth through
acquisitions presents risks that could materially adversely affect Sheridan's
business and financial performance, including:
o the diversion of Sheridan's management's attention;
o the risks associated with the past operations of, and unanticipated
problems arising from, the acquired assets or business;
o the risks associated with the integration of the acquired businesses;
o the potential loss of artists or songwriters from Sheridan's roster;
o the need to expand management, administration, and operational
systems; and
o the competition for acquisition opportunities from private equity or
strategic bidders, such as major music companies, which could increase
the pricing of these assets or businesses.
Sheridan cannot predict whether:
o Sheridan will be able to identify suitable assets or complementary
acquisition candidates;
o Sheridan will be able to acquire such assets or businesses on terms
favorable to Sheridan if at all;
o Sheridan will be able to successfully integrate into its business the
assets or operations of any new businesses;
o Sheridan will realize any anticipated benefits of completed
acquisitions;
o Sheridan will be able to obtain regulatory approval, if required;
o there will be substantial unanticipated costs associated with new
acquisitions; or
o Sheridan will have to issue its securities or obtain debt financing in
connection with future acquisitions.
At the time of the acquisition of Sheridan Square Entertainment, LLC d/b/a
Artemis Records, Sheridan Square Entertainment, LLC was a party to a
distribution contract with KOCH Entertainment Distribution LLC, "KOCH", through
December 31, 2004. Sheridan has given a termination notice to KOCH and, as of
May 1, 2005, the majority of Sheridan's products are self-distributed and the
majority of its products are being sold by Sheridan's in-house salesforce
through Sheridan's own distribution system. If Sheridan is unable to
successfully integrate the sales of these products through Sheridan's existing
distribution system, Sheridan could face increased costs and a slowdown in the
sale of its products into the marketplace, which would result in a reduction of
Sheridan's revenues.
Sheridan's success depends on the scope of Sheridan's intellectual property
rights and not infringing the intellectual property rights of others and if
Sheridan is unable to adequately protect its intellectual property rights, its
business prospects and profitability could be adversely affected.
Sheridan's success depends in part on Sheridan's ability to:
o obtain copyrights or trademarks or rights to copyrights or trademarks
and to maintain their validity and enforceability;
o operate without infringing upon the proprietary rights of others; and
o prevent others from infringing on Sheridan's proprietary rights.
Sheridan will be able to protect its proprietary intellectual property
rights from unauthorized use by third parties only to the extent that its
proprietary rights are covered by valid and enforceable copyrights or
trademarks. Sheridan's inability to protect its proprietary rights could
materially adversely affect Sheridan's business prospects and profitability. If
Sheridan is unable to operate without infringing upon proprietary rights of
others, it may result in a reduction of Sheridan's revenues.
Litigation also may be necessary to:
o enforce and protect Sheridan's proprietary rights;
o determine the scope and validity of such proprietary rights; and
o defend claims of infringement of other parties' proprietary rights.
If Sheridan is alleged to infringe the intellectual property rights of a
third party, any litigation to defend the claim could be costly and would divert
the time and resources of management, regardless of the merits of the claim.
If a copyright or trademark infringement claim is brought against Sheridan for
uninsured liabilities or exceeds Sheridan's insurance coverage, Sheridan could
be forced to pay substantial damage awards, which could adversely affect
Sheridan's profitability.
The marketing and sale of recorded music and home video products, most of
which have been created using the input of a number of creative personnel,
including musicians, producers, mixers, film directors and others, sometimes
results in disputes over ownership of rights. Although Sheridan makes every
effort to clarify and protect its rights as owner or licensor of the products it
sells, it relies on the representations and indemnification obligations of the
persons involved in creating the products. If a dispute arises challenging such
ownership or other rights, Sheridan may be exposed to copyright and/or trademark
claims by third parties. Sheridan currently has worldwide errors and omissions
liability insurance coverage in the amount of $10 million. However, such
insurance coverage may not protect Sheridan against any or all of the copyright
and/or trademark claims which may be brought against it in the future. In
addition, Sheridan may not be able to maintain adequate insurance coverage at a
commercially reasonable cost or in sufficient amounts or scope to protect
Sheridan against potential losses.
In the event a copyright and/or trademark claim is brought against
Sheridan:
o Sheridan may be required to pay legal and other expenses to defend the
claim, as well as uncovered damage awards resulting from a claim
brought successfully against Sheridan; or
o such party could secure injunctive or other equitable relief, which
could effectively block Sheridan's ability to make, use, sell,
distribute or market Sheridan's products.
If Sheridan fails to obtain a necessary license or other right to
proprietary rights held by third parties, such third party could preclude the
sale, manufacture or distribution of such products and could materially
adversely affect Sheridan's revenues and profitability. This is particularly
true as regards the sales by Sheridan's distribution of CD's manufactured abroad
where copyright owners may have royalty claims and/or consent rights with
respect to the importation of such goods. Defending any copyright and/or
trademark claim or claims could require Sheridan to expend significant financial
and managerial resources, which could have an adverse effect on Sheridan's
business operations and results of operations.
Copyright laws may negatively affect the value of certain assets Sheridan owns.
Under existing United States copyright law, sound recordings may be
protected. United States copyright law, however, also gives record artists (or
their heirs) the right to recapture the rights to their copyrighted material to
the extent they are not considered "works made for hire." If any of Sheridan's
recordings are determined not to be "works made for hire," the recording artists
(or their heirs) will have the right to recapture Sheridan's rights in those
recordings starting 35 years from the date of transfer or assignment of those
rights to Sheridan. As a result, certain of Sheridan's assets may be lost if
challenged by recording artists seeking to recapture their copyrighted material,
thereby potentially adversely affecting Sheridan's revenues.
Sheridan's ability to increase its revenues will depend on its ability to
increase market penetration of its current products and to evolve its product
mix.
The music industry is, by its nature, a business which relies upon the
acceptance of its creative product by the marketplace. Sheridan's ability to
increase revenues will depend, to a material extent, on:
o expanding the market penetration of Sheridan's current products; and
o the successful evolution of Sheridan's product mix.
While Sheridan is continually evaluating the marketplace and evolving its
product mix, Sheridan may not be able to anticipate shifting tastes of its
customer base and the creative content offered by Sheridan may fall out of favor
with its consumers. If Sheridan is unable to expand the market penetration of
its current products or anticipate changes in consumer taste, Sheridan's
revenues would decline.
Consolidation in the music industry could reduce the number of outlets available
to market and distribute Sheridan's products, thereby reducing profitability.
Increased consolidation of radio stations, video promotional outlets and
retail outlets, as well as the growth in U.S. mass merchant music penetration,
has reduced the potential outlets for artist exposure and airplay. Such
reduction is likely to result in an increase in promotional spending in order
for record companies to market its artists and products. Any increase in
Sheridan's promotional spending may have an adverse effect on Sheridan's
profitability.
Intense competition in the music industry may adversely affect Sheridan's
revenues and profitability.
Sheridan operates in a highly competitive environment and competes with
numerous well established music companies, as well as many smaller music
companies. In addition to music, there are numerous entertainment products and
services available to consumers and, as a result, Sheridan also competes with
companies that operate in the television, movie and video game industries. If
Sheridan is unable to differentiate its products and generate sufficient appeal
in the marketplace, Sheridan's ability to achieve its business plan would be
adversely affected. The effect of such competition has been to put pressure on
profit margins and to involve Sheridan in vigorous competition to obtain and
retain customers.
As compared to Sheridan, many of its competitors have:
o significantly longer operating histories and broader product lines;
o significantly greater brand recognition; and
o greater financial, management and other resources.
As a result, Sheridan's competitors may be able to:
o adapt more quickly to changing market conditions and customer
preferences;
o devote greater resources to the promotion and sale of their products;
o reduce their prices in an effort to increase market share;
o introduce new products or services;
o improve the quality of their products or services;
o respond more effectively to competitive pressures; and
o have greater access to distribution channels.
If Sheridan is unable to compete effectively in its market, Sheridan's
revenues and profitability would be adversely affected.
Sheridan's music publishing business competes not only with other music
publishing companies, but also with songwriters who publish their own works.
Sheridan's recorded music business is to a large extent dependent on
technological developments, including access to and selection and viability of
new technologies, and is subject to potential pressure from competitors as a
result of their technological developments. For example, Sheridan's recorded
music business may be adversely affected by technological developments that
facilitate the piracy of music, such as Internet peer-to-peer file-sharing and
CD-R activity; by its inability to enforce its intellectual property rights in
digital environments; and by its failure to develop a successful business model
applicable to a digital online environment. Sheridan also faces competition from
other forms of entertainment and leisure activities, such as cable and satellite
television, pre-recorded films on videocassettes and DVD, the Internet and
computer and videogames.
Sheridan also sells non-exclusive merchandise and competes directly with
other companies who are selling the same merchandise in direct competition with
Sheridan. Increased competition from other distributors for retail business of
non-exclusive product could increase the need for sales discounts and compress
the wholesale unit price and profit margin to Sheridan on these products.
If Sheridan is unable to attract and retain key employees, Sheridan may be
unable to successfully attract and develop top recording artists and acquire
additional recorded music catalogs.
Sheridan's success depends in part on Sheridan's ability to attract and
retain highly qualified management and personnel. Because Sheridan has a limited
number of management personnel, Sheridan is currently dependent upon the efforts
of its executive officers. If Sheridan loses any of its executive officers or
other key personnel, or if Sheridan is unable to attract, motivate and retain
qualified professionals, it could significantly and adversely impact Sheridan's
ability to attract and develop top recording artists, and to carry out
Sheridan's strategic objectives.
If Sheridan is unable to obtain foreign product to import, Sheridan's revenues
would be reduced.
From time to time, as opportunities arise, Sheridan imports from foreign
countries for distribution in the United States, CDs which are manufactured or
owned by a third party label that are not available in such third party label's
catalog in the U.S. It is possible that the opportunities available to Sheridan
for these products may become more limited due to factors beyond Sheridan's
control, including tariffs, duties, export controls and other trade barriers.
Such a situation would constrict the availability and appeal of product that
Sheridan would be able to offer its retail customers and, therefore, may reduce
the order flow which Sheridan has experienced to-date, thereby reducing
Sheridan's revenues.
The purchase of finished goods in foreign currencies may reduce Sheridan's
margins.
Sheridan purchases finished goods from overseas suppliers in local currency
and imports these products into the U.S. for sale. A continued weakening of the
dollar could increase the price paid for the product and reduce Sheridan's
margins. Although Sheridan is constantly seeking ways to reduce its exposure to
currency movements so as to improve the profit predictability of Sheridan's
goods, such as licensing the product for sale in the U.S. instead of purchasing
finished goods, if Sheridan is not able to reduce this exposure, Sheridan's
potential profitability could decline.
The failure to finance Sheridan's significant working capital needs could
adversely affect a number of aspects related to Sheridan's business, such as
Sheridan's ability to source, manufacture and/or distribute its products.
As a producer of recorded music, Sheridan has significant working capital
requirements, principally to finance artist investment and accounts receivable.
Although Sheridan believes that cash from operations and cash available under
Sheridan's credit facilities or lines will be sufficient to meet Sheridan's
working capital requirements over the next 12 months, Sheridan will need to
obtain additional financing in the future, especially in connection with
acquisitions. The failure to finance Sheridan's working capital needs or the
failure to obtain additional financing upon favorable terms when required in the
future for the operation of Sheridan's business or in connection with
acquisitions, could cause Sheridan to curtail its business operations and reduce
the growth of Sheridan's business. Any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
significant restrictive covenants.
Sheridan's prospects and financial results may be materially and adversely
affected if it fails to identify, sign and retain artists and songwriters.
Sheridan is dependent on identifying, signing and retaining artists with
long-term potential, whose debut albums are well received on release, whose
subsequent albums are anticipated by consumers and whose music will continue to
generate sales as part of Sheridan's catalog for years to come. Sheridan is also
dependent on signing and retaining songwriters who will write the hit songs of
today and the classics of tomorrow. The competition among record companies for
such talent is intense. Sheridan's competitive position is dependent on its
continuing ability to attract and develop talent whose work can achieve a high
degree of public acceptance. Sheridan's financial results may be adversely
affected if Sheridan is unable to identify, sign and retain such artists and
songwriters under terms that are economically attractive to Sheridan.
The recorded music industry is under investigation by the attorney general for
the state of New York, regarding its practices in promoting its records to radio
stations.
The Attorney General of the State of New York, has served subpoenas on
several major music companies with requests for information in connection with
an investigation of the relationship between music companies and radio stations,
including the use of independent promoters. The investigation is pursuant to
consumer fraud statutes. This investigation could potentially result in changes
in the manner in which the recorded music industry promotes its records or
financial penalties, which could adversely affect Sheridan's business.
Due to the nature of Sheridan's music business, its results of operations and
cash flows may fluctuate significantly from period to period.
Sheridan's net sales, operating income and profitability, like those of
other companies in the music business, are largely affected by the number and
quality of albums that Sheridan releases, its release schedule, and, more
importantly, the consumer demand for these releases. Sheridan also makes advance
payments to recording artists and songwriters, which impact Sheridan's operating
cash flows. Sheridan reports results of operations quarterly and its results of
operations and cash flows in any reporting period may be materially affected by
the timing of releases and advance payments, which may result in significant
fluctuations of its results of operations and cash flow from period to period.
A significant portion of Sheridan's music publishing revenues is subject to rate
regulation, either by government entities or by local third-party collection
societies throughout the world, which may limit its profitability.
Mechanical royalties and performance royalties are the two largest sources
of income to Sheridan's music publishing business and mechanical royalties are a
significant expense to Sheridan's recorded music business. In the U.S.,
mechanical rates are set pursuant to industry negotiations contemplated by the
U.S. Copyright Act and performance rates are set by performing rights societies
and subject to challenge by performing rights licensees. Outside the U.S.,
mechanical and performance rates are typically negotiated on an industry-wide
basis. The mechanical and performance rates set pursuant to such processes may
adversely affect Sheridan by limiting its ability to increase the profitability
of its music publishing business. If the mechanical rates are set too high it
may also adversely affect Sheridan by limiting its ability to increase the
profitability of its recorded music business.
The enactment of legislation limiting the terms by which an individual can be
bound under a "personal services" contract could impair Sheridan's ability to
retain the services of its artists.
California Labor Code Section 2855 limits the duration of time any
individual can be bound under a contract for "personal services" to a maximum of
seven years. In 1987, Subsection (b) was added, which provides a limited
exception to Section 2855 for recording contracts, creating a damages remedy for
record companies. Legislation was introduced in California to repeal Subsection
(b) but was subsequently withdrawn. Legislation was introduced in New York to
create a statute similar to Section 2855, which did not advance. There is no
assurance that New York, California or any other state will not reintroduce or
introduce similar legislation in the future. The repeal of Subsection (b) of
Section 2855 and/or the passage of legislation similar to Section 2855 by other
states would make it more difficult to retain artists and could materially
adversely affect Sheridan's prospects.
Non-Merger Risks Related To Our Business
Approximately 75% of our revenues are derived from our agreements with Tajima
and therefore termination of such agreements would eliminate most of our
revenues.
For the fiscal year ended January 29, 2005, approximately 74.2% of our
revenues resulted from the sale of embroidery equipment supplied by Tajima. Two
separate distributorship agreements govern our rights to distribute Tajima
embroidery equipment in the United States. The agreements collectively provide
us with the exclusive rights to distribute Tajima's complete line of standard
embroidery, chenille embroidery and certain specialty embroidery machines in 50
states of the United States. The main agreement, which now covers 39 states, is
effective through February 21, 2011. This agreement may be terminated by Tajima
and/or us on not less than two years' prior notice. The other agreement covers
nine western continental states, Alaska and Hawaii. This second agreement
expired February 20, 2005. We are in the process of negotiating an extension of
this agreement; however, there can be no assurance that an agreement will be
reached on terms acceptable to us. Our failure to obtain an extension on terms
acceptable to us could result in a loss of our right to distribute embroidery
machines in the territories covered by that agreement, which would negatively
impact our revenues. Each of the agreements contains language that permits
termination if we fail to achieve certain minimum sales quotas or annual
targets. In fiscal 2004, we met our quotas and in fiscal 2005, we obtained a
waiver from Tajima for failure to meet our sales quotas. The agreements may also
be terminated if (a) Henry Arnberg is no longer our Chairman and/or CEO or (b)
the merger is deemed in the opinion of Tajima, to be a change in control of us.
The consummation of the merger may give Tajima the right to terminate the
distributorship agreements if Tajima does not give its consent to the merger. We
are presently in discussions with Tajima, there can be no assurance we will
receive their consent. The termination of the Tajima agreements would materially
and adversely impact our revenues, business and results of operations.
Due to our reliance on products produced by Tajima in Japan and the United
States, any significant interruption to Tajima's manufacturing facilities or any
change in Tajima's costs could negatively impact our profitability.
Tajima manufactures and assembles its embroidery machines in several
locations in Japan and the United States. Should any of these facilities be
seriously damaged, thereby interrupting our supply, our revenues would be
negatively impacted. Also, if Tajima increases the cost of the equipment, it
would negatively impact our profitability. A cost increase can also result if
the U.S. dollar is devalued in relationship to the Japanese yen. Such a
devaluation has been under way in recent years.
Since we pay for the embroidery machinery in Japanese Yen, a weakening of the
U.S. Dollar could have a negative impact on our profitability.
We pay for our Tajima embroidery machinery in Japanese yen. Any change in
the valuation of the U.S. dollar compared to the Japanese yen either increases
our cost of the embroidery machine inventory or results in competitive pressures
for reduced U.S. Dollar pricing among yen-based equipment distributors and
manufacturers. A reduction in the value of the U.S. dollar against the Japanese
yen has been going on for the past several years which has resulted in
increasing pricing pressures and pressures on our margins. We have generally
been able to recover the resulting increased costs through price increases to
our customers or, in limited circumstances, price reductions from Tajima. If we
are unable to recover such increased costs in the future or reduce overhead,
this will have a negative impact on our profitability. These transactions are
not currently hedged through any derivative currency product. Currency gains and
losses in foreign exchange transactions are recorded in the statement of
operations.
Due to the ordering cycle, if we do not accurately predict the appropriate
amounts of inventory required, this will negatively effect our finances and
operations.
Our ordering cycle for new embroidery machines is approximately three to
four months. Since we generally deliver new machines to our customers within one
week of receiving orders, we order inventory based on past experience and
forecasted demand. Due to the relatively long lead times of the ordering cycle,
any significant unanticipated downturn in equipment sales could result in an
increase in inventory levels, which could negatively effect our profitability.
Increased competition may cost us customers and cause us to reduce our margins,
which would have a negative impact on our profitability.
We compete with distributors of embroidery machines produced by
manufacturers other than Tajima and with manufacturers who distribute their own
embroidery machines directly, as well as with other providers of embroidery
products and services. We believe that competition in the embroidery industry is
based on technological capability and quality of embroidery machines, price and
service. If other manufacturers develop embroidery machines which are more
technologically advanced than Tajima's or if the quality of Tajima embroidery
machines diminishes, we would not be able to compete as effectively, which could
have a negative impact on our revenues. Our future success will depend, to a
certain extent, on the ability of Tajima to adapt to technological change and
address market needs, including price competition. There can be no assurance
that Tajima will be able to keep pace with technological change in the
embroidery industry, the current demands of the marketplace or be able to
compete favorably on price. The failure of Tajima to do so would have a material
adverse effect on our ability to compete.
The Company also faces competition in selling software, embroidery
supplies, accessories and proprietary products, as well as providing customer
training, support and services. Due to the decline in overall demand in the
industry during the last several years, potential customers may emphasize price
differences over value-added services and support in purchasing new embroidery
machines. Price competition may impair our ability to provide customers with
value-added services and support. Although we attempt to compete on the basis of
price and to maintain our profit margins, there can be no assurance that we will
be able to do so. Our failure to compete effectively in these areas would have a
negative impact on our profitability.
If we were to lose certain key members of our management, that would have a
material adverse effect on our ability to operate and could cause the
termination of our agreement with Tajima.
Changes in the embroidery industry and recent restructuring of our business
have resulted in increased responsibilities for management and have placed
increased demands on our operating, financial and technical resources. Our
continued success will depend to a significant extent upon the abilities and
continued efforts of Henry Arnberg, our Chairman of the Board, and Paul
Gallagher, our Chief Executive Officer. The loss of the services of Messrs.
Arnberg or Gallagher, or the services of other key management personnel, could
have a material adverse effect on our ability to operate the business. Also,
Tajima may terminate our distribution agreements if Henry Arnberg is no longer
our Chairman and/or Chief Executive Officer. The termination of those vital
agreements would have a significant adverse effect on our business and revenues.
CAUTIONARY STATEMENTS REGARDING
FORWARD-LOOKING STATEMENTS
This proxy statement contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements may be made directly in this proxy statement by appearing in other
documents filed with the Securities and Exchange Commission by Hirsch
International Corp. or they may be incorporated by reference in this proxy
statement. These statements may include statements regarding the period
following the completion of the merger.
Words such as "may," "will," "anticipate," "estimate," "expect," "project,"
"intend," "plan," "believe," "target," "objective," "goal," "should" and words
and terms of similar substance used in connection with any discussion of
operating or financial performance, other than statements of historical facts
included in this proxy, of us, Sheridan or Merger Sub or of the mergers identify
forward-looking statements. All forward-looking statements are management's
present expectations or forecasts of future events and are subject to a number
of factors and uncertainties that could cause actual results to differ
materially from those described in the forward-looking statements. The factors
relating to the merger discussed under the caption "Risk Factors" beginning on
page 33 above and the following risks related to our business and the business
of Sheridan, among others, could cause actual results to differ materially from
those described in the forward-looking statements:
o the continued decline in the global recording industry and the rate of
overall decline in the music industry;
o changes in consumer confidence, tastes, preferences and spending;
o the threat posed to our business by piracy of music of home and
Internet peer-to-peer file-sharing;
o anticipated cash flow and our and Sheridan's ability to maintain
sufficient operating cash flow and liquidity;
o the possibility that new business and strategic options for one or
more business segments will be identified, potentially including
selective acquisitions, dispositions, restructurings, joint ventures
and partnerships;
o trade restrictions, tariffs, and other factors potentially affecting
the ability to do business with qualified vendors and access products
in an efficient manner;
o the significant threat posed to the music industry by organized
industrial piracy;
o social and political conditions such as war, political unrest and
terrorism or natural disasters;
o volatility in financial markets;
o the ability to maintain product pricing in a competitive environment;
o the impact of seasonal buying patterns, which are difficult to
forecast with certainty;
o general economic conditions and normal business uncertainty; and
o failure to attract and retain key personnel.
OUR STOCKHOLDERS MEETING
Date, time and place
This proxy statement and the accompanying form of proxy are being furnished
to holders of record of our Class A and Class B common stock, par value $0.01
per share, in connection with the solicitation of proxies by our Board of
Directors for use at a Meeting of our stockholders, to be held on ________,
2005, at __________________________________, commencing at _________, local
time, and at any adjournment or postponement of that meeting.
Purposes of the meeting
At the Meeting, we are asking our stockholders to consider and vote on the
following proposals:
1. to consider and vote on a proposal to adopt the Merger Agreement dated
July 20, 2005, by and among the Company, Merger Sub and Sheridan and the
issuance of shares of our common stock to the stockholders of Sheridan pursuant
to the Merger;
2. to consider and vote on proposals to amend our Restated Certificate of
Incorporation that would have the following effects:
(a) to modify the fixed range of the number of our directors
comprising our Board and to designate our initial directors following the
merger;
(b) to convert the two classes of common stock we are authorized to
issue into a single class of common stock having equal voting and other
rights;
(c) to increase our authorized common stock to 50,000,000 shares, $.01
par value per share;
(d) to adopt the Second Amended and Restated Certificate of
Incorporation that includes the foregoing changes in the event that they
are approved by the stockholders and makes the other changes set forth in
our proposed Second Amended and Restated Certificate of Incorporation which
is included as Annex C to the this proxy statement.
3. to amend our 2003 Stock Option Plan to increase the number of shares
reserved for issuance thereunder from 750,000 to 5,000,000
4. to elect nine (9) directors to a new Board of Directors;
5. to ratify the appointment of BDO Seidman, LLP as the Company's
independent registered public accounting firm for the fiscal year ending January
31, 2006; and
6. to transact such other business as may properly come before the Meeting
and any adjournment or postponement thereof, including the solicitation of
proxies if there are not sufficient votes in favor of approving the merger.
Approval of each of proposals 1, 2, 3 and 4 together is conditioned on the
approval of all of those proposals. If any of proposals 1, 2, 3 or 4 is not
approved, none of them will be implemented, even if one or more of them receive
sufficient stockholder votes for approval.
Recommendation of our Board of Directors
Our Board of Directors has unanimously determined that the merger and the
related Merger Agreement are in the best interests of our stockholders and have
approved the Merger Agreement. Our Board of Directors has also unanimously
approved, and recommended to you, the other proposals described in this Proxy
Statement.
Our Board of Directors unanimously recommends that you vote "for" the approval
of the merger, "for" each amendment to Certificate of Incorporation and the
Restatement of our Certificate of Incorporation, "for" the amendment to our 2003
Stock Option Plan,"for" each director nominated by the Board.
Record date; shares entitled to vote; quorum requirement; broker non-votes;
Our board of directors has fixed the close of business on ________, 2005 as
the record date for the determination of stockholders entitled to notice of and
to vote at the Meeting. Accordingly, only holders of record of shares of our
common stock at the close of business on the record date will be entitled to
notice of, and to vote at, the meeting. At the close of business on the record
date, there were 7,912,010 and 550,018 shares of our Class A and Class B common
stock respectively outstanding and entitled to vote, held by approximately
________ beneficial holders.
Each holder of record of shares of our common stock on the record date is
entitled to cast one vote per share on each proposal properly submitted for the
vote of the stockholders at the Meeting. Votes may be cast either in person or
by proxy.
The presence in person or by proxy of the holders of a majority of the
outstanding shares of common stock on the record date is necessary to constitute
a quorum for the transaction of business at the Meeting. If a quorum is not
present at the meeting, the stockholders present may adjourn the meeting from
time to time, without notice other than by announcement at the meeting, until a
quorum is present in person or by proxy. Shares represented by proxies that are
marked "ABSTAIN" and broker "non-votes" will be counted as present for the
purpose of determining the presence or absence of a quorum at the meeting. A
broker "non-vote" occurs when a broker holding shares for a beneficial owner
does not vote on a particular proposal because the broker does not have
discretionary voting power for that particular item and has not received
instructions from the beneficial owner. Brokers do not have authority to vote on
proposals 1, 2, and 3.
If a broker indicates on the enclosed proxy or its substitute that such
broker does not have discretionary authority as to certain shares to vote on a
particular matter (broker non-votes), those shares will not be considered as
voting or abstaining with respect to that matter. The Company believes that the
tabulation procedures to be followed by the Inspector are consistent with the
general statutory requirements in Delaware concerning voting of shares and
determination of a quorum.
In a 1988 Delaware case, Berlin v. Emerald Partners, the Delaware Supreme
Court held that while broker non-votes may be counted for purposes of
determining the presence or absence of a quorum for the transaction of business,
non-votes should not be counted for purposes of determining the number of votes
cast with respect to the particular proposal on which the broker has expressly
not voted. Broker non-votes with respect to proposals set forth in this Proxy
Statement will therefore not be considered "votes cast" and, accordingly, will
not affect the determination as to whether the requisite majority of votes cast
has been obtained with respect to a particular matter.
Required vote; broker voting procedures
The approval of the merger and the proposed amendments to our 2003 Stock
Option Plan requires the affirmative vote of holders of a majority of the shares
of our Class A and Class B common stock outstanding and entitled to vote at the
Meeting as of the record date, either in person or by proxy. The approval of the
amendments to our Restated Certificate of Incorporation requires the affirmative
vote of a majority of the holders of each of the Class A and Class B common
stock, voting as separate classes. Thus, if you abstain from voting your shares
or direct your proxy to abstain from voting your shares, or if you do not
complete and return a proxy card and do not attend the meeting, the effect will
be a vote against these proposals. Additionally, broker non-votes, if any, will
effectively be a vote against proposal 2 and, consequently, against the merger
and the transactions contemplated in the Merger Agreement since their
consummation is conditioned upon the adoption of each of Proposals 1, 2, and 3.
Directors will be elected by a plurality of the voting power present in
person or represented by proxy and entitled to vote at the Meeting. You may vote
either "FOR" each director nominee or you may "WITHHOLD AUTHORITY" for each
director nominee separately. Only shares that are voted in favor of a particular
nominee will be counted towards that nominee's achievement of a plurality. Thus,
shares represented at the meeting that are not voted for a particular nominee,
shares present in person or represented by proxy where the stockholder properly
withholds authority to vote for the nominee, and broker non-votes, if any, will
not be counted towards a nominee's election.
Voting by directors and executive officers
At the close of business on the record date, our directors and executive
officers beneficially owned and were entitled to vote approximately 29% of our
common stock outstanding on that date. They have indicated they intend to vote
in favor of the proposals in this Proxy Statement. Holders of 1,676,677 of such
shares have entered into a voting agreement with Sheridan and have agreed to
vote in favor of proposals 1, 2, 3 and 4.
Voting
You may vote by proxy or in person at the Meeting.
Voting in Person
If you plan to attend the Meeting and wish to vote in person, you will be
given a ballot at the meeting. Please note, however, that if your shares are
held in "street name," which means your shares are held of record by a broker,
bank or other nominee, and you wish to vote at the Meeting, you must bring to
the Meeting a proxy from the record holder of the shares authorizing you to vote
at the Meeting.
Voting by Proxy
Shares of our stock represented by properly executed proxies received at or
prior to the meeting and not revoked will be voted in the manner specified on
such proxies. Properly executed proxies that do not contain voting instructions
will be voted "FOR" each of the proposals. Properly executed proxies marked
"ABSTAIN," although counted for purposes of determining whether there is a
quorum at the meeting, will not be voted.
The enclosed proxy provides that you may vote your shares of common stock
"FOR" each of the director nominees or you may "WITHHOLD AUTHORITY" for each of
the nominees, and that you may vote "FOR," "AGAINST" or "ABSTAIN" from voting
with respect to each of the other proposals. The board of directors recommends
that you vote "FOR" each of the director nominees named in this document and
"FOR" each of the other proposals.
Revocation of proxies
A stockholder who has given a proxy has the power to revoke it at any time
before the vote is taken at the Meeting by:
- submitting to our secretary a written instrument revoking the proxy;
- submitting a duly executed proxy bearing a later date; or
- voting in person at the Meeting.
Any written notice of revocation or subsequent proxy should be sent so to
us at 200 Wireless Boulevard, Hauppauge, New York, 11787, Attention: Secretary,
or hand-delivered to our secretary at that address, at or before the taking of
the vote at the special meeting.
Adjournment of meeting; other business
Adjournments may be made for the purpose of, among other things, soliciting
additional proxies. An adjournment may be made from time to time by approval of
the holders of shares representing a majority of the votes present in person or
by proxy at the Meeting, whether or not a quorum exists, without further notice
other than by an announcement made at the Meeting of the date, time and place at
which the adjourned meeting will reconvene. However, if the adjournment is for
more than 30 days, or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting will be given to each
stockholder of record entitled to vote at the Meeting. No proxy voted against
the proposal to approve the merger will be voted in favor of any adjournment.
We do not expect that any matters other than those set forth in the notice
accompanying this document will be brought before the Meeting. If, however,
other matters are properly presented at our meeting, the persons named as
proxies will vote in accordance with their best judgment with respect to those
matters.
Solicitation of proxies
Proxies being solicited hereby are being solicited on behalf of our Board
of Directors. We will pay the costs incurred in connection with the printing and
mailing of this proxy statement and the solicitation of the enclosed proxy. In
addition to solicitation by mail, our directors, officers and employees may
solicit proxies in person or by telephone, telegram or other means of
communication. Our directors, officers and employees will receive no additional
compensation for such services, but we may reimburse them for reasonable
out-of-pocket expenses in connection with such solicitation. Some of these
directors and executive officers may have interests in the proposed transactions
that differ from yours, as described in "The Merger - Proposal 1-Interests of
Our Directors and Executive Officers in the Transactions." Brokers, custodians,
nominees and fiduciaries will be requested to forward proxy solicitation
materials to the beneficial owners of shares held of record by them, and we will
reimburse them for the reasonable, out-of-pocket expenses they incur in doing
so. We will retain a proxy solicitor to aid in the proxy solicitation at an
estimated cost of approximately $10,000, plus expenses.
Appraisal rights
Neither our Restated Certificate of Incorporation nor the laws of the State
of Delaware provide appraisal rights or any other statutory remedy to dissenting
stockholders in connection with any of the proposals described in this proxy
statement.
Assistance
If you need assistance in completing your proxy card or have questions
regarding our Meeting, please contact, Paul Gallagher or Beverly Eichel as
follows:
By Mail: Hirsch International Corp.
200 Wireless Boulevard
Hauppauge, New York 11787
By Phone: (631) 701-2211 or (631) 701-2169
By Email: paulg@hirschintl.com or beichel@hirschintl.com
PROPOSAL 1: APPROVAL OF AGREEMENT AND PLAN OF MERGER
The following is a description of the material aspects of the merger with
Sheridan. Although we believe that this description covers the material terms of
this transaction, the description may not contain all of the information that is
important to you. We encourage you to read carefully this entire document,
including the Merger Agreement included with this document as Annex A for a more
complete understanding of the merger. The following description is subject to,
and is qualified in its entirety by reference to, the Merger Agreement.
Description of the merger
Pursuant to the merger, we will acquire all of the outstanding capital
stock of Sheridan. Sheridan stockholders will receive our common stock as
consideration in the merger. To complete the merger, Merger Sub will merge with
and into Sheridan, with Sheridan continuing as the surviving company and
becoming our wholly-owned subsidiary. Each outstanding share of Sheridan's
common and preferred stock will be canceled and converted into the right to
receive shares of our common stock (other than shares of Sheridan's Series B
preferred stock held by us, which will be cancelled). Each outstanding share of
Merger Sub common stock will be converted into one new share of common stock of
Sheridan, in its capacity as the surviving company.
Following the merger, the former Sheridan stockholders, together with
holders of vested options and warrants will own an aggregate of approximately
62% of our outstanding common stock (including shares issuable upon the exercise
of vested and "in the money" options and warrants), subject to adjustment as
described in this proxy statement and current holders of our common stock,
together with holders of vested options and warrants to purchase shares of our
common stock, will own the remaining approximately 38% of our outstanding common
stock (including shares issuable upon the exercise of vested and "in the money"
options and warrants). For details about the ratios for the conversion of
Sheridan's capital stock into our common stock, which we refer to as the merger
exchange ratios, see "The Merger Agreement-Merger Consideration," beginning on
page 61. As of July 30, 2005, there were 7,912,000 and 550,018 shares of our
Class A and Class B common stock respectively issued and outstanding, 1,176,000
shares of our common stock issuable upon exercise of outstanding options and
100,000 shares of our common stock issuable upon exercise of outstanding
warrants.
Background of the merger
In June 1994, we concluded an initial public offering of our Class A common
stock. The price to the public was $8.00 per share. Our Class A common stock was
traded on the NASDAQ National Market. In August, 2002 our common stock was moved
from the NASDAQ National Market and became listed on the NASDAQ SmallCap Market.
From June 1994 until February 1998 our common stock traded in the range of
$8.00 to $25.50 per share. During the period beginning with fiscal 1994 through
the end of fiscal 1998, our gross revenues increased at an average annual rate
of approximately 32.5%. In fiscal 1999, at a time when our common stock was
trading in the range of $6.91 per share, our Board of Directors determined that
our common stock was undervalued and authorized a repurchase by the Company of
its shares. In total, from March 1998 to October 2001, the Company repurchased
approximately 695,000 shares of its Class A common stock in the open market at a
total cost of approximately $1,602,000.
Beginning in the fiscal year ended January 31, 1999, and continuing through
the present, the U.S. embroidery industry as a whole and our business
experienced a decrease in overall demand driven by the reduction of large,
multi-head equipment customers, that resulted in reduced domestic demand for
large embroidery machines. During the same period, our gross revenues decreased
by approximately 66% from $127,546,000 in fiscal 1999 to $43,641,000 in fiscal
2005. In addition, during the same period, our stock traded in the range of
$0.16 to $11.38 per share.
The relocation of large embroidery equipment purchasers off shore and the
resulting effect on the market for embroidery equipment in the United States
adversely effected the Company's business. In 2001, the Company reported a net
loss of approximately $15,700,000 or approximately $1.72 per share. In September
2001, recognizing the need for a turnaround, the Company hired Paul Gallagher as
its Chief Operating Officer. Our balance sheet continued to deteriorate together
with our cash position. In addition, we were in default of the financial
covenants contained in our bank agreement with PNC Bank. During the year ended
January 31, 2002, the Company initiated a restructuring program designed to
address the market shifts in the embroidery industry, including the closing and
consolidation of certain divisions, a reduction of total employment and
disposition of facilities that were no longer required. The ultimate goal of
this restructuring was to improve cash flow and to simplify our business to both
position us within a shrinking embroidery equipment market, and to focus on our
core business. In the fourth quarter of fiscal 2002, we discontinued the
operations of our HAPL Leasing Co., Inc. subsidiary after determining that its
operations and business was not strategic to our business objectives. Effective
October 31, 2002, we completed the sale of our interest in our Pulse
Microsystems Ltd. subsidiary and entered into a supply agreement with the
purchaser to ensure a continued and adequate supply of Pulse software. Effective
January 31, 2004, we sold our remaining 55% equity interest in our Tajima USA
Inc. manufacturing subsidiary to Tajima Industries. Tajima USA Inc. manufactures
small (based on number of sewing heads) embroidery equipment in the United
States. More recently, during the first quarter of fiscal 2005, we determined
that our Hometown Threads, LLC subsidiary was not strategic to our business
objectives. Consequently, on October 22, 2004, we sold substantially all of the
assets of Hometown Threads to Embroidery Acquisitions LLC, a wholly owned
subsidiary of PCA LLC. As a result of these transactions, our business now
consists solely of our embroidery equipment distribution business.
As a result of this restructuring, our business was simplified, we have
realized improved margins, a reduction in our losses and an improved cash
position of approximately $12 million at the end of fiscal 2005. Our management
has continued to focus on the persistent weakness in the overall embroidery
equipment market in the United States and the need to identify and implement new
avenues of growth. During 2003, our Board recommended that we retain an outside
consultant to evaluate our business diversification options both within and
outside the embroidery equipment industry. Management subsequently held
conversations with a consultant regarding possible acquisitions of other
businesses to augment our core business. During the next several months,
management held preliminary discussions with several potential acquisition
candidates related directly or indirectly to the embroidery equipment industry.
None of these discussions resulted in management conducting in-depth due
diligence. During 2004, our Board authorized management to begin the process of
interviewing investment bankers and business consultants concerning an
engagement to identify additional acquisition candidates. During November 2003,
management made initial contact with Michael Volk, who was subsequently engaged
by us as a consultant and broker to identify such acquisition candidates
directly or indirectly related to the embroidery business to augment our core
business. From February through July 2004, with the assistance of Mr. Volk,
management profiled numerous acquisition candidates, contacted a significant
number of them and conducted preliminary due diligence on approximately ten.
Following the conclusion of the preliminary due diligence, none of these
candidates were deemed by management, to be beneficial to us or our business. In
May 2004, management began the further process of interviewing investment
bankers which culminated in the engagement of Duncan Capital Group LLC on July
30, 2004. With the assistance of Duncan Capital, our management identified the
need for us to enter new growth businesses outside of the embroidery industry
having limited business risk and substantial asset value. Duncan Capital
provided us with profiles of a variety of candidates. We performed limited due
diligence on seven of these candidates, and substantial due diligence on one of
these candidates, which was Sheridan.
On October 27, 2004, Paul Gallagher, our Chief Executive Officer, held an
initial meeting with Joseph Bianco, Co-Chief Executive Officer of Sheridan at
the offices of Duncan Capital to discuss a potential transaction. The meeting
followed a day later by another meeting between Mr. Gallagher and Mr. Bianco at
the offices of Sheridan located in New York City. In the next six months Mr.
Gallagher and Henry Arnberg, our Chairman of the Board, held numerous meetings
with management of Sheridan concerning a potential transaction and conducted due
diligence. On November 26, 2004, Mr. Gallagher and Mr. Arnberg met with Emanuel
Gerard of Harris Nesbitt, Corp. for the purpose of exploring the retention of
Harris Nesbitt to act as our advisor for the transaction. Mr. Gerard is an
investment banker focusing on the music industry.
Management became interested in Sheridan, a full service, independent
producer and distributor of recorded music, due to its unique position in the
industry, its past growth through acquisition and the overall state of the
recorded music industry. Management believes that the (a) emergence of
alternative distribution channels; (b) consolidation of the industry of both
record labels and retailers; (c) emergence of pay-for-service digital
distribution; and (d) impact of piracy on "Top 40" revenues, has temporarily
reduced liquidity and asset values. We believe that Sheridan's strategy of (i)
acquiring and aggregating niche music content with established and recurring fan
bases; (ii) leveraging the economics of its distribution business to further
reduce acquisition costs; and (iii) building and maintaining a catalog of
established, profitable music content distributed through traditional and
alternative channels, including via digital means, could create an opportunity
for our stockholders to benefit through potential long term growth of Sheridan's
business.
Sheridan had informed us that it believed a combination with us would be
beneficial in that it was seeking to (i) make additional acquisitions to support
its growth strategy through the issuance of shares of our common stock since our
common stock is `publicly traded'; (ii) utilize our existing cash to support its
ongoing operations and growth strategy; and (iii) benefit from our management's
experience in creating efficient business operations.
On January 6, 2005, Beverly Eichel, our Chief Financial Officer, began a
more comprehensive due diligence review of Sheridan at the offices of Sheridan.
On January 7, 2005, a meeting was held between our management, Sheridan
management and their advisors, to discuss the structure of a potential
acquisition by merger by us of Sheridan. For the next two months, our management
and Sheridan's management held frequent meetings concerning due diligence, the
structure of a potential transaction and the relative valuation of each
participant.
On March 16, 2005, we engaged Harris Nesbitt, Corp. to provide a fairness
opinion to our Board and advise our management with respect to the music
industry and the Exchange contemplated by the merger. In addition, Emanuel
Gerard, vice-chairman, was to provide the Company with an overview of the music
industry. Both we and Sheridan continued the efforts to finalize a non-binding
term sheet with respect to the merger.
On April 18, 2005, we announced the signing of a non-binding term sheet
with Sheridan for the merger, and issued a press release announcing that we had
signed the term sheet. On April 20, 2005, we filed a report on Form 8-K with the
SEC which contained as an Exhibit a copy of the press release. The Company
engaged Ruskin Moscou Faltischek, P.C., regular outside counsel to the Company,
to act as our counsel for the transaction.
On April 26, 2005, Ruskin Moscou submitted to Olshan Grundman Frome
Rosenzweig and Wolosky, LLP ("Olshan"), counsel to Sheridan, comments to the
draft Agreement and Plan of Merger than had been previously prepared by Olshan,
including a reduction in scope of the representations and warranties to be
provided by us and, an increase in the scope of the representations and
warranties to be provided by Sheridan and the concept that certain additional
shares of common stock would be issued to the Sheridan stockholders or Hirsch
stockholders, as the case may be, in the event of a breach, by Sheridan or
Hirsch, as the case may be, of its representations, warranties or covenants set
forth in the Merger Agreement. Over the next three (3) months, negotiations
ensued with respect to the draft Merger Agreement and ancillary documents.
Approximately ten (10) additional drafts were circulated before the parties
signed the final version of the Merger Agreement on July 20, 2005.
In June 2005, Sheridan identified a short term need for additional working
capital for its ongoing operations. Sheridan approached our management and
requested that we provide them up to $1 million for this purpose. Following
several discussions as to whether the requested cash infusion would take the
form of equity or debt and due to constraints placed upon Sheridan by its
existing lenders, it was agreed that we would purchase up to $1 million of
Sheridan's newly authorized Series B Convertible participating stock ("Series B
Preferred Stock") in one or more traunches. Our management also conditioned the
purchase of the Series B Preferred Stock upon the execution of the Merger
Agreement.
As of the date hereof, we have purchased approximately $1,000,000 worth of
Sheridan's Series B Preferred Stock.
The Series B Preferred Stock is senior to all other equity securities of
Sheridan in terms of dividends, distributions and liquidation preference.
Dividends, whether or not declared, accrue at the rate of 8% per annum of the
sum of the stated value of each share ($25,000) commencing January 1, 2006,
provided that in the event a "Disposition Transaction" (as defined in the
Certificate of Designations of the Series B Preferred Stock) has not occurred by
April 1, 2006, the dividend rate shall increase to 14% per annum and provided
further that if a Disposition Transaction does not occur by July 1, 2006, the
dividend rate shall increase to 18% per annum. Upon consummation of the merger,
the Series B Preferred Stock will be cancelled and of no further force and
effect.
Sheridan and Kinderhook Capital Fund I, L. P., or an affiliate ("Kinderhook
Capital Fund") thereof, has the right to redeem the shares of Series B Preferred
Stock for an amount equal to the stated value of each such share plus all
accumulated and unpaid dividends, provided that if either Sheridan or Kinderhook
Capital Fund exercises this right within 90 days following termination of the
Merger Agreement, then the redemption price shall be equal to 80% of the stated
value of each share of Series B Preferred Stock. Kinderhook Capital Fund and its
affiliate Kinderhook Capital SBIC Fund I, L.P. are collectively the largest
beneficial owner of Sheridan capital stock, and, we believe, will be the largest
holder of our common stock immediately following the merger.
On June 23, 2005, Harris Nesbitt delivered its oral opinion to our Board of
Directors to the effect that, as of such date, based upon and subject to certain
qualifications; the merger is fair, from a financial point of view, to our
stockholders on July 19, 2005.
Our Board approved the Merger Agreement, the transactions contemplated
thereunder and our purchase of Sheridan's Series B Preferred Stock. The Board
was authorized and permitted to consider other offers as an alternative to the
transaction with Sheridan. However, notwithstanding our public announcement of
the proposed transaction with Sheridan, no other expressions of interest in a
transaction with us have been received.
THE MERGER AGREEMENT
We, Merger Sub and Sheridan are parties to the Merger Agreement dated as of
July 20, 2005. The following summary of the Merger Agreement is qualified by
reference to the complete text of the Merger Agreement, which is attached as
Annex A and incorporated in this proxy statement by reference.
The merger
Pursuant to the Merger Agreement, Sheridan will merge with our wholly-owned
subsidiary, SSE Acquisition Corp. ("Merger Sub"), with Sheridan surviving. As a
result of the merger, each outstanding share of Sheridan common stock and
preferred stock will be converted into Hirsch common stock as described below,
and each of the shares of the common stock of Merger Sub outstanding just before
the merger will be converted into one share of common stock of Sheridan.
Sheridan will then become our wholly owned subsidiary. We then plan to transfer
our current business to another wholly-owned subsidiary of Hirsch, so that
Hirsch will thereafter be a holding company with two operating subsidiaries.
Consideration to Sheridan security holders
The Merger Agreement provides for the following cancellations and
conversions of Sheridan common stock and preferred stock at the effective time
of the merger (subject to adjustment as provided therein):
(a) Each of the 107,422.72 shares of Sheridan common stock expected to be
outstanding immediately prior to the effective time of the merger will be
canceled and automatically converted into the right to receive approximately
30.7234 shares of our common stock.
(b) Each of the 901.90621 shares of Sheridan's Series A convertible
preferred stock expected to be outstanding immediately prior to the effective
time of the merger will be canceled and automatically converted into the right
to receive approximately 13,023.87 shares of our common stock.
(c) Each outstanding warrant and option to purchase Sheridan common stock
shall be converted into a warrant or option to purchase our common stock in
accordance with the Merger Agreement.
The total increase in the shares of our common stock on account of
outstanding Sheridan common stock and preferred stock is approximately
15,047,000 shares, as compared to 8,462,000 shares outstanding at July 30, 2005.
If between July 20, 2005 and the time of the merger, the outstanding shares
of our common stock or Sheridan's capital stock that is being converted in the
merger are changed, respectively, into a different number of shares or different
class by reason of any reclassification, recapitalization, split-up, combination
or exchange of shares or readjustment, or a stock dividend is declared with a
record date within that period, or if we issue additional shares of our common
stock for a financing or acquisition, the Merger Agreement provides that the
merger exchange ratios will be appropriately adjusted to maintain the economic
effect contemplated by the Merger Agreement.
Procedures for exchange of share certificates; no fractional shares
Upon completion of the merger, the former stockholders of Sheridan may
deliver to us for cancellation, stock certificates that immediately prior to the
merger, represented outstanding shares of Sheridan's common stock and Series A
convertible preferred stock. We will then deliver to each of such former
Sheridan stockholders a certificate for shares of our common stock representing
the stockholder's share of the merger consideration. Upon completion of the
merger, the stock certificates that immediately prior to the merger represented
all of the shares of Sheridan's common stock and Series A convertible preferred
stock will represent only the right to receive shares of our common stock set
forth above. We will not issue any fractional shares of our common stock in the
merger, instead, any fractional shares held by a stockholder that aggregates at
least one-half a share, will be rounded up from .5 or more to a whole share.
Also, following the merger, our current stockholders will be asked to exchange
their current shares of our common stock for new shares of our common stock, on
a share for share basis.
Amendment and restatement of our existing Restated Certificate of Incorporation
Immediately prior to the merger, we will amend our existing Restated
Certificate of Incorporation, and file same with the Delaware Secretary of
State. The amendment would (a) increase the size of our Board of Directors to
nine directors; (b) increase our authorized common stock to 50,000,000 shares,
$.01 par value and (c) cause each shares of Class A common stock and Class B
common stock to be automatically converted into one share of our common stock as
described in the Second Amended and Restated Certificate of Incorporation. For
more information about those changes, see "Amendments to Our Certificate of
Incorporation - Proposal," and "Description of Our Capital Stock."
Adoption of Second Amended and Restated Bylaws
Our Board of Directors has approved our Second Amended and Restated Bylaws,
subject to the consummation of the merger, by requiring not less than seventy
(70%) percent of the directors comprising the entire Board approve (a) our
annual budget; (b) the incurrence of indebtedness in excess of $2.5 million in
the aggregate (excluding indebtedness incurred in the ordinary course of
business); (c) the issuance of any additional equity securities or securities
convertible into equity securities, in excess of $2.5 million in the aggregate,
or the granting of any options, warrants or other rights to acquire our equity
securities; (d) approval of the sale, lease, exchange or other disposition of
any material asset by us or any of our subsidiaries, or the merger,
consolidation or liquidation of us or any of our subsidiaries; (e) the approval
of the acquisition of any asset or assets outside of the ordinary course of
business in one or a series of related transactions having an aggregate purchase
price in excess of $5 million; (f) approval or payment of any dividend on any of
our equity securities; (g) approval of any stock split, combination or
reclassification of any of our equity securities; (h) subject to the bylaws, the
approval of any transaction between us or any of our affiliates; (i) approval of
any amendment to our Certificate of Incorporation or bylaws; (j) approval of a
change in the number of directors that constitute our Board; and (k) the
approval of the appointment or removal of any executive officer, or the adoption
or amendment of any employment contract or terms of employment with any of the
executive officers or any manager with authority substantially equivalent to
that of one of our executive officers or that of any of subsidiaries. Our
stockholders will not vote on the approval of our Second Amended and Restated
Bylaws.
Representations and warranties
We and Merger Sub, on the one hand, and Sheridan and its subsidiaries, on
the other hand, have made a number of factual statements, called representations
and warranties, to the other about aspects of our respective businesses and
other matters pertinent to the merger. The topics covered by these
representations and warranties include, but are not limited to, the following:
- corporate organization, foreign qualification and good standing;
- capital stock;
- corporate authority;
- no violations;
- accuracy of financial statements; and, in our case, SEC reports
- no undisclosed liabilities;
- no default and compliance with applicable laws;
- environmental matters;
- litigation;
- permits;
- employee plans;
- labor matters;
- absence of certain changes or events;
- accuracy of the information contained in this proxy statement;
- tax matters;
- absence of questionable payments;
- title to properties and related matters;
- material contracts;
- insurance;
- subsidies;
- intellectual property;
- minutes and stock record books;
- bank accounts and powers of attorney;
- accuracy and completeness of disclosure;
- disputes with customers;
- accounts receivable;
- transactions with insiders;
- brokers or finders;
- no prior activities of Merger Sub; and
- Sheridan's music library and music products
Covenants related to conduct of business and approval of the merger
We and Sheridan have made a number of covenants in the Merger Agreement,
including, but not limited to, the following:
- we and Sheridan will operate our business in the ordinary course and
use commercially reasonable efforts to preserve the business,
customer, supplier and employee relationships, except for the possible
purchase by us of up to $1 million of Sheridan Class B preferred
stock, to provide working capital for Sheridan.
- neither we nor Sheridan;
-- will amend our respective certificate of incorporation or by laws
-- issue any common stock or instruments related thereto, except for
exercise of our outstanding options or warrants
-- recapitalize our respective capital stock
-- adopt a liquidation, dissolution, merger, recapitalization or
restructuring plan
-- incur funded debt, make guarantees, make loans or grant security
interest or mortgages outside of the ordinary course of business
-- lease office space
-- enter into, modify or terminate any employee benefit plan
-- buy or sell assets outside the ordinary course of our business,
respectively
-- make acquisitions
-- settle material litigation or claims
-- take any action to impede the merger
-- fail to comply with applicable laws
-- effect a mass layoff of employees or a plant closing
-- dispose of intellectual property outside of the ordinary course
of business
-- modify banking arrangements
-- fail to maintain book and accounts
-- agree to do any of the above
- we and Sheridan will continue to give each other access to our
business information
- we and Sheridan will continue our insurance coverages, respectively;
and
- we and Sheridan agreed to jointly prepare this proxy statement and
process the same with the SEC, and to provide all information required
to keep the same current and accurate as of the time of submission to
our stockholders
Voting agreement
Pursuant to the Merger Agreement, holders of a total of 1,676,677 shares of
our common stock, representing approximately 21% of our presently outstanding
shares of common stock, have entered into a Voting Agreement with us and
Sheridan whereby they have agreed to vote for the merger. In addition, the
holders have agreed not to enter into transactions which are inconsistent with
the merger and not to transfer their common stock or any interest therein. A
copy of the Voting Agreement is annexed to this proxy statement as Annex E.
Standstill provisions
Under the terms of the Merger Agreement, and subject to exceptions
described below, we and Sheridan have agreed that, prior to the completion of
the merger or the earlier termination of the Merger Agreement, neither we nor
Sheridan, nor any of our respective subsidiaries, nor any of our and our
respective subsidiaries' officers, directors, employees, advisors or other
representatives will:
- solicit, initiate or encourage any "acquisition transaction," as
defined below;
- approve, accept or recommend any acquisition transaction, or enter
into any agreement, agreement in principle or letter of intent with
respect to any acquisition transaction, or resolve or publicly propose
to take any of these actions; or
- participate in any discussions or negotiations regarding, or furnish
to any person or entity, any information with respect to, or take any
other action to facilitate any inquiries or the making of any proposal
that is or could reasonably be expected to lead to, any takeover
proposal.
The Merger Agreement permitted us to issue a press release announcing the
Merger Agreement and to promptly file a current report on Form 8-K that included
a copy of the Merger Agreement.
Under the Merger Agreement, an "acquisition transaction" is an inquiry,
proposal or offer, from any person or entity, relating to a merger,
consolidation, business combination, purchase or disposition of any amount of
assets or capital stock or other equity interest in us, Sheridan or Merger Sub.
Notwithstanding these provisions, the Merger Agreement permits us to engage
in discussions and negotiations with, and provide information to, any third
party that has made an unsolicited proposal for an acquisition transaction, if
and only to the extent that:
- our stockholders have not adopted the Merger Agreement;
- our Board of Directors concludes in good faith, that the takeover
proposal is or is reasonably likely to lead to a "superior proposal,"
as defined below;
- prior to providing any information to or entering into discussions or
negotiations with the third party, we notify Sheridan, within 48
hours, of the proposal and otherwise comply with our respective
obligations under the no solicitation provisions described above; and
- our Board of Directors concludes in good faith, after consultation
with outside legal counsel, that it is required to provide information
to or have discussions with the third party in order to comply with
its fiduciary duties.
A "superior proposal" means a bona fide written takeover proposal:
- on terms that our Board of Directors concludes in good faith would
result in a transaction that is more favorable to our stockholders
from a financial point of view than the merger (including any proposal
by the other party to modify the terms of the Merger Agreement), in
each case:
- after taking into account all relevant factors, including the
conditions to the proposal, the timing and likelihood of completing
the proposed transaction, the financing of the proposal and required
consents, filings and approvals; and
- obtaining the advice of a financial advisor to the extent that the
proposal does not require cash consideration and/or has a financing
contingency.
Registration rights agreement
Our common stock to be issued in the merger will be restricted securities
and will not be registered under the Securities Act of 1933, as amended (the
"Securities Act"). Pursuant to the Merger Agreement, we will enter into a
registration rights agreement with certain holders of 5% or more of the
outstanding Sheridan capital stock which will provide that, at our expense, we
will provide one or more registration statements under the Securities Act for
the sale of some or all of our common stock received in the merger. Since the
common stock to be issued in the merger represents approximately 190% of our
common stock now outstanding, the offer and sale of such common stock could
materially and adversely affect the market price of our common stock.
Timing of merger
The closing of the merger will occur as soon as practicable following the
satisfaction or waiver of the conditions set forth in the Merger Agreement,
unless we and Sheridan agree to a different date or time or the Merger Agreement
has been terminated prior to that time. We currently expect to complete the
merger by November, 2005.
Conditions to completion of the merger
The obligations of the parties to the Merger Agreement to complete the
merger are subject to the satisfaction or waiver of conditions specified in the
Merger Agreement.
The conditions to the merger applicable to all of the parties' obligations
to complete the merger include the following:
- the adoption of the Merger Agreement, the proposed new charter, the
new board of directors and the addition of shares to our 2003 stock
option plan, by the affirmative vote of the holders of the requisite
number of the outstanding shares of our common stock;
- the absence of any law, rule, regulation, executive order, injunction,
order or decree prohibiting or making illegal the completion of the
merger; and
- an existing management agreement between Kinderhook Industries, LLC.,
an affiliate of one of the beneficial stockholders of Sheridan, and
Sheridan's Musicrama subsidiary, will be amended so that it will be
capped at 20 months and $500,000 in fees, payable in monthly
installments of $25,000, subject to acceleration in certain events (it
is anticipated that affiliates of Kinderhook Industries, LLC will be
our principal stockholder following the merger).
Our obligation and the obligation of Merger Sub to complete the merger are
subject to the satisfaction or waiver by us of the following additional
conditions:
- The representations and warranties Sheridan has made in the Merger
Agreement and related documents must be true and correct in all
material respects as of the date of the Merger Agreement and as of the
closing date.
- Sheridan must have performed in all material respects all obligations
required to be performed by it under the Merger Agreement prior to the
merger.
- There is no material adverse effect relating to the business of
Sheridan.
- We receive a certificate as to the above conditions being satisfied.
- We receive a legal opinion from Sheridan's counsel.
- There is no court order preventing the merger.
- Sheridan has received all governmental and other approvals of the
merger the failure to receive which would have a material adverse
effect on the combined companies.
The obligation of Sheridan to complete the merger is subject to the
satisfaction or waiver of additional conditions by Sheridan of the following
additional conditions:
- The representations and warranties we and Merger Sub have made in the
Merger Agreement and related documents must be true and correct in all
material respects as of the date of the Merger Agreement and as of the
closing date.
- We and Merger Sub must have performed in all material respects all
obligations required to be performed by us under the Merger Agreement.
- There is no material adverse effect relating to our business.
- Sheridan receives a certificate as to the above conditions being
satisfied.
- The Board of Directors contemplated by this proxy statement have been
elected.
- Sheridan receives a legal opinion from our counsel.
- There is no court order preventing the merger.
- The senior executives of the combined companies disclosed in this
proxy statement have entered into employment agreements with us on the
terms disclosed beginning on page 134 of this proxy statement.
- We and Merger Sub have received all governmental and other approvals
of the merger the failure of which to receive would have a material
adverse effect on the combined companies.
Termination of the Merger Agreement
The Merger Agreement may be terminated, and the merger abandoned, at any
time before the merger is completed, whether before or after our stockholders
have voted at the Meeting:
- by mutual agreement of Sheridan, Merger Sub and us, with the approval
of each of our boards of directors;
- the action of the board of directors of either Sheridan or us, if
-- the merger is not completed by December 31, 2005, unless the
Meeting has not yet been held, in which case, it may only be
terminated by Sheridan;
-- any judgment, law, rule, regulation, ordinance, order, decree or
other legal restraint prohibiting or making illegal the
completion of the merger is in effect, has become final and
non-appealable; or
-- our stockholders do not approve the merger and the other matters
set forth in this proxy statement at the Meeting;
- by Sheridan, if:
- there is a failure of the conditions related to our
representations, warranties or covenants;
- our Board of Directors withdraws or adversely modifies its
recommendation of the merger or recommends another proposal to
our stockholders; or
- a material adverse effect concerning our business has occurred;
- by us, if prior to the time our stockholders adopt the Merger
Agreement:
- there is a failure of the conditions related to Sheridan's
representations, warranties or covenants;
- a material adverse effect concerning Sheridan's business has
occurred;
- our Board of Directors determines that it is obligated to accept
a superior proposal.
In any case, the party wishing to terminate the merger agreement must give
written notice to the other parties. Unless termination is due to breach of a
party, on termination, the Merger Agreement shall become null and void.
Remedies for Breach of Representations
and Warranties, Covenants
If the merger is consummated and within 180 days thereafter, a party has
breached its representations and warranties, or if until covenants are performed
in full, a party breaches its obligation to perform the same, the other party
can send a claim notice to adjust the relative holdings of our common stock as
of the date of the merger, by our stockholders and Sheridan's former
stockholders. Damages which are determined shall be paid in additional shares of
our common stock valued as of the date of the merger, provided aggregate damages
exceed $150,000 and provided that not more than an additional 1,000,000 shares
of our common stock are issued in the aggregate.
Expenses
Whether or not the merger is not completed pursuant to the Merger
Agreement, each party will bear all expenses incurred by it in connection with
the Merger Agreement and the transactions contemplated by the Merger Agreement.
Actions to complete the merger
In general, we, Merger Sub and Sheridan have each agreed to use all
commercially reasonable efforts to take all actions and do all things reasonably
necessary or advisable under applicable laws and regulations to permit
completion of the merger and the other transactions contemplated by the Merger
Agreement. This expressly includes obtaining all consents, approvals and
authorizations required for completion of the transactions contemplated by the
Merger Agreement and, if we and Sheridan agree (but only if we agree),
contesting any action, and seeking to have reversed or put aside any
legislation, administrative or judicial action, that restricts or prohibits
completion of those transactions.
In addition, we agreed to file this proxy statement after giving Sheridan
and its counsel reasonable opportunity to review it. We also agreed to use
commercially reasonable efforts to respond promptly to any comments or requests
by the SEC with respect to this proxy statement, after consulting with Sheridan,
and not to file any amendment or supplement to this proxy statement without
Sheridan' consent unless the amendment or supplement pertains only to us and our
subsidiaries. In addition, we agreed to mail this document to you within five
days after the SEC tells us that it has completed its review. For its part,
Sheridan agreed to use commercially reasonable efforts to cooperate and provide
us with information for use in this document.
We, Merger Sub and Sheridan have agreed to cooperate and consult with each
other to prepare and file all documentation, make all necessary applications and
give all necessary notices, execute all necessary documents and use all
reasonable efforts to obtain all necessary permits, consents, approvals and
authorizations of governmental or other entities necessary to complete the
transactions contemplated by the Merger Agreement. However, no party may modify
a note, bond, license, permit, contract, lease or other document or instrument
to increase the amount payable thereunder or otherwise to be more favorable, or
less burdensome, in any material respect to us and our subsidiaries, or Sheridan
and its subsidiaries, as applicable, taken as a whole, without the written
consent of the other party.
Officers and directors
The Merger Agreement provides that immediately after the merger, our Board
of Directors will consist of nine directors, two whom Sheridan has nominated,
two of whom we have nominated and five independent directors who shall be
nominated jointly by us and Sheridan. It also requires us to cause certain of
our officers to resign, effective upon completion of the merger. At that time,
our new board of directors will appoint new officers.
Registration rights agreement; blue sky
The Merger Agreement contemplates, as a condition to closing, that certain
stockholders of Sheridan will enter into a registration rights agreement with
respect to the shares of our common stock that we will issue to the Sheridan
stockholders in connection with the merger
In addition, we agreed to take any actions necessary so that the common
stock we issue to Sheridan' stockholders in connection with the merger will
qualify with applicable state securities laws.
Amendment; extension and waiver
Any provision of the Merger Agreement may be waived in writing by the party
benefited by the provision, or amended or changed with the written agreement of
all parties to the Merger Agreement. However, after our stockholders have
adopted the Merger Agreement, no amendment may be made that adversely affects
the rights of our stockholders, or that would require our stockholders' approval
under applicable law or rules of the NASDAQ Stock Market, Inc., without the
further approval of our stockholders.
Any party may extend the time for performance of any obligations of another
party or waive any inaccuracies in representations and warranties by another
party or compliance by another party with any agreements or conditions contained
in the Merger Agreement. Any agreement to any of these extensions or waivers
must be in writing.
The parties to the merger
Hirsch
We were founded in 1970 and have become a leading single source provider of
electronic computer-controlled embroidery machinery and related value-added
products and services. The Company markets itself under the brand "Tajima USA
Sales and Support by Hirsch International Corp." and offers a complete line of
technologically advanced single-head and multi-head embroidery machines,
proprietary application software, a broad line of embroidery parts, supplies,
accessories and embroidery products. In addition, we provide a comprehensive
service program, and user training and support. We believe our wide-range of
product offerings together with its related value-added products and services
place it in a competitively advantageous position within its marketplace.
Sheridan
Sheridan generated net sales of approximately $38.0 million and had a net
loss of approximately $6.0 million for the twelve month period ended December
31, 2004. Sheridan had net sales of approximately $19.0 million and had a net
loss of approximately $2.0 million for the six month period ended June 30, 2005.
Sheridan was formed in July 2003 for the purpose of acquiring established
independent record labels and music catalogs, the releasing of new music,
developing proprietary catalogs internally and acquiring a full-service
distribution operation. In July 2003, Sheridan acquired all of the stock of
Musicrama, Inc., a New York corporation ("Musicrama"), a leading importer and
distributor of music products (e.g., CDs and DVDs) since its founding in 1978;
and in August 2003 Sheridan acquired all the membership interests of Sheridan
Square Entertainment, LLC, a leading, independent record company doing business
as Artemis Records, and its affiliate Artemis Classics, LLC.
Since these acquisitions, Sheridan has purchased and/or licensed additional
catalogs from third parties and continued to release new music and develop its
music catalogs internally. At present Sheridan is comprised of (i) the Label
Group, consisting of Artemis Records, Artemis Classics/Vanguard Classics,
Tone-Cool Records, Corp., Triloka Records, Artemis Gospel, Ropeadope, Sheridan
Square Records and labels comprising Compendia Music; (ii) the Distribution
Group, being Musicrama and (iii) the Publishing Group, being Sheridan Square
Publishing Group, LLC.
Merger Sub
We formed Merger Sub solely for the purpose of merging with Sheridan. To
date, Merger Sub has conducted no activities other than activities in connection
with its formation, the signing of the Merger Agreement and the preparation of
this document. If we complete the transactions described in this document,
Merger Sub will merge into Sheridan and will not survive the merger.
Recommendation of our board of directors
At its meeting on July 19, 2005, after due consideration, our Board of
Directors unanimously:
o determined that it was advisable for us to enter into the Merger
Agreement and that the Merger Agreement and the transactions
contemplated by the Merger Agreement are advisable, fair to and in the
best interests of our company and our stockholders;
o approved the Merger Agreement and the transactions contemplated by the
Merger Agreement;
o approved the proposed amendments to our Restated Certificate;
o approved the purchase of up to $1 million in the aggregate of
Sheridan's Series B Preferred Stock;
o authorized us to enter into a Securities Purchase Agreement with
Sheridan for the purchase of Series B Preferred Stock; and
o recommended that our stockholders vote to approve the merger with
Sheridan under the Merger Agreement, the related amendments to our
Restated Certificate of Incorporation and to our 2003 Stock Option
Plan, and the election of our new Board of Directors.
Common stock listing
Our common stock is presently listed on the NASDAQ SmallCap Market. We
anticipate that upon completion of the Merger we will be required to, but will
not meet, the qualifications for a new listing on the NASDAQ SmallCap Market and
consequently, there is a substantial likelihood that our common stock may be
delisted from the NASDAQ SmallCap Market. Accordingly, if this occurs, we may
make application for listing of our common stock on the American Stock Exchange.
Our present common stock price does not qualify us for such listing, and if we
make such application, we would have to seek a waiver. If the waiver is not
granted, and our common stock is not listed on the American Stock Exchange, we
anticipate the same will be listed on the OTC Bulletin Board. That marketplace
does not have the liquidity and reputation of the NASDAQ SmallCap Market or the
American Stock Exchange, which could have a material adverse effect on the
quoted prices for our common stock and our ability to sell our common stock.
Anticipated accounting treatment
The merger will be accounted for using purchase accounting. Generally
accepted accounting principles require that one of the two companies in the
transaction be designated as the acquiror for accounting purposes. Sheridan has
been designated as the acquiror because immediately after the merger, its
stockholders will hold more than 50% of our common stock on a fully diluted
basis. The market value of the Company on July 20, 2005, the date of the
announcement, was $9.3 million. The purchase price will be allocated to our
identifiable assets and liabilities based on their estimated fair market values
at the date of the completion of the Merger and any excess of our cost over
those fair market values will be accounted for as negative goodwill. The results
of final valuations of property, plant and equipment and intangible and other
assets, and the finalization of any potential plans of restructuring, have not
yet been completed. We may revise the allocation of the purchase price when
additional information becomes available.
Directors and management following the merger
Upon completion of the merger, our Board of Directors will consist of nine
members, two of whom have been nominated from the current members of our Board
of Directors and two have been nominated by Sheridan. The remaining five members
have been jointly nominated by us and Sheridan. After the merger, the board will
be as follows:
Henry Arnberg Company
Paul Gallagher Company
Joseph J. Bianco Sheridan
Robert E. Michalik Sheridan
Marvin Broitman Independent
Mary Ann Domuracki Independent
Kammy Moalemzadeh Independent
Edward J. Tobin Independent
Jose Axtmayer Independent
However, if we do not complete the merger, the individuals who are not
currently serving on our Board will immediately resign, and a separate
stockholders meeting will be scheduled to elect new directors.
Upon completion of the merger, the following individuals will serve as our
executive officers in the capacities listed below:
Name Corporate Office/Title
----------------------------------------------------------------------
Joseph J. Bianco Chief Executive Officer
Paul Gallagher President and Chief Operating Officer
Anil K. Narang Vice-Chairman
Beverly Eichel Executive Vice President, Chief Financial
Officer and Secretary
Amendments to our restated certificate of incorporation
In connection with the merger, you will be asked at the Meeting to consider
and approve amendments to our current Restated Certificate of Incorporation, and
to replace it with the Second Amended and Restated Certificate of Incorporation
the form of which is attached to this document as Annex C.
Each significant amendment will be presented as a separate proposal at
the Meeting. The following chart lists these proposals:
1. To modify the fixed range of the number of our directors and designate
our initial directors after the merger.
2. To convert the two presently authorized classes of common stock (Class
A and Class B) into a single class of common stock having equal voting
and other rights.
3. To increase the number of authorized shares of common stock to
50,000,000 shares, $.01 par value per share.
4. To amend and restate our Restated Certificate of Incorporation to
reflect the foregoing.
Stockholders entitled to vote; vote required
Each holder of record of Class A or Class B shares of our common stock on
_________, 2005 is entitled to cast one vote per share on each proposal properly
submitted for the vote of our stockholders at the Meeting.
Approval of the merger and the issuance of the shares of our common stock
pursuant to the Merger Agreement, and the amendment of our 2003 Stock Option
Plan requires the approval of the holders of a majority of our shares of common
stock present at the meeting and entitled to vote thereon. The amendments to our
Restated Certificate of Incorporation requires the affirmative vote of the
holders of a majority of the shares of our Class A and Class B common stock
outstanding voting as separate classes.
Fairness opinion of our financial advisor
On June 23, 2005, Harris Nesbitt delivered its oral opinion to our Board of
Directors to the effect that, as of such date, based upon and subject to certain
qualifications the Exchange contemplated by the merger is fair, from a financial
point of view to our stockholders. Harris Nesbitt subsequently confirmed this
oral opinion by delivery of a written opinion, dated July 18, 2005, to our Board
of Directors. The full text of Harris Nesbitt's written opinion is attached as
Annex B to this document, and the opinion is incorporated by reference into this
proxy statement. The opinion of Harris Nesbitt does not constitute a
recommendation to any of our stockholders regarding how you should vote on the
proposals to approve the transactions. You should carefully read the opinion in
its entirety.
Hirsch retained Harris Nesbitt in March 2005 to provide a fairness opinion
in connection with the merger (the "Merger") of SSE Acquisition Corp, a wholly
owned subsidiary of Hirsch ("SSE") with and into Sheridan Square Entertainment,
Inc. ("Sheridan"), with Sheridan continuing on as the surviving corporation and
a wholly-owned subsidiary of Hirsch. The stockholders of Hirsch immediately
prior to the Merger will own thirty-eight (38%) of Hirsch immediately following
the Merger and the stockholders of Sheridan immediately prior to the Merger will
own sixty-two (62%) of Hirsch immediately following the Merger (the "Exchange").
Harris Nesbitt is an affiliate of the BMO Financial Group.
Hirsch's board of directors retained Harris Nesbitt based on Harris
Nesbitt's qualifications, experience and expertise in investment banking,
particularly its experience and expertise in providing investment banking
services to the media industry. As part of Harris Nesbitt's investment banking
business, it is regularly engaged in the valuation of businesses and their
securities in connection with mergers, acquisitions, divestitures,
restructurings, recapitalizations, underwritings, secondary distributions of
listed and unlisted securities, private placements and valuations for corporate
and other purposes. The board requested that Harris Nesbitt evaluate the
fairness of the Exchange, from a financial point of view, to Hirsch's
stockholders.
At the meeting of Hirsch's board of directors held on July 18, 2005, Harris
Nesbitt rendered its written opinion (the "Fairness Opinion") that, as of that
date and based upon and subject to the various assumptions made, procedures
followed, matters considered and limits of review as set forth in its opinion,
the Exchange was fair, from a financial point of view, to those stockholders.
The full text of the Fairness Opinion, dated July 18, 2005, is attached as
Annex B to this proxy statement. The Fairness Opinion sets forth, among other
things, the assumptions made, procedures followed, matters considered and
limitations on the scope of the review undertaken by Harris Nesbitt in rendering
its opinion. We urge you to read the entire opinion carefully. Harris Nesbitt's
opinion is directed to Hirsch's board of directors and addresses only the
fairness of the Exchange, from a financial point of view, to holders of Hirsch
common stock as of the date of the opinion. Harris Nesbitt's opinion does not
address any other aspect of the Merger and does not constitute a recommendation
to any holder of Hirsch common stock as to any matter relating to the merger or
how to vote at the Special Meeting. This summary is qualified in its entirety by
reference to the full text of the Fairness Opinion.
In connection with rendering its opinion, Harris Nesbitt, among other
things:
o Reviewed a draft of the Merger Agreement provided to them on July 15,
2005, substantially incorporating the terms set forth in that certain
Term Sheet dated March 30, 2005 between Hirsch and Sheridan;
o Reviewed Hirsch's report on Form 10K and related financial information
for the fiscal years ended January 29, 2005 and January 31, 2004 and
Hirsch's report on Form 10-Q and related unaudited financial
information for the three months ended April 30, 2005 and the
definitive proxy statement dated August 6, 2004;
o Reviewed Sheridan's audited financial information for the fiscal year
ended December 31, 2004 and for the period from July 29, 2003 to
December 31, 2003 and Sheridan's unaudited financial information for
the three months ended March 31, 2005;
o Reviewed certain financial and operating information relating to the
business, earnings, cash flow, assets, liabilities and prospects of
Hirsch and of Sheridan, furnished to Harris Nesbitt by Hirsch and
Sheridan, respectively;
o Reviewed the confidential private placement memorandum of Sheridan
dated December 3, 2004;
o Conducted discussions with members of Hirsch's senior management and
that of Sheridan concerning Hirsch's and their respective operations,
financial condition and prospects;
o Compared Hirsch's financial performance and that of Sheridan with that
of certain companies that Harris Nesbitt deemed to be reasonably
similar to Hirsch and to Sheridan, respectively;
o Compared the proposed financial terms of the transactions contemplated
by the merger agreement with the financial terms of other mergers and
acquisitions which Harris Nesbitt deemed to be relevant;
o Performed discounted cash flow analysis for Sheridan; and
o Reviewed such other financial studies and performed such other
analysis and investigations and took into account such other matters
as Harris Nesbitt deemed appropriate.
In its review and analysis and in formulating its opinion, Harris Nesbitt
relied upon and assumed, without independent verification, the accuracy and
completeness of all of the financial and other information publicly-available or
provided to it. With respect to the financial forecasts, projections and other
information provided to it, Harris Nesbitt assumed that those financial
forecasts, projections and other information were reasonably prepared on bases
reflecting the best currently available estimates and good faith judgments at
the time of both Hirsch's and Sheridan's senior management teams of their
respective company's future competitive, operating and regulatory environments
and the related financial performance of Hirsch and Sheridan. Harris Nesbitt
expresses no opinion as to those financial forecasts, projections and other
information, the reasonability of their preparation, the judgments made or the
assumptions on which they were based.
Harris Nesbitt did not conduct a physical inspection of any of Hirsch's
properties or facilities or those of Sheridan. In addition, it assumed that the
executed version of the merger agreement will not differ in any material respect
from the last draft it had reviewed and that the Merger will be consummated on
the terms set forth therein, without waiver or modification of any material
term. Harris Nesbitt based its opinion on economic, market and other conditions
and circumstances as they existed and could be evaluated and the information
made available to it as of the date of the opinion.
In arriving at its opinion, Harris Nesbitt did not ascribe a specific range
of values to Hirsch and Sheridan, but rather made its determination as to
fairness, from a financial point of view, of the Exchange contemplated by the
Merger on the basis of the financial and comparative analyses summarized below.
The preparation of a fairness opinion involves various determinations as to the
most appropriate and relevant method of financial and comparative analysis and
the application of these methods to the particular circumstances. Consequently,
a fairness opinion is not readily susceptible to summary description. Harris
Nesbitt believes that its analyses must be considered as a whole and that
considering any portions of those analyses and factors without considering all
of them could create a misleading or incomplete view of the process underlying
its opinion.
The following is a summary of the material financial analyses performed by
Harris Nesbitt in connection with the preparation of the Fairness Opinion, dated
as of July 18, 2005. Some of these summaries of financial analyses include
information presented in tabular format. In order to understand fully the
financial analyses used by Harris Nesbitt, the tables must be read together with
the text of each summary. The tables alone do not constitute a complete
description of the financial analyses. Considering the data set forth below in
the tables without considering the full narrative description of the financial
analyses, including the methodologies and assumptions underlying the analyses,
could create a misleading or incomplete view of Harris Nesbitt's financial
analyses.
Review of Sheridan operations
Harris Nesbitt reviewed actual and projected Sheridan operating statements
including fiscal year 2004 (actual), twelve months ended March 31, 2005 (actual)
and fiscal years 2005, 2006, 2007, 2008 and 2009 (estimated) based upon growth
rates provided by management ("Base Case"). In addition, Harris Nesbitt prepared
a recasted 2006 through 2009 estimate at a lower assumed rate of revenue growth
and operating margins ("Modified Case").
Sheridan comparable company analysis
Harris Nesbitt compared selected financial information of Sheridan with
publicly-available information of selected comparable public companies. The
selected comparable companies were chosen because they are involved in the media
industry and they demonstrate certain similar characteristics to those of
Sheridan. Specifically, the comparable companies considered by Harris Nesbitt
were:
o EMI Group plc
o Warner Music Group
o Edel Music AG
o Sanctuary Group plc
For each of the selected comparable companies, Harris Nesbitt analyzed the
respective multiples of the enterprise value of these companies to their sales,
and earnings before interest, taxes, depreciation and amortization ("EBITDA").
The following table summarizes the analysis:
Implied Valuation ($ in millions)
SSE Result Multiple Range Enterprise Value Less Net Debt Equity Value
---------- -------------- ---------------- ------------- ------------
LTM Sales $39.5 0.8x-1.2x $31.6-$47.4 $20.9 $10.7-$26.5
2005E EBITDA $4.0 6.0x-8.0x $24.0-$32.0 $20.9 $2.8-$10.7
2006E EBITDA (Base Case) $7.0 5.0x-7.0x $35.0-$49.0 $20.9 $14.1-$28.0
2006E (Modified Case) $6.4 5.0x-7.0x $32.0-$44.8 $20.9 $11.2-$23.8
No company included in the peer group is identical to Sheridan. In
selecting and evaluating the comparable companies, Harris Nesbitt made judgments
and assumptions with regard to industry performance, general business, economic,
market and financial conditions, and other matters. Because of the inherent
differences between the business, operations, financial condition and prospects
of Sheridan and those of the selected comparable companies, Harris Nesbitt
believed it was inappropriate to, and therefore did not, rely solely on the
quantitative results of the comparable company analysis.
Precedent M&A transactions valuation analysis
The precedent merger and acquisition transactions valuation analysis
provides a benchmark based on the consideration paid in selected comparable
merger and acquisition transactions. For this analysis, Harris Nesbitt compared
financial statistics from publicly-available information for selected comparable
transactions completed in Sheridan's industry. The following table presents the
selected transactions utilized in Harris Nesbitt's analysis:
Date June-04 Feb-04 May-03 Apr-02
Target Fantasy Records Warner Music Group Newscorp, Fonovisa Records
Mushroom Records
Acquiror Concord Music, Investor Group Warner Music Group Univision Music Group
Tailwind
Harris Nesbitt analyzed these transactions to discern a multiple of each
company's respective revenues and derived a sales price to revenue multiple
range of 0.9x - 1.3x. Applying this multiple to Sheridan's revenues resulted in
a hypothetical transaction value range of approximately $14.7 million to $30.4
million.
No transaction included in the comparable transactions analysis is
identical to the Merger. Harris Nesbitt made judgments and assumptions with
regard to industry performance, general business, economic, market and financial
conditions and other matters. Many of these matters are beyond the control of
Hirsch, such as the impact of competition on the business of Sheridan, industry
growth and the absence of any material adverse changes in the financial
condition and prospects of Sheridan, Sheridan's industry or the financial
markets in general.
Discounted cash flow analysis
The discounted cash flow analysis provides a net present value of the
projected unlevered free cash flows of Sheridan for the fiscal years 2005
through 2009. Harris Nesbitt applied a range of discount rates of 16% to 20% and
a range of exit multiples of 6.0x to 8.0x of estimated 2009 EBITDA. This
analysis indicated a value range, as illustrated by the tables below, of $37.2
million to $61.8 million based on Sheridan's projections and $13.4 million to
$26.9 million based on the projections as modified by Harris Nesbitt.
Discount Rate (Base Case)
16% 17% 18% 19% 20%
6.0x $ 45.8 $ 43.5 $ 41.3 $ 39.2 $ 37.2
EBITA 6.5x $ 49.8 $ 47.3 $ 45.0 $ 42.8 $ 40.6
Exit
Multiple 7.0x $ 53.8 $ 51.2 $ 48.7 $ 46.4 $ 44.1
7.5x $ 57.8 $ 55.1 $ 52.4 $ 49.9 $ 47.5
8.0x $ 61.8 $ 58.9 $ 56.2 $ 53.5 $ 51.0
Discount Rate (Modified Case)
16% 17% 18% 19% 20%
EBITA
Exit 6.0x $ 18.2 $ 16.9 $ 15.7 $ 14.5 $ 13.4
Multiple
6.5x $ 20.4 $ 19.0 $ 17.7 $ 16.4 $ 15.2
7.0x $ 22.6 $ 21.1 $ 19.7 $ 18.4 $ 17.1
7.5x $ 24.7 $ 23.2 $ 21.7 $ 20.3 $ 19.0
8.0x $ 26.9 $ 25.3 $ 23.8 $ 22.3 $ 20.9
Review of Hirsch operations
Harris Nesbitt reviewed Hirsch's operating statements for fiscal years
ending January 31, 2003, 2004 and 2005 in addition to Hirsch's estimated
operating statement for fiscal year ending January 31, 2006.
Hirsch comparable company analysis
Harris Nesbitt compared selected financial information of Hirsch with
publicly-available information of selected comparable public companies. The
selected comparable companies were chosen because they are involved in the
industrial distribution industry. Specifically, the comparable companies
considered by Harris Nesbitt were:
o Key Technologies, Inc.
o Oilgear Co.
o Quipp, Inc.
For each of the selected comparable companies, Harris Nesbitt analyzed the
respective multiples of the enterprise value of these companies to their sales,
and earnings before interest, taxes, depreciation and amortization ("EBITDA"),
as well as equity value to book value. The following table summarizes the
analysis:
Implied Valuation
Hirsch Result Multiple Range Enterprise Value Plus Net Cash Equity Value
------------- -------------- ---------------- ------------- ------------
LTM EBITDA $0.2 7.5x-9.5x $1.5-$1.9 $9.3 $10.8-$11.2
2005E EBITDA $0.8 6.5x-8.5x $5.2-$6.8 $9.3 $14.5-$16.1
3/31/05 $14.2 1.0x-1.2x $4.9-$7.7 $9.3 $14.2-$17.0
Book Value
Implied Valuation Range $13.2-$14.9
No company included in the peer group is identical to Hirsch. In selecting
and evaluating the comparable companies, Harris Nesbitt made judgments and
assumptions with regard to industry performance, general business, economic,
market and financial conditions, and other matters. Because of the inherent
differences between the business, operations, financial condition and prospects
of Hirsch and those of the selected comparable companies, Harris Nesbitt
believed it was inappropriate to, and therefore did not, rely solely on the
quantitative results of the comparable company analysis.
Harris Nesbitt also determined that Hirsch's market capitalization
indicated a valuation range of $7.4 million to $12.1 million for Hirsch based on
its fifty-two (52) week high and low closing price. Based upon these analyses
Harris Nesbitt determined a summary value range of $13.2 million to $14.9
million for Hirsch.
Relative valuation of Hirsch and Sheridan
Harris Nesbitt compared the valuation ranges for Sheridan and Hirsch in
order to derive sets of relative ownership percentages of the combined company
by stockholders of Sheridan and Hirsch. Hirsch's summary valuation range of
$13.2 million to $14.9 million was compared to Sheridan's valuation ranges based
on sales multiples, EBITDA multiples for various periods, multiples related to
precedent M&A transactions and discounted cash flow valuation amounts. The
following table summarizes the analysis:
Relative Hirsch Ownership
Sheridan valuation methodology
Comparable Public Companies
High Low
---- ---
LTM Sales Multiple 58.2% 33.3%
2005E EBITDA Multiple 84.0% 55.2%
2006E EBITDA Multiples Base Case 51.5% 32.0%
2006E EBITDA Multiples Modified Case 57.4% 35.6%
Precedent Transactions
High Low
---- ---
LTM Sales Multiple 50.4% 30.2%
Discounted Cash Flow Analysis
High Low
---- ---
Base Case 28.6% 17.6%
Modified Case 52.7% 32.9%
Based on the above, Harris Nesbitt formed the opinion that the relative
valuation in the merger agreement of 38% for Hirsch and 62% for Sheridan is fair
to Hirsch's stockholders from a financial point of view.
The preparation of a fairness opinion is a complex process and,
consequently, a fairness opinion is not easily summarized. Harris Nesbitt
believes that selecting any portion of its analyses, without considering all of
its analyses, would create an incomplete view of the process underlying its
opinion. In addition, Harris Nesbitt may have given various analyses and factors
more or less weight than other analyses and factors, and may have deemed various
assumptions more or less probable than other assumptions. As a result, the
ranges of considerations resulting from any particular analysis described above
should not be taken to be Harris Nesbitt's view of the actual value of the
Exchange. In performing its analyses, Harris Nesbitt made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters. Many of these matters are beyond the control of Hirsch and
any estimates contained in Harris Nesbitt's analyses are not necessarily
indicative of future results or actual values, which may be significantly more
or less favorable than those suggested by such estimates.
Harris Nesbitt conducted the analyses described above solely as part of its
analysis of the fairness, from a financial point of view, of the Exchange
resulting from the Merger and its delivery of the Fairness Opinion to the Hirsch
board of directors. These analyses do not purport to be appraisals or to reflect
the prices at which the securities to be issued in the Merger to the
stockholders of Hirsch may trade at any time.
The type and amount of the Exchange contemplated in the Merger was
determined through arm's-length negotiations between Hirsch and Sheridan and
were approved by Hirsch's and Sheridan's board of directors. Harris Nesbitt did
not recommend any specific consideration to Hirsch or that any specific amount
of consideration constituted the only appropriate consideration. In addition,
Harris Nesbitt's opinion was one of several factors taken into consideration by
Hirsch's board of directors in making its decision to approve the Merger.
Consequently, Harris Nesbitt's analysis as described above should not be viewed
as determinative of the opinion of the board of directors with respect to the
value of the Exchange or whether the board of directors would have been willing
to agree to different merger consideration.
Under the terms of an engagement letter, dated March 16, 2005, as amended,
between Hirsch and Harris Nesbitt, Hirsch agreed to pay Harris Nesbitt a
fairness opinion fee in an amount equal to $250,000 payable upon delivery of the
Fairness Opinion. In addition to the above described compensation, Hirsch agreed
to reimburse Harris Nesbitt for all of its reasonable out-of-pocket expenses
incurred in connection with its engagement and to indemnify Harris Nesbitt and
its affiliates and their respective directors, officers, agents and employees
against liabilities and expenses, including liabilities under the federal
securities laws, related to or arising out of Harris Nesbitt's engagement.
BUSINESS OF SHERIDAN
Overview
Sheridan is a full-service, independent music company that had net sales of
approximately $38.0 million with a net loss of $6.0 million for the year ended
December 31, 2004. Sheridan had net sales of approximately $19.0 million with a
net loss of $2.0 million for the six month period ended June 30, 2005.
Sheridan was formed in July 2003 for the purpose of building a full-service
independent music company through acquisition of established independent record
labels and music catalogs, the release of new music, the development of
proprietary catalogs internally and acquisition of a full-service distribution
operation. In July 2003, Sheridan acquired all of the stock of Musicrama, Inc.,
("Musicrama"), a leading importer and distributor of music products, such as CDs
and DVDs, since its founding in 1978. In August 2003, Sheridan acquired all the
membership interests of Sheridan Square Entertainment, LLC, an independent
record company doing business as Artemis Records, and its affiliate, Artemis
Classics, LLC.
Since the initial acquisitions in 2003, Sheridan has purchased and/or
licensed additional catalogs from third parties and continues to release new
music and develop its music catalogs internally. At present, Sheridan is
comprised of (i) the Label Group, consisting of Artemis Records, Artemis
Classics/Vanguard Classics, Tone-Cool Records, Corp., Triloka Records, Artemis
Gospel, Ropeadope, Sheridan Square Records and labels comprising Compendia
Music; (ii) the Distribution Group, led by Musicrama and (iii) the Publishing
Group consisting of Sheridan Square Publishing Group, LLC.
The Sheridan Label Group
Artemis Records. Artemis Records is an independent record label formed in
1999. Since its formation, Artemis Records has grown its annual revenues to over
$14 million and has had a compounded annual growth rate, or CAGR, of
approximately 3.9% over the past four years, during a period in which the music
industry experienced significant decline. During that time, Artemis Records has
had five albums achieve gold status, which means sales level of greater than
500,000 units per album, among them Warren Zevon's "The Wind" and The Baha Men's
"Who Let the Dogs Out", and received a number of Grammy awards and nominations.
In 2000 and 2001, Billboard Magazine named Artemis Records the number one
independent label in the United States based on actual sales.
The diversified Artemis Records' roster has produced albums by recording
artists including , but not limited to, the : The Pretenders, Jimmy Cliff,
Better Than Ezra, Zakk Wylde's Black Label Society, Steve Earle, Kittie, Susan
Tedeschi, Warren Zevon, Russell Crowe, Jesse Malin, Sugarcult, Dope, Jaguar
Wright, Ruff Ryders, Freddie Jackson and Little Barrie.
Artemis Classics/Vanguard Classics. In January 2003, Artemis acquired the
Vanguard Classics catalogue for approximately $300,000. Founded in 1950,
Vanguard Classics includes works ranging from eighteenth century to contemporary
music. The catalogue of 1,200 masters includes such titles as, "Cantaloube:
Songs of the Auverne" - complete, "Beethoven: Late String Quartets" - Yale
String Quartet, "Bach: Sonatas and Partitas for Solo Violin" - Joseph Szigeti,
as well as the recordings of Alfred Deller, counter-tenor and The Mahler, Brahms
and Sibelius symphony cycles with the Utah Symphony Orchestra and pianist Alfred
Brendel. The label has also seen recent success with releases from Leon Fleisher
("Two Hands"), Gil Shaham, and Matt Haimovitz.
Triloka Records/Karuna Music. In October 2003, Sheridan purchased
substantially all of the assets of Triloka Records/Karuna Music, ("Triloka"),
for approximately $800,000. Triloka is an independent label that was formed in
1991 to focus on music for yoga, meditation and relaxation. Triloka's leading
artist is Krishna Das, one of the most well-known artists in the yoga community
and a top performer for Triloka. Triloka sells its product to both conventional
music retailers as well as through specialty yoga and wellness stores, a form of
non-traditional distribution that Sheridan believes is becoming a bigger and
more important part of the overall music business.
Tone-Cool. In May 2004, Sheridan purchased all of the outstanding equity of
Tone-Cool Records, Corp., ("Tone-Cool"), for $750,000. Tone-Cool is the
proprietor of a highly regarded blues specialty catalog, including Susan
Tedeschi, The North Mississippi All-Stars, Sean Costello, Hubert Sumlin, and The
Fabulous Thunderbirds and many others.
Ropeadope. In September 2004, Sheridan purchased all of the catalogue
assets of Ropeadope Records, or Ropeadope, for $150,000. Ropeadope is the
proprietor of a highly regarded alternative and jazz catalog, including Charlie
Hunter, Antibalas, Tin Hat Trio and the Dirty Dozen Brass Band.
Compendia Media Group. In December 2004, Sheridan purchased substantially
all of the music assets of the Nashville based Compendia Media Group
("Compendia"), including the names and assets of the record labels Intersound,
Light Records and Compendia Records, for approximately $7.8 million, with
payment of the remaining $3 million to be suspended for a period of two years to
cover certain indemnity obligations by the sellers. The group consists of four
labels, Artemis Gospel; Artemis Strategic Marketing; Light Records; and
Intersound Records. Through these labels, we produce, market and sell music in a
variety of genres, including gospel, smooth jazz, country, classical, adult rock
and blues. Sheridan's archives include master recordings and artist agreements
by artists including Joan Osborne, Robert Palmer, the Tony Rich Project, The
Beach Boys, Peter Cetera, Dionne Warwick, The Band, Roger Daltrey, Taylor Dayne,
Oak Ridge Boys, Pete Townshend, Suzy Bogguss, Sixpence None The Richer, Juice
Newton, Rick Springfield, Mighty Clouds of Joy, Eddie Rabbitt, Crystal Gayle,
Kansas, George Clinton, Lakeside, Cameo, Dazz Band, Vickie Winans, Andrae Crouch
and Britain's Royal Philharmonic Orchestra. The purchased assets include master
recordings and related artwork, artist and producer agreements, as well as
compositions and songwriter agreements related to a large library of musical
compositions.
Sheridan Distribution Group
Musicrama, Inc. ("Musicrama") is a leading distributor and importer of
music products, such as CDs and DVDs. Musicrama was founded in 1978 by Mark
Jarzebek, its current President and Charles Jarzebek, its current Vice
President. Musicrama has experienced consistent growth in the niche market of
imported music where there is minimal threat of downloading piracy and few
competitors. Musicrama's revenues have grown from approximately $12.8 million in
1999 to approximately $26.5 million in 2004, resulting in a CAGR of 20%, and has
been profitable.
Musicrama specializes in distributing titles that are not readily available
in the United States, mainly featuring musical artists who are already
well-received in the United States. Musicrama's management uses its extensive
industry knowledge, combined with its relationships with retail buyers, to make
determinations of which products to distribute. Recently, Musicrama also
successfully developed and distributed, with United States based producers,
domestically originated product that now accounts for approximately 35% of
Musicrama's revenues.
Revenues are generated primarily from national retail chains and mass
merchants, with a smaller portion of Musicrama's revenue generated from
independent stores, wholesalers, and rack-jobbers. Musicrama has diversified its
customer base in anticipation of Sheridan's planned migration to
self-distribution, and as a result is not dependent upon any one national
account.
Sheridan is using the sales expertise and retail relationships of Musicrama
to distribute a variety of Sheridan products. On May 1, 2005, Musicrama entered
into a two-year agreement with Koch Entertainment Distribution of Port
Washington, New York to provide Musicrama with all pick, pack and ship functions
for its products. This outsourcing of fulfillment functions will allow Musicrama
to focus its management resources and capital on the expansion of the sales and
account base, and will convert a substantial portion of Musicrama's distribution
costs from fixed to variable.
Sheridan Square Publishing Group
The assets purchased described above included ownership in the underlying
compositions of approximately 1,200 songs. Sheridan has consolidated all of
these copyrights in this subsidiary. The Publishing Group has started to
successfully exploit these compositions through use on records, films,
television programs and commercials. Recently a sample of a composition by
Andrae Crouch was licensed to Universal Music for use on an album by Snoop Dogg.
Industry overview
Sheridan believes that current conditions in the recorded music industry
represent the confluence of several factors, including, among others:
o the emergence of alternative distribution channels;
o the consolidation of the industry, both labels and retailers;
o the emergence of pay-for-service digital distribution; and
o the impact of piracy on "Top 40" revenues.
Historically, the transition from one format to another, such as LP's to
CD's, has caused severe short term dislocation and impacted pricing models.
Sheridan believes that the uncertainty caused by the factors outlined above and
discussed below has reduced liquidity and asset prices in the music industry,
representing a unique opportunity to invest. Sheridan also believes that current
conditions in the recorded music industry present an opportunity to aggregate
content at attractive values, while the industry transitions from physical
retail as the dominant distribution channel to digital distribution channels
with specialty physical distribution. The factors leading to this situation
include (i) the emergence of alternative distribution channels which has allowed
music content to become widely available; (ii) the rise in popularity of new
formats for digital distribution of music content which have contributed to the
existing dislocation within the music industry; and (iii) label and retail
consolidation in the music industry which has led to an increased availability
of music content for acquisition.
Despite the loss of revenues associated with illegal downloading from "top
40" artists, the following new distribution channels have emerged, which have
allowed music content to become widely available:
o Branded specialty retail compilations, such as Pottery Barn and
Starbucks;
o Cellular phone ring tones synchronization and music downloading;
o Music licensing and soundtrack sales, such as movies, television,
video games and commercials; and
o Satellite radio.
Although not yet accounting for a significant portion of recorded music
sales, the rise in popularity of new formats for digital distribution of music
content has demonstrated the willingness and enthusiasm of consumers to purchase
music content in non-traditional formats, which has contributed to the existing
dislocation within the music industry. Insight Digital Media forecasts that
within five years, 15-20%, or $4.0 - $6.0 billion, of the industry's total
recorded music sales will be accounted for via online music sales. Sheridan
believes that the following factors will continue, and accelerate, the
development and growth of digital distribution channels:
o The entry of Apple iTunes, Real Networks Rhapsody, AOL, Amazon, MTV,
Dell, Sony and Microsoft as online music service providers;
o The shift in sales mix to discount retailers, which will accelerate
the move towards lower cost digital distribution;
o The growth in MP3 players, digital ring tunes, audio-video players and
satellite radio;
o The growth in high-speed broadband connections to the internet, which
will continue to drive demand for content rich media services such as
online music services; and
o The aggressive servicing of such digital distribution channels by
content and rights owners who will benefit from these new channels,
even at lower per unit price points, due to the difference in the
economics of digital distribution, such as lower manufacturing,
printing, wholesale and retail expenses, as compared to physical
retail channels.
The consolidation of major music companies has resulted in an increased
overhead cost structure and a reliance by the major music companies on "platinum
plus", meaning sales levels of greater than 1,000,000 units per album,
performance requirements to justify their A&R investment. As a result, artists
whose sales levels are unprofitable for the major labels, meaning sales levels
ranging from 50,000 to 500,000 units per album, can be very profitable for
smaller independent labels such as Artemis. In addition, these artists can be
more predictable for sales estimates than newer acts, as they have an
established record history with a more quantifiable sales base. This recording
history allows for a more proportional and, therefore, less risky, A&R
commitment and royalty advance, which increases the likelihood of recoupment and
reduces the label's cash exposure.
Historically, major record labels have been the principal source of
liquidity for music catalogue assets, but due to their weakened financial
positions, resulting from debt financed expansions and lost revenues associated
with illegal downloading of their "Top 40" acts, liquidity for catalogue assets
has nearly disappeared. As a result, music and music related content are now
available at historically low price levels. Sheridan believes that this is an
opportune time to aggregate content.
Sheridan's strategy
Sheridan's strategy is to take advantage of the opportunities made
available through the dislocations occurring in the music industry and the
decrease in liquidity for music assets, by:
o Increasing content ownership;
o Increasing exploitation of Sheridan's owned and licensed content
through existing and emerging distribution channels, including through
online and other digital distribution markets; and
o Participating in the new retail models evolving within the music
industry.
Sheridan believes that even during the correction period being experienced
by the music industry, controlling the sale of one's own product is of critical
importance in ensuring priority treatment of owned content and maintaining a
connection with the marketplace. Physical distribution is not going away but is
rather changing into a means of distribution for more specialized product and
less "Top 40" popular music.
Music is no longer restricted to being sold only in music stores. The
evolution of the sales medium has developed to include almost any location where
goods are sold, such as convenience stores, Starbucks, big-box and specialty
retailers to online. In fact, music products continue to be among the biggest
beneficiaries of impulse purchases by consumers. As such, the challenge of
distribution in this new environment of ubiquity will be getting product to
where the ears are and reducing the reliance on consumers actively seeking
product at traditional storefronts.
Acquiring and aggregating niche music content with established and
recurring fan bases.
Sheridan believes that current conditions in the recorded music industry
present a unique opportunity to aggregate niche content at attractive prices,
while the industry completes a realignment during the transition from
predominantly physical retail distribution channels to multiple physical and
digital distribution channels. Sheridan's strategy for building its catalogue
and its roster in the Label and Publishing Groups is to exploit the temporary
uncertainty surrounding the music industry by opportunistically aggregating
recording rights from selected new artists, musically exquisite established
artists, and from under-valued independent labels with a history of
profitability and recurring cash flow streams. Specifically, Sheridan intends to
avoid major label "Top 40" artists and focus on artists of undeniable artistic
integrity, with a loyal and devoted fan base, that will generate reasonably
predicable sales that are commensurate with the investment Sheridan will be
required to make in production and marketing.
o Selective acquisition of new artists. To find and selectively sign new
never before signed artists, with undeniable talent, by leveraging
Artemis's strength of management team and its reputation for
integrity.
o Selective acquisition of previously signed artists. To find and
selectively sign artists who have previously released albums and have
a sales history, but who still reflect the dynamics of a developing
act. Artemis believes these artists did not reach their potential at
their prior label frequently as a result of the prior label's priority
structure and promotion strategy.
o Acquisition of "Established" artists. To exploit the temporary
uncertainty surrounding the music industry to acquire rights to "
established" artists formerly signed to major labels, with built-in
fan bases and recurring cash flow streams, but who are no longer
strategic to the major label's long-term plans. The displacement in
the market has created a situation where some of the most respected
artists in American music are available to a company with Sheridan's
strength and expertise.
o Maintaining a diversified roster. To maintain a musically diversified
roster that reflects the industry change in paying music consumer
demographics (for example, the older adult consumer).
o Acquisition of catalogues. To acquire catalogues that may provide
stable, predictable revenue streams with minimal ongoing maintenance
costs.
o Release of content created by culturally significant artists. To sign
culturally significant artists whose releases provide incremental
revenue as well as building an attractive base to facilitate future
acquisitions (for example, Les Nubians, Krishna Das, Hubert Sumlin and
Al Franken).
Leveraging the economics of Sheridan's music distribution company to
further reduce Sheridan's acquisition costs.
The execution of Sheridan's strategy involves using music distribution
operations. Sheridan believes that combining the ownership of proprietary
musical content and distribution will lead to significant margin expansion
opportunities as a result of the savings from transferring distribution
agreements internally.
Building and monetizing a catalogue of established, profitable music
content distributed through traditional and alternative channels, including
digital.
In addition to using Sheridan's traditional distribution channel, Sheridan
intends to exploit its existing and future catalogue assets through various
actions including:
o catalogue licensing, for uses such as television commercials,
compilations and videogames;
o music branding opportunities;
o sponsorship and promotional tie-ins;
o film soundtrack licensing and distribution; and
o alternative distribution, such as specialty retail compilation
opportunities.
The announced and impending additions of MTV Networks, Sony Music, Dell
Computer, AOL, Microsoft, Amazon, Apple iTunes, RealNetworks Rhapsody,
Listen.com, Napster and Virgin Megastores as online music service providers will
continue to accelerate the development of pay for service digital distribution
channels, which also includes MP3 players, cellular phones, and satellite radio.
Sheridan has entered into digital distribution agreements for the
distribution of its owned and licensed content with Apple iTunes, Audiolunchbox,
Real.com, Napster, eMusic, Music Now (affiliated with Best Buy and Circuit
City), Microsoft Music Service, Liquid Audio (affiliated with Wal-Mart and Tower
Records), MusicMatch (owned by Yahoo!), Buy.com, DiscLogic, MusicNet, Karma
Download, Next Radio (owned by BellSouth), Puretracks (Canadian), Altnet,
DownloadPunk, Music Choice (for streaming videos), Audible.com (for audiobooks
and spoken word recordings), and Starbucks (for download use by its in-store
kiosks). Sheridan has also entered into agreements with Zingy,
Faithwest/Modtones, and WiderThan.com for the digital downloading of its master
recordings as ring tones, ring tunes and ringback tunes.
In 2004, Sheridan entered into a joint venture with JSM Music ("JSM"), one
of the major providers of music for television commercials. Through this joint
venture, Sheridan hopes to achieve sales of recordings by Artemis Records
artists through their placement in television commercials whose music is sourced
by JSM. JSM has produced and placed in a Chevrolet commercial a new master
recording of "Magic Carpet Ride" performed by Artemis Records' recording artist
Jeffrey Gaines, and has placed in a national Burger King commercial the
recording "Sugar" from the new album of Artemis Records' recording artist Kittie
entitled "Until the End."
Revolving credit facility, term loan and other indebtedness
Sheridan has a $12.5 million revolving credit facility that terminates in
July 2008 and provides for loans, subject to availability based upon eligible
accounts receivable and inventory as defined under the facility. Interest on the
facility is based on the higher of the bank's base rate or the federal funds
rate in effect on that date plus 0.75%. At June 30, 2005, the effective interest
rate was 6.5% per annum and the borrowings totaled $8.5 million. Borrowings
under the facility are secured by all of the assets of Musicrama and Artemis'
distribution receivables and is guaranteed by Sheridan.
Sheridan also had a $2.5 million term loan which matures in August 2006.
Interest on the loan is based on the higher of the bank's base rate or the
federal funds rate in effect on that date plus 3.50%. At June 30, 2005, the
effective interest rate was 9.25% per annum and the outstanding balance was
$78,600. Borrowings under the term loan are secured by all of the assets of
Musicrama and is guaranteed by Sheridan. As of August 1, 2005, the term loan has
been repaid in full.
In connection with the Compendia acquisition, Sheridan has a $10 million
senior secured term loan credit facility that matures in December 2009. On
December 10, 2004, Sheridan drew down $7 million in connection with the
Compendia acquisition. The remaining $3 million can be drawn by Sheridan,
subject to certain conditions, to satisfy, and in accordance with, the holdback
arrangement between Sheridan and Compendia. At June 30, 2005, interest on the
facility was 14.11% per annum and the outstanding balance was $ 7 million.
Sheridan expects these facilities to continue after the merger.
Employees
As of June 30, 2005, Sheridan had 111 full-time employees, 49 of whom were
engaged in record production and marketing operations, 30 of whom were engaged
in distribution operations, and 32 of whom were engaged in corporate
management/administration. Sheridan's employees are not covered by any
collective bargaining agreement with any unions. Sheridan believes that it
maintains satisfactory relations with its employees.
Facilities
Sheridan's principal executive offices, and the headquarters of the Artemis
Label Group, are located at 130 Fifth Avenue, New York, New York 10011. The
phone number at such address is (212) 433-1800. Sheridan has a lease for this
office that expires on November 30, 2005, with a monthly rent of $32,289.16.
Musicrama leases approximately 15,000 square feet for its warehouse and
distribution operations at 43-01 22nd St. 6th Floor, Long Island City, NY 11101.
Musicrama's lease for this property expires on August 31, 2007 and has a monthly
rent of $7,270.87. Artemis Nashville leases approximately 8,000 square feet of
office space at 210 25th Avenue North, Suite 1200, Nashville, TN 37203. Artemis
Nashville's lease for this property expires on October 31, 2005 and has a
monthly rent of $9,221.70. In addition, Sheridan leases two small offices in Los
Angeles and Connecticut, which it pays $4,726 and $1,000 a month respectively.
Legal proceedings
Currently, Sheridan is not a party to or engaged in any material legal
proceedings other than the following:
Sheridan Square Entertainment, Inc./24/7
On May 6, 2003, the record company 24/7 filed a lawsuit in the United
States District Court for the Southern District of New York, being Case No. 03
Civ. 3204, against SSE and Sony Music Entertainment Inc. Sony is indemnifying
SSE's legal fees and expenses in the action. The action alleges that SSE and
Sony, respectively, breached 24/7's distribution contract with 24/7 and engaged
in tortious interference with contract in connection with SSE's decision to
retract the release of 24/7's recording of "The Ketchup Song." SSE and Sony
filed a motion for summary judgment on all counts. The Court granted the motion,
entering judgment on the case in favor of SSE and Sony, as well as dismissing
the case in its entirety. At the end of October, 2004, Sheridan received a
Notice of Appeal to the Second Circuit; the appeal was heard on July 15, 2005.
Sheridan Square Entertainment, Inc./Machat
On August 11, 2005, The Machat Company, whose principal is Steven Machat,
filed a lawsuit in the Supreme Court of the State of New York, New York County,
being Case No. 602903/05, against SSE. Steven Machat was a principal in Free,
Inc., one of two venture partners in the Heat Group/ Free, Inc., the entity who
assigned to SSE the masters embodied in the album THUG MISSES performed by the
recording artist Khia Chambers. The action alleges that SSE has not properly
accounted to and paid Plaintiff, that SSE breached its agreement with Plaintiff
by releasing Khia Chambers from her recording contract, and that SSE tortiously
interfered with Plaintiff's relationship with Khia Chambers. Sheridan believes
it has properly accounted to and paid all parties in interest, and has behaved
properly in all respect in connection with this matter. SSE believes the
allegations are frivolous and without merit. SSE intends to engage counsel and
answer the complaint.
Sheridan Square Entertainment, Inc./Basil Fitzpatrick
In April 2005 an individual named Basil C. Fitzpatrick filed a Petition to
Cancel before the Patent and Trademark Office Trademark Trial and Appeal Board
to cancel Sheridan's registration of the mark "Artemis Records". On May 13, 2005
Sheridan filed an Answer to the Petition to Cancel on May 13, 2005, including
counterclaims against Mr. Fitzpatrick. Sheridan believes Mr. Fitzpatrick's
allegations are without merit.
Compendia/Value Music Concepts
William Kaye, as Credit Representative for Value Music Concepts, Inc. et.
Al v. Compendia Media Group: Pending action in the United States Bankruptcy
Court for the Northern District of Georgia (Case No. 04-06204). The plaintiff in
this action seeks to avoid and recover an alleged preferential transfer of
approximately $85,000 to Compendia Music Group arising from a Chapter 11
bankruptcy proceeding filed by plaintiff on or about January 27, 2003. SSE is
indemnified against claims relating to pre-closing liabilities of Compendia.
Compendia/Dead Reckoning Records
There is a threatened litigation relating to the Exclusive Master Use
License between Compendia Music Group and Dead Reckoning Records, dated as of
April 17, 2002. A third party claims that Dead Reckoning Records did not have
the rights to license the album entitled "Woodstock Nation" by Big House to
Compendia Music Group. SSE is indemnified against claims relating to pre-closing
liabilities of Compendia.
SHERIDAN SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with "Sheridan Square's Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Sheridan Square
consolidated financial statements and the related notes included in Annex G.
The following selected consolidated financial data should be read in
conjunction with the Sheridan Consolidated Financial Statements and the Notes
thereto included in Annex G. The consolidated financial statement data as of
December 31, 2004 and for the period July 29, 2003 (inception) through December
31, 2003 for Sheridan are derived from, and qualified by reference to, the
audited Consolidated Financial Statements included in Annex G. For Musicrama,
the audited Consolidated Financial Statements the period January 1, 2003 through
July 31, 2003 and the year ended December 31, 2002 included in Annex I as well
as the unaudited Consolidated Financial Statements for the years ended December
31, 2001 and 2000, are derived from, and qualified by reference to, the
financial statements and should be read in conjunction with those Consolidated
Financial Statements and the Notes thereto. We have also provided Sheridan's
unaudited consolidated financial statements for the six months ended June 30,
2005 and 2004 in Annex K. The unaudited consolidated financial statements of
Sheridan, in the opinion of management, reflect all material adjustments, which
consists of normal recurring adjustments necessary for a fair presentation of
such data.
Sheridan Square Musicrama (4) Sheridan Square
Entertainment Entertainment (5)
Year Ended July 31 - January 1- Year Ended Year Ended Year Six Months Ended
Ended
December December July 31, December December December
31, 31, 31, 31, 31, June 30,
- ------------------- --------- --------- -------- --------- --------- --------- --------------
Sheridan Square 2004 2003 2003 2002 2001 2000 2005 2004
Entertainment and (1)
subsidiaries --------- --------- -------- --------- --------- --------- --------------
(in thousands)
Statement of
Operations Data:
Net sales $ 37,991 $ 17,279 $ 13,199 $ 26,024 $ 20,765 $ 18,308 $ 19,013 $ 16,960
Cost of sales 24,762 10,605 8,705 18,141 15,458 12,842 9,846 10,944
Operating expenses 18,352 5,933 2,866 5,515 5,146 5,402 10,301 8,042
Other Expenses
(income) (2,3) 859 934 81 104 (8) -- 889 247
Income (loss) from
operations before
income tax
provision (benefit)
(2,3) (5,982) (193) 1,547 2,264 169 64 (2,023) (2,273)
Income tax
provision - - 34 141 16 37 - -
-------- -------- -------- -------- -------- -------- -------- --------
Net Income (loss) $ (5,982) $ (193) $ 1,513 $ 2,123 $ 153 $ 27 $(2,023) $ (2,273)
========= ======== ======== ======== ======== ======== ======== ========
(1) Represents period from July 2003 (inception) through December 31,
2003.
(2) Includes $194,000 in abandoned acquisition expenses for 2004.
(3) Includes $760,000 in lease settlement charges associated with the
closure of a facility in California for 2003.
(4) Represents historical financial statement data for the existing entity
of Musicrama prior to its acquisition by Sheridan.
(5) From July 31, 2003 (the date of inception for Sheridan), Musicrama is
included in Sheridan's financial results.
Sheridan Square Entertainment, Inc. and December 31, June 30,
subsidiaries (in thousands of dollars) (in thousands
of dollars)
--------------------------------------- ------------------------- ------------------
2004 2003 2005
---------- ----------- ------------------
Balance Sheet Data:
Working capital........................... $2,056 $3,135 $5,987
Total assets.................................. 50,019 38,728 51,885
Long-term debt, less current maturities....... 15,532 7,138 18,865
Stockholders' equity.......................... $11,537 $13,423 $13,042
Sheridan Square Entertainment, Inc.
Summarized Quarterly Data
Fiscal Quarters
$ in thousands
------------------------------------------------------------
(unaudited)
2004 First Second Third Fourth
------------ ------------ ------------ ------------
Net Sales....................................... $ 8,017 $ 8,942 $ 11,168 $ 9,864
Gross profit.................................... 3,024 2,992 3,950 3,263
Net income (loss)............................... (949) (1,324) (1,520) (2,189)
============ ============ ============ ============
2003 First Second Third Fourth
------------ ------------ ------------ ------------
Net Sales....................................... $ 0 $ 0 $ 8,034 $ 9,245
Gross profit.................................... 0 0 3,128 3,546
Net income (loss)............................... 0 0 1,439 (1,632)
============ ============ ============ ============
SHERIDAN MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains forward-looking statements which
involve risks and uncertainties. When used herein, the words "anticipate",
"believe", "estimate" and "expect" and similar expressions as they relate to
Sheridan or its management are intended to identify such forward-looking
statements. Sheridan's actual results, performance or achievements could differ
materially from the results expressed in or implied by these forward-looking
statements. Factors that could cause or contribute to such differences should be
read in conjunction with, and are qualified in their entirety by, Sheridan's
Consolidated Financial Statements, including the Notes thereto. Historical
results are not necessarily indicative of trends in operating results for any
future period. As used herein, "fiscal year" and "fiscal" refers to the
applicable fiscal year ending December 31 of the applicable calendar year.
Fiscal year 2004 ended on December 31, 2004.
General
Sheridan is a full-service, independent music company that had generated
net sales of approximately $38.0 million for the twelve month period ended
December 31, 2004, and had a net loss of approximately $6.0 million for the
twelve month period ended December 31, 2004. Sheridan had net sales of
approximately $19.0 million and had a net loss of $2.0 million of the six month
period ended June 30, 2005.
Sheridan was formed in July 2003 for the purpose of building a full-service
independent music company through acquisitions of established independent record
labels and music catalogs, the release of new music, the development of
proprietary catalogs internally, and acquisition of a full-service distribution
operation. In July 2003, Sheridan acquired all of the stock of Musicrama, Inc.,
a New York corporation ("Musicrama"), an importer and distributor of music
products (e.g., CDs and DVDs) since its founding in 1978; and in August 2003
Sheridan acquired all the membership interests of Sheridan Square Entertainment,
LLC, an independent record company doing business as Artemis Records, and its
affiliate Artemis Classics, LLC.
Since the initial acquisitions in the summer of 2003, Sheridan has
purchased and/or licensed additional catalogs from third parties and continued
to release new music and develop its music catalogs internally. At present
Sheridan is comprised of (i) the Label Group, consisting of Artemis Records,
Artemis Classics/Vanguard Classics, Tone-Cool Records, Corp., Triloka Records,
Artemis Gospel, Ropeadope, Sheridan Square Records and labels comprising
Compendia Music; (ii) the Distribution Group, spearheaded by Musicrama and (iii)
the Publishing Group, Sheridan Square Publishing Group, LLC.
Results of Operations
The following table presents certain income statement items expressed as a
percentage of total revenue for the six months ended June 30, 2005 and the
fiscal years ended December 31, 2004 and for the period July 29, 2003
(inception) through December 31, 2003:
December 31,
---------------------------- June 30,
2004 2003 2005
------------ ------------ -------------
Net sales........................................ 100% 100% 100%
Cost of sales.................................... 65.2% 61.4% 51.8%
Operating expenses............................... 48.3% 34.3% 54.1%
Interest expense, net............................ 1.7% 1.0% 4.3%
Other expense (income), net...................... 0.6% 4.4% 0.4%
------------ ------------ -------------
(Loss) income from operations
before income taxes............................ (15.8%) (1.1)% (10.6%)
Income tax provision............................. - - -
Net loss....................................... (15.8%) (1.1%) (10.6%)
============ ============ =============
Use of Estimates and Critical Accounting Policies
The preparation of Sheridan's financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and revenues and
expenses during the period. Future events and their effects cannot be determined
with absolute certainty; therefore, the determination of estimates requires the
exercise of judgment. Actual results inevitably will differ from those
estimates, and such differences may be material to our financial statements.
Management continually evaluates its estimates and assumptions, which are based
on historical experience and other factors that are believed to be reasonable
under the circumstances.
Critical Accounting Policies
Management believes the following critical accounting policies affect its
more significant estimates and assumptions used in the preparation of its
consolidated financial statements:
Revenue Recognition - Sheridan derives its revenue substantially from sales
arising from the distribution of pre-recorded music, the sale of music
recordings (predominantly compact discs) produced by Sheridan, and from the
licensing of Sheridan-owned master recordings. Revenue from music sales is
recognized at the time of shipment to the customer, while licensing revenue is
recognized as income is earned over the term of the agreement. Most sales of
pre-recorded music are made with a right of return of unsold goods. Estimated
reserves for returns are established by management based upon historical
experience and product mix and are subject to ongoing review and adjustment by
Sheridan. These reserves are recorded at the time of sale and are reflected as a
reduction in revenues. The accompanying consolidated balance sheet includes a
provision for returns which has been netted against the accounts receivable of
Musicrama and a liability for the reserve for returns for Artemis, Tone Cool and
Compendia.
Income Taxes - Sheridan files a consolidated federal tax return with its
subsidiaries, and separate state and local corporate tax returns. A deferred
income tax provision based on currently enacted tax rates is included in the
Sheridan's accounts to reflect the temporary differences between the financial
reporting basis and tax basis of the Sheridan's operations. A valuation
allowance of 100% of the deferred tax benefit for the year ending December 31,
2004, in the amount of $2,378,000, was established to provide for income tax
loss carryforwards that potentially will not be utilized against taxable income.
At December 31, 2004, Sheridan had a net operating loss carryforward of
$6,218,000, which expires through 2024, available to reduce taxable income, if
any, in subsequent years. State and local corporate taxes are based on capital
and not on income.
Royalties - Sheridan is obligated to pay royalties to the owners of music
copyrights used in master recordings. Sheridan accrues royalties using
contractual rates and certain estimated rates on units sold. The contractual
liability is computed quarterly and the accrued royalty balance is adjusted
accordingly. The royalty agreements are subject to audit by licensors.
Allowance for Doubtful Accounts - Sheridan does not have a provision for
doubtful accounts. Amounts deemed unrecoverable by management, based on specific
analysis, are written off as they are identified. Estimated reserves for returns
are established by management and at December 31, 2004 and December 31, 2003,
Musicrama's reserve was $1,560,581. Musicrama also provides for an allowance for
customer trade discounts which was $113,105 and $92,674 at December 31, 2004 and
December 31, 2003, respectively.
Inventories - Inventory consists of musical recordings, such as compact
discs, audiocassettes, digital discs, videotapes, and record albums stated at
lower of cost or market as determined under the average cost method, or net
realizable value.
Long lived Assets - Sheridan reviews its long-lived assets, including
property, plant and equipment, identifiable intangibles and purchased
technologies, for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully recoverable. To
determine recoverability of its long-lived assets, Sheridan evaluates the
probability that future undiscounted net cash flows will be less than the
carrying amount of the assets.
Advances to Artists - Advances to artists, which are recoupable against
future royalties, are capitalized only in the case of "proven" artists, which
are defined as those whose past performance and current popularity supports
capitalization. Unearned balances are reviewed periodically and if future
performance is no longer assured, the balances are appropriately reserved.
Six months ended June 30, 2005 compared to six months ended June 30, 2004
Net sales. Net sales for the six months ended June 30, 2005 were $19.0
million, an increase of $2.0 million, or 11.8%, compared to $17.0 million for
the six months ended June 30, 2004. The increase in sales for the six months
ended June 30, 2005 is primarily attributable to the acquisition of Compendia
Media Group in December of 2004, as well a better than expected performance of
certain first quarter new releases in the Label Group, including Zakk Wylde's
Black Label Society.
Cost of sales. For the six months ended June 30, 2005, cost of sales
decreased $1.1 million to $9.8 million from $10.9 million for the six months
ended June 30, 2004. For the six months ended June 30, 2005 gross margin was
48.2% an improvement of 12.8% over 35.4% for the six months ended June 30, 2004.
The decrease in cost of sales was primarily a result of reduced distribution
costs from the transfer of 3rd party distribution to in-house, increased digital
sales as a percentage of total sales as well as a more than 20% reduction in
manufacturing costs and reduced royalty expenses associated with the increase in
digital download revenue.
Operating Expenses. For the six months ended June 30, 2005, operating
expenses increased $2.3 million to $10.3 million from $8.0 million for June 30,
2004 primarily as a result of the Compendia acquisition. Operating expenses as a
percentage of sales remained relatively constant resulting from the
rationalization of revenues to the costs associated with the acquisition.
Other Expense (Income). Interest expense for the six months ended June 30,
2005 increased $0.6 million to $0.8 million from $0.2 million for the six months
ended June 30, 2004. The increase in interest expense is directly related to
increased borrowings to support additional working capital needs associated with
higher sales activity.
Net Income (Loss). Net loss for the six months ended June 30, 2005 was $2.0
million a decrease of $0.3 million over the net loss of $2.3 million for the six
months ended June 30, 2004.
Fiscal year 2004 compared to fiscal year 2003
Net sales. Net sales for fiscal year 2004 were $38.0 million, an increase
of $20.7 million, or 120% compared to $17.3 million for fiscal year 2003.
Inception of Sheridan was July of 2003, as a result the net sales for the fiscal
year ended December 31, 2003 only reflect six months of activity.
Cost of sales. For fiscal year 2004, cost of sales increased $14.2 million
or 133%, to $24.8 million from $10.6 million for fiscal year 2003. Cost of Sales
as a percentage of sales increased 4% to 65% in 2004 versus 61% in 2003. During
the period ended December 31, 2004, Musicrama contributed a slightly higher
percentage of sales than the Music Group compared to the prior year. The
resulting increase in cost of sales is directly related to a higher cost for
Musicrama sales versus a lower cost for Music Group sales.
Operating Expenses. For fiscal year 2004, operating expenses increased
$12.5 million or 212%, to $18.4 million from $5.9 million for fiscal year 2003.
The operating expense variance is primarily the result of the additional 6
months of activity included in the 2004 results as well as the timing of the
periods being reported. As a percentage of sales, operating expenses increased
14.0% to 48.3% of sales for the fiscal year ended December 31, 2004 from 34.3%
for the fiscal year ended December 31, 2003. The increase in expenses as a
percentage of sales is due to the timing. The music business typically generates
the majority of its revenue in the last four months of the year while operating
expenses are for the most part fixed and do not vary from month to month
resulting in a decreased percentage of sales in 2003 where the percentage was
applied to only the heaviest sales months.
Other (Income) Expense. Other expense for fiscal 2004 decreased $75,000 to
$859,000 from $934,000 for fiscal 2003. Included in other expense for fiscal
2004 was a $470,000 increase in interest expense, $195,000 in abandoned
acquisition charges and $20,000 in minority interest offset by a $760,000
non-recurring lease settlement charge from fiscal 2003.
Net Income (Loss). The net loss for fiscal year 2004 was $6.0 million, an
increase of $5.8 million, compared to net loss of $193,000 for fiscal year 2003
for the reasons set forth above.
Liquidity and capital resources
The Company's working capital decreased $1.1 million or 34% to $2 million
at December 31, 2004 from $3.1 million at December 31, 2003.
During fiscal 2004, the Company's cash decreased $4.4 million or 83% to $.9
million from $5.3 million at December 31, 2003. The majority of the decrease was
cash used in operating activities of $8.7 million and net cash used in investing
activities of $6.2 million and net cash provided by financing activities of
$10.5 million.
Investing activities used $6.2 million in cash during fiscal 2004.
Investing activities during fiscal 2004 used $6 million for acquisitions and
related costs and $0.2 million in capital expenditures for the purchase of
additional fixed assets.
Financing activities provided $10.5 million during fiscal 2004, which
included $3 million in borrowings under a revolving credit facility, $7 million
from the proceeds of a new note and $4.1 million from the issuance of preferred
stock, net of financing costs of $1.7 million and $1.8 million in payments under
a term loan.
Revolving credit facility and borrowings
The Company's subsidiary, Musicrama, has a Loan and Security Agreement
("the Agreement") with PNC Business Credit which expires on July 31, 2008. The
Agreement, as amended, provides for a credit facility of $12.5 million. Advances
made pursuant to the Agreement may be used for working capital and general
corporate needs with certain limitations. The terms of the Agreement require
Musicrama to maintain certain financial covenants. The Company was in compliance
with all financial covenants at December 31, 2004. Borrowings under the credit
facility were $8.5 million at December 31, 2004.
Future capital requirements
We believe our existing cash and funds generated from operations, together
with our credit facility and equity investment commitments from certain
institutions and investors will be sufficient to meet our working capital
requirements. Capital expenditures are expected to be immaterial.
BUSINESS OF HIRSCH
Overview
We were founded in 1970 and became a leading single source provider of
electronic computer-controlled embroidery machinery and related value-added
products and services. We market our business under the brand "Tajima USA Sales
and Support by Hirsch International Corp." and offer technologically advanced
single- and multi-head embroidery machines, proprietary application software, a
diverse line of embroidery parts, supplies, accessories and embroidery products.
In addition, we provide a comprehensive service program, and user training and
support. We believe our range of product offerings together with our related
value-added products and services place us in a competitive position within our
marketplace.
Beginning in the fiscal year ended January 31, 2000 (fiscal 2000) and
continuing through the present day, the U.S. embroidery industry as a whole
experienced a decrease in overall demand driven by the relocation offshore of
large, multi-head equipment customers that resulted in reduced domestic demand
for large embroidery machines. As a result, in the year ended January 31, 2002
(fiscal 2002) we initiated a restructuring program designed to address the
market shifts in the industry, including closing and consolidating certain
divisions, reducing total employment and disposing of facilities no longer
required to support our business model.
Our customer base includes large operators who run numerous machines (which
accounts for a smaller percentage of our business than in years past) as well as
individuals who customize products on a single machine. Principal customer
groups include: (i) contract embroiderers, who serve manufacturers that
outsource their embroidery requirements; (ii) manufacturers, who use embroidery
to embellish their apparel, accessories, towels, linens and other products with
decorative appeal; and (iii) embroidery entrepreneurs, who produce customized
products for individuals, sports leagues, school systems, fraternal
organizations, promotional advertisers and other groups.
The embroidery industry
The embroidery industry today uses electronic computer-controlled machinery
that, on a world-wide basis, benefits from the demand for licensed products
distributed by apparel and other manufacturers. Licensed names, logos and
designs provided by, among other sources, professional and collegiate sports
teams and the entertainment industry appear on caps, shirts, outerwear, luggage
and other softgoods for sale at affordable prices. In addition, the intricacy of
the designs capable of being embroidered have attracted commercial appeal for
special event promotional marketing. Embroidery equipment may contain single or
multiple sewing heads, each sewing head consisting of one to a group of needles
that are fed by spools of thread attached to the equipment. The design and
production capabilities of the sewing heads are enhanced through the application
and integration of computers and specialized software.
Tajima
We have certain exclusive United States rights to sell new embroidery
machines manufactured by Tajima and certain non-exclusive rights to distribute
to U.S. based customers who expand their operating facilities into the Caribbean
region. Tajima, located in Nagoya, Japan, is one of the world's leading
manufacturers of embroidery machines, and is regarded as a technological
innovator and producer of high quality, reliable and durable embroidery
equipment. We also have certain exclusive rights to distribute Tajima machines
in the continental United States and Hawaii.
We enjoy a good relationship with Tajima, having spanned more than 30
years. We are one of Tajima's largest distributors and collaborate with Tajima
in the development of new embroidery equipment and enhancements to existing
equipment. Until early 1997, all Tajima equipment sold in the U.S. was assembled
in Japan. At that time, we formed a new subsidiary, Tajima USA, Inc ("TUI"), to
assemble two, four, six and eight-head Tajima machines in the United States. In
December 1997, Hirsch sold a forty-five (45%) percent interest in TUI to Tokai
Industrial Sewing Machine Company, Ltd. ("Tokai"), Tajima's parent company's
manufacturing arm. As of January 31, 2004, the Company sold its remaining
interest in TUI to Tajima Industries, Ltd. The sale was reflected in the
financial statements as a discontinued operation.
During fiscal 2005, Tajima introduced MicroSmart(TM) technology and
launched the all-new M series family of computer-controlled embroidery
equipment. MicroSmart(TM) - a Tajima exclusive - is a groundbreaking proprietary
technology that acts as the "brains" of the machine. MicroSmart(TM) Technology
optimizes microchip integration into the design and operation of the machine and
simultaneously executes each task command in the stitch production process -
thereby producing the world's smartest and easiest machine to operate. Frame
drive is MicroSmart(TM) controlled, yielding a more precise stitch length and
higher quality embroidery.
Other Products and Services
In addition to offering a complete line of technologically-advanced
embroidery machines and customer training, support and service, we provide an
array of value-added products to our customers. We are now a distributor in the
United States of software developed by our former software subsidiary, Pulse
Microsystems Ltd. ("Pulse"). Pulse develops and supplies proprietary application
software programs which enhances and simplifies the embroidery process, as well
as enables the customization of designs and reduction of production costs.
Until October 2001, our leasing subsidiary, HAPL Leasing Co., Inc. ("HAPL
Leasing"), provided a wide range of financing options to customers wishing to
finance their purchases of embroidery equipment. In the fourth quarter of fiscal
2002, we determined that the HAPL Leasing subsidiary was not strategic to our
business objectives and discontinued its operations. We have continued to work
with customers to help them obtain financing through independent leasing and
financing companies, as an attractive alternative for purchasers looking to
begin or expand operations.
We also sell a broad range of embroidery supplies, machine parts,
accessories and proprietary embroidery products. Our equipment and value-added
products are marketed directly by an employee sales force, whose efforts are
augmented by trade journal advertising, informational "open house" seminars, an
e-commerce presence and trade shows. Our long-term goal is to leverage our
reputation, knowledge of the marketplace, Tajima distribution rights, industry
expertise and technological innovation to enable us to increase the overall size
of the embroidery equipment market and our market share.
Business strategy
Our objective is to establish and maintain long-term relationships with our
customers by providing them with a single source solution for their embroidery
equipment, software and related services. To achieve this goal, we have
developed a comprehensive approach under which we (i) sell a broad range of
Tajima embroidery machines, (ii) distribute Pulse's proprietary application
software programs for embroidery machines, (iii) sell a broad range of
embroidery supplies, accessories and products, (iv) sell used embroidery
machinery, and (v) provide comprehensive customer training, support and service
for these embroidery machines. We believe that this comprehensive approach
positions us to become our customers' preferred vendor for their embroidery
equipment and related services.
Products and services
Embroidery Machines
We market and distribute over 80 models of Tajima embroidery machines,
ranging in size from 1 head per machine, suitable for sampling and small
production runs, to 30 heads per machine, suitable for high production runs for
embroidered patches and small piece goods which become parts of garments and
other soft goods. Embroidery equipment may contain single or multiple sewing
heads. The prices of these machines range from approximately $10,000 to
$150,000. Each sewing head consists of a group of needles that are fed by spools
of thread attached to the equipment. The needles operate in conjunction with
each other to embroider the thread into the cloth or other surface in such
configuration as to produce the intended design. Thread flowing to each needle
can be of the same or varying colors. Each head creates a design and heads
operating at the same time create the same size and shape designs, although
designs created at the same time can differ in color. Thus, a 30-head machine
with all heads operating simultaneously creates an identical design on thirty
surfaces. The design and production capabilities are enhanced through the
integration of computers and specialized software applications.
Contracted Assembly Operations
Our former subsidiary Tajima USA, Inc. ("TUI") maintains facilities located
in Ronkonkoma, New York, near our headquarters and East Rancho Dominguez,
California. Assembly of Tajima machines of up to eight heads are completed at
these locations, using both Tajima supplied sub-assembly kits and locally
supplied components. Shorter lead times and production flexibility enables the
Company to be responsive to changing needs of the market.
Pulse Microsystems Ltd. Software
Pulse, a former subsidiary of us, offers a wide range of proprietary
application software products to enhance and simplify the embroidery process.
Pulse's computer-aided design software packages target the different functions
performed by embroiderers, and are contained in an integrated product line. A
majority of Pulse's proprietary application software products are designed to
operate in the Microsoft(R), Windows(R) 98 and Windows(R) XP environments that
we believe will enhance creativity, ease of use and user flexibility. All Tajima
machines, as well as other manufacturers' embroidery machines, can be networked
through Pulse software. We aggressively market this software with embroidery
equipment and as an upgrade to our installed base of over 20,000 embroidery
machines. We believe that these products have broad appeal to purchasers of
single-head and multi-head embroidery machines and present opportunities for the
Company to increase sales of embroidery equipment and software as the Company
continues to emphasize marketing activities.
Embroidery Supplies, Accessories, Machine Parts and Products
Our parts, supplies and accessories division offers a broad range of
embroidery supplies, accessories and proprietary products. An expansion of our
marketing efforts is directed toward trade publications and advertising as well
as to both industry and trade show participation. During fiscal 2005, the
Company launched an on-line embroidery store allowing customers to order parts
and supplies 24 hours a day, 7 days a week.
Used Embroidery Machinery
We accept used embroidery machines from customers on a trade-in basis as a
condition to the sale of a new machine on a case by case basis. Our ability to
accept used machines is an important sales tool and necessary element in our
sales strategy. On occasion, we will also purchase used machines from customers
and third-party leasing companies. The Company believes that the market for used
embroidery machines represents an established share of the machine market.
Marketing and customer support
We reinforce recognition of our name through trade magazine advertising and
participation in seminars and over 20 trade shows annually. Our sales staff is
headed by Kris Janowski, our Executive Vice-President, and currently consists of
salespeople who maintain frequent contact with customers in order to understand
and satisfy each customer's needs.
We believe that a key element in its business is our focus on service, and
investment in sales support and training, infrastructure and technology to
support operations. We provide comprehensive one to five day training programs
to assist customers in the use, operation and servicing of embroidery machines
and software. Customers are trained in the operation of embroidery machines as
well as in embroidery techniques and the embroidery industry in general. We
provide our customers with manuals as training tools. Our personnel also provide
technical support by telephone, field maintenance services and quality control
testing, as well as advice with respect to matters generally affecting
embroidery operations. Telephone software support is provided by Pulse.
We maintain a training center at our Hauppauge, New York headquarters for
the training of service technicians. Senior service technicians also receive
formal training from Tajima in addition to technical updates throughout the
year. We plan to continue to dedicate resources to education and training as the
foundation for providing the highest level of service.
We provide our customers with a limited warranty of up to five years
against malfunctions from defects in material or workmanship on the Tajima
machines it distributes. The warranty covers specific classes of parts and
labor. Tajima provides us with a limited two year warranty. As a consequence, we
absorb a portion of the cost of providing warranty service on Tajima products.
Relationships with Tajima
On August 30, 2004, we entered into new consolidated distribution
agreements (the "Consolidated Agreements") with Tajima granting us certain
rights to distribute the full line of Tajima commercial embroidery machines and
products.
One of the Consolidated Agreements (the "Main Agreement") grants us
distribution rights on an exclusive basis in 39 states for the period February
21, 2004 through February 21, 2011. In addition, we were was also granted
certain distribution rights in the remaining 11 western states (the "West Coast
Distribution Agreement") for the period February 21, 2004 through February 21,
2005. We are negotiating an extension of the West Coast Distribution Agreement.
Each agreement may be terminated upon the failure by us to achieve certain
minimum sales quotas. During fiscal 2005, we failed to meet these minimum sales
quotas. However, Tajima waived our failure for fiscal 2005. For fiscal 2004, the
minimum sales quotas were met. Furthermore, the agreements may be terminated if
(a) Henry Arnberg is no longer Chairman and/or CEO of the Company or (b) if
Tajima determines that a change in control of the Company has occurred.
Following the consummation of the merger, it is possible that Tajima may
determine that a change in control has occurred and consequently elect to
terminate our distribution agreements. We are, therefore, seeking Tajima's
consent to the merger and the transactions contemplated thereunder, however,
there can be no assurance that Tajima will give its consent. The termination of
the distribution agreements could have a material adverse effect on our business
and operations.
Under existing circumstances, Tajima may take the position that the
Consolidated Agreements are terminated upon the Merger or otherwise. Although
there can be no assurance that we will be able to maintain our relationship with
Tajima, our management believes it is less than likely that we will lose Tajima
as a source of supply because: (i) we have maintained a relationship with Tajima
for over 30 years and are one of Tajima's largest distributors; (ii) Tajima's
success in the United States is, in large part, attributable to our knowledge of
the marketplace as well as our reputation for customer support; and (iii) we
support Tajima's development activities.
Other supplier relationships
We obtain our inventory for our embroidery supplies and accessories
business from many different sources. We believe that alternate sources of
supply are readily available.
Customers
Our customers range from large operators utilizing numerous machines to
individuals who customize products on a single machine. Principal customer
groups include: (i) contract embroiderers, who serve manufacturers that
outsource their embroidery requirements; (ii) manufacturers, who use embroidery
to embellish their apparel, accessories, towels, linens and other products with
decorative appeal; and (iii) embroidery entrepreneurs, who produce customized
products for individuals, sports leagues, school systems, fraternal
organizations, promotional advertisers and other groups. There are no major
customers who exceed 10% of revenues.
Competition
We compete with original equipment manufacturers, such as Barudan, Brother
International, Happy, Melco Industries and SWF. We believe we compete on the
basis of our knowledge and experience in the marketplace, name recognition,
customer service and the quality of the embroidery equipment we distribute. Due
to the recent decline in overall demand for the embroidery industry, potential
customers may emphasize price over technology when selecting a machine. Although
we attempt to compete on the basis of price to the greater degree practicable,
we focus as well on maintaining our profit margins, and there can be no
assurance that we will be able to do so, the failure of which would have a
material adverse effect on us.
Further, our customers are subject to competition from importers of
embroidered products, which could materially and adversely affect our customers,
and consequently could have a material adverse effect on our business, financial
conditions and results of operations.
Our success is dependent, in part, on the ability of Tajima to continue
producing products that are technologically superior and price competitive with
those of other manufacturers. The failure of Tajima to produce technologically
superior products at a competitive price could have a material adverse effect of
our business, financial condition and results of operations.
Our embroidery supplies and accessories business competes with ARC, a
division of Melco Industries, MIM, a division of Brother Industries, and other
vendors of embroidery supplies. We believe that the market for embroidery
supplies is fragmented and that we will benefit from the breadth of our product
line and the fact that the we are a single source provider.
Employees
As of July 30, 2005, we employed approximately 102 persons who are engaged
in sales, service and supplies, product development, finance, administration and
management. None of our employees are represented by unions. We believe our
relationship with our employees is good.
Litigation
From time to time, we may be named as a party to legal claims and
proceedings in the ordinary course of business. We are not aware of any claim or
proceeding that could reasonably be expected to have a material adverse effect
on our business and operations.
OUR SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with "Our Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and related notes.
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and notes thereto filed
with our Annual Report on Form 10-K for the fiscal years ended January 29, 2005,
January 31, 2004, 2003, 2002 and 2001. The consolidated financial statement data
as of January 29, 2005 and January 31, 2004 and for the fiscal years ended
January 29, 2005, January 31, 2004, 2003, 2002 and 2001 are derived from, and
qualified by reference to, the audited Consolidated Financial Statements filed
with our Annual Report on Form 10-K and should be read in conjunction with those
Consolidated Financial Statements and the Notes thereto. We have also provided
the unaudited consolidated financial statements for the six months ended July
30, 2005 and July 31, 2004 which should be read in conjunction with the
Consolidated Financial Statements and notes thereto filed with our Quarterly
Report on Form 10-Q for the quarters ended July 30, 2005 and July 31, 2004. The
unaudited consolidated financial statements of Hirsch, in the opinion of
management, reflect all material adjustments, which consists of normal recurring
adjustments necessary for a fair presentation of such data.
Year Ended Six Months Ended
- ------------------------------------ ------------------------------------------------------------- -----------------------
January January January January January July July
29, 31, 31, 31, 31, 30, 31,
- ------------------------------------ ---------- ---------- -------- --------- --------- --------- ----------
Hirsch International Corp. and 2005 2004 2003 2002 2001 2005 2004
Subsidiaries (3) (1,3,4) (3) (2,3) (2,3)
- ------------------------------------ ---------- ---------- -------- --------- --------- --------- ----------
(in thousands of dollars, except per share amounts)
Statement of Operations Data:
Net sales.............................. $ 43,641 $46,449 $42,723 $50,156 $63,980 $25,890 $20,004
Cost of sales........................... 29,574 31,120 29,490 36,876 44,992 17,679 13,356
Operating expenses...................... 15,874 17,488 16,793 24,925 34,378 7,956 8,210
Income (loss) from continuing (2,139) (2,025) (3,451) (16,990) (15,346) 623 (1,548)
operations before income tax
provision (benefit)
Income tax provision (benefit).......... 9 25 (504) (5,881) -- 30 16
---------- ---------- -------- --------- --------- --------- ----------
Income (loss) from continuing
operations............................. (2,148) (2,050) (2,947) (11,109) (15,346) 593 (1,564)
Income (loss) from discontinued
operations
....................................... 376 2,494 (2,603) (7,216) (323) - (193)
---------- ---------- -------- --------- --------- --------- ----------
Net Income (loss)..................... $ (1,772) $ 444 $(5,550) $(18,325) $(15,669) $593 $(1,757)
========== ========== ======== ========= ========= ========= ==========
Basic earnings (loss) per share:
Earnings (loss) from continuing
operations............................. $(0.26) $ (0.24) $(0.34) $(1.25) $ (1.68) $ 0.07 $ (0.19)
Loss (income) from discontinued
operations............................. $0.05 $ 0.29 $(0.30) $ (0.81) $ (0.04) $ 0.00 $ (0.02)
Net income (loss)...................... $(0.21) $ 0.05 $(0.64) $(2.06) $ (1.72) $ 0.07 $ (0.21)
========== ========== ======== ========= ========= ========= ==========
Diluted earnings (loss) per share:
Earnings (loss) from continuing
operations............................. $(0.26) $ (0.24) $(0.34) $ (1.25) $ (1.68) $ 0.06 $ (0.19)
Loss (income) from discontinued
operations............................. $0.05 $ 0.29 $(0.30) $ (0.81) $ (0.04) $ 0.00 $ (0.02)
Net income (loss)...................... $(0.21) $ 0.05 $(0.64) $ (2.06) $ (1.72) $ 0.06 $ (0.21)
========== ========== ======== ========= ========= ========= ==========
Weighted average number of shares
used in the calculation of
earnings (loss) per share..............
Basic 8,351 8,571 8,789 8,894 9,112 8,455 8,339
Diluted 8,351 8,571 8,789 8,894 9,112 9,401 8,339
(1) In fiscal year 2004, the Company completed its plan of restructuring and
reversed, as a reduction of operating expenses, $716,000 of restructuring
costs that had been previously provided for facilities and severance costs.
(2) Fiscal year 2002 operating expenses included a write-down of impaired
goodwill of $3.5 million and restructuring costs of $2.7 million and Fiscal
2001 includes a write-down of impaired goodwill of $7.6 million.
(3) Fiscal years 2005, 2004, 2003, 2002 and 2001 have been restated to reflect
the discontinued operations of HTT, TUI, HAPL and Pulse.
(4) In fiscal year 2004, the Company reversed $2.0 million of reserves
associated with the UNL lease portfolio which was sold to Beacon Funding in
September 2003.
(in thousands of dollars)
--------------------------------------------------------------------------------
January 29, January 31, July 30,
------------ --- -------------------------------------------------- ----------
2005 2004 2003 2002 2001 2005
------------ --------- ---------- --------- ---------- ----------
Balance Sheet Data:
Working capital........................... $13,269 $14,698 $14,616 $16,161 $18,136 $13,130
Total assets.................................. 26,626 30,346 30,796 33,430 50,002 25,357
Long-term debt, less current maturities....... 1,270 1,418 1,559 1,642 16 1,066
Stockholders' equity.......................... $14,055 $15,848 $16,065 $21,459 $40,278 $14,654
Hirsch International Corp
Summarized Quarterly Data**
$ in thousands, except for per share amounts Fiscal Quarters
------------------------------------------------------------
(unaudited)
2005 First Second Third Fourth
------------ ------------ ------------ ------------
Net Sales....................................... $9,387 $10,617 $11,867 $11,770
Gross profit.................................... 3,082 3,567 3,881 3,537
Gain on sale of Hometown Threads................ 0 0 943 0
Income (loss) from discontinued operations (83) (110) (374) 0
Net income (loss)............................... (1,107) (650) 508 (523)
------------ ------------ ------------ ------------
Basic and diluted income (loss) per share....... ($0.13) ($0.08) $0.06 ($0.06)
============ ============ ============ ============
2004 First Second Third Fourth
------------ ------------ ------------ ------------
Net Sales....................................... $11,951 $11,096 $11,892 $11,510
Gross profit.................................... 4,138 3,719 3,738 3,734
Restructuring costs (income).................. (497) (200) 0 (19)
Income (loss) from discontinued operations (69) 1,592 765 206
Net income (loss)............................... 105 1,151 (79) (733)
------------ ------------ ------------ ------------
Basic and diluted income (loss) per share....... $0.01 $0.13 $(0.01) $(0.08)
============ ============ ============ ============
**Note: The quarterly data has been restated to reflect the discontinued
operations of Tajima USA, Inc and Hometown Threads, LLC.
OUR MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains forward-looking statements
which involve risks and uncertainties. When used herein, the words "anticipate",
"believe", "estimate" and "expect" and similar expressions as they relate to us
or our management are intended to identify such forward-looking statements. Our
actual results, performance or achievements could differ materially from the
results expressed in or implied by these forward-looking statements. Factors
that could cause or contribute to such differences should be read in conjunction
with, and are qualified in their entirety by, our Consolidated Financial
Statements, including the Notes thereto. Historical results are not necessarily
indicative of trends in operating results for any future period. As used herein,
"fiscal year" and "fiscal" refers to the applicable fiscal year ending January
31 of the applicable calendar year. Fiscal year 2005 ended on January 29, 2005.
General
We are a leading single source supplier of electronic computer-controlled
embroidery machinery and related value-added products and services to the
embroidery industry. We offer a complete line of technologically advanced
single- and multi-head embroidery machines, proprietary application software and
a diverse line of embroidery supplies and accessories. We believe our
comprehensive customer service, user training, software support through Pulse
and broad product offerings combine to place us in a competitive position within
its marketplace. We sell embroidery machines manufactured by Tajima and TUI, as
well as a wide variety of embroidery supplies.
In fiscal 1998 we formed TUI for the purpose of assembling Tajima
embroidery machines in the United States. Production at TUI consists of models
in configurations of up to eight heads per machine. In January 1998 Tokai
Industries (Tajima's manufacturing arm) purchased a 45 percent interest in TUI.
In July 1999 Tajima granted to us the non-exclusive right to distribute to its
existing US customers who have expanded their operations into the Caribbean
region. As of January 31, 2004, we sold our majority interest in TUI to Tajima
Industries.
We grew rapidly from the time of our initial public offering through fiscal
1998. Growth during this period was fueled by rapid technological advances in
software and hardware, the strong demand for embroidered products, the creation
of new embroidery applications and the strength of the "embroidery entrepreneur"
as a growing segment of the marketplace. We believe that the purchasers of
smaller embroidery machines are a significant source of repeat business for the
sale of additional embroidery machines as the entrepreneurs' operations expand.
The market is affected by weakening value in foreign exchange of the US
dollar versus the Yen resulting in dollar price pressure for machine sales. Most
Japanese equipment-based competitors in the industry (including us) faced
difficulty in meeting these new market demands. In fiscal 2002, we initiated a
restructuring program to address the market shifts in the industry, including
closing and consolidating certain divisions, reducing total employment, and
consolidating facilities that were no longer required to support our new
business model. In fiscal 2004, we completed our plan of restructuring and
reversed, as a reduction of operating expenses, $716,000 of restructuring costs
that had been provided for facilities and severance costs due to the
re-negotiation of the office facility in Solon, Ohio.
Results of operations
The following table presents certain income statement items expressed as a
percentage of total revenue for the fiscal years ended January 29, 2005 and
January 31, 2004 and 2003 and the quarters ended July 30, 2005 and July 31,
2004.
Year Ended Six Months Ended
------------------------------------------ -----------------------
January January 31, January July 30, July 31,
29, 31,
----------- ------------ ----------- ---------- ---------
2005 2004 2003 2005 2004
----------- ------------ ----------- --- ---------- -- ---------
Net sales...................................... 100% 100% 100.0% 100% 100%
Cost of sales.................................. 67.8% 67% 69% 68.3% 66.8%
Operating expenses............................. 36.4% 37.6% 39.3% 30.7% 41.0%
Income (loss) from continuing operations
before income taxes -4.9% -4.4% -8.1% 2.4% -7.8%
Income tax (benefit) provision................. 0.02% 0.05% -0.12% 0.01% 0.1%
Income (loss) from discontinued operations,
net of tax................................... 0.9% 5.4% -6.1% 0.00% -0.9%
----------- ------------ ----------- --- ---------- -- ---------
Net Income (loss)............................ -4.1% 1.0% -13.0% 2.3% -8.8%
=========== ============ =========== === ========== == =========
Note:The results of operations have been restated to reflect the discontinued
operations of TUI, and Hometown Threads.
Use of estimates and critical accounting policies
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and revenues and expenses
during the period. Future events and their effects cannot be determined with
absolute certainty; therefore, the determination of estimates requires the
exercise of judgment. Actual results inevitably will differ from those
estimates, and such differences may be material to our financial statements. Our
management continually evaluates its estimates and assumptions, which are based
on historical experience and other factors that are believed to be reasonable
under the circumstances.
Critical accounting policies
We believe the following critical accounting policies affect our more
significant estimates and assumptions used in the preparation of our
consolidated financial statements:
Revenue Recognition - We distribute embroidery equipment that we offer for
sale. Where installation and customer acceptance are a substantive part of the
sale, by its terms, we have deferred recognition of the revenue until such
customer acceptance of installation has occurred. In fiscal years 2005, 2004 and
2003, most sales of new equipment did not require installation within the terms
of the sales contract and accordingly sales are booked when shipped. Service
revenues and costs are recognized when services are provided. Sales of computer
hardware and software are recognized when shipped provided that no significant
vendor and post-contract and support obligations remain and collection is
probable. Sales of parts and supplies are recognized when shipped.
Long lived Assets - We review our long-lived assets, including property,
plant and equipment, identifiable intangibles and purchased technologies, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. To determine
recoverability of our long-lived assets, we evaluate the probability that future
undiscounted net cash flows will be less than the carrying amount of the assets.
Income Taxes - Current income tax expense is the amount of income taxes
expected to be payable for the current year. A deferred income tax asset or
liability is established for the expected future consequences resulting from
temporary differences in the financial reporting and tax bases of assets and
liabilities. We provide a valuation allowance for our deferred tax assets when,
in the opinion of management, it is more likely than not that such assets will
not be realized.
Allowance for Doubtful Accounts - We maintain an allowance for estimated
losses resulting from the inability of our customers to make required payments.
An estimate of uncollectible amounts is made by our management based upon
historical bad debts, current customer receivable balances, age of customer
receivable balances, the customer's financial condition and current economic
trends. If the actual uncollected amounts significantly exceed the estimated
allowance, then our operating results could be significantly adversely affected.
Inventories - Inventories are valued at the lower of cost or market. Cost
is determined using the "FIFO" weighted average cost for supplies and parts and
specific cost for embroidery machines and peripherals. The inventory balance is
recorded net of an estimated allowance for obsolete or unmarketable inventory.
The estimated allowance for obsolete or unmarketable inventory is based upon
management's understanding of market conditions and forecasts of future product
demand. If the actual amount of obsolete or unmarketable inventory significantly
exceeds the estimated allowance, our cost of sales, gross profit and net income
(loss) could be significantly adversely affected.
Warranty - We instituted a five-year limited warranty policy for our
embroidery machines. Our policy is to accrue the estimated cost of satisfying
future warranty claims on a quarterly basis. In estimating its future warranty
obligations, we consider various relevant factors, including our stated warranty
policies and practices, the historical frequency of claims, and the cost to
replace or repair its products under warranty. If the number of actual warranty
claims or the cost of satisfying warranty claims significantly exceeds the
estimated warranty reserve, our operating expenses and net income (loss) could
be significantly and adversely affected.
Six months ended July 30, 2005 compared to six months ended July 31, 2004
Net sales. Net sales for the six months ended July 30, 2005 were $25.9
million an increase of $5.9 million or 29.5%, compared to $20.0 million for the
six months ended July 31, 2004. The increase in sales for the six months ended
July 30, 2005 is attributable to increased sales of small (2 through 8 head) and
mutli-head (12 and larger) machines versus sales of single-head machines. The
market for small and multi-head machines has demonstrated some growth during the
first six months of fiscal 2006.
Cost of sales. For the six months ended July 30, 2005 cost of sales
increased $4.3 million, or 32.1%, to $17.7 million from $13.4 million for the
six months ended July 31, 2004. Our gross margin decreased to 31.7% for the six
months ended July 30, 2005 as compared to 33.2% for the six months ended July
31, 2004. Gross margin as a percentage of sales decreased during the six months
ended July 30, 2005 primarily as the result of continued pricing pressures in
what remains an extremely competitive market and changes in product mix to lower
margin multi-head machines. The recent adverse fluctuation in the yen, which is
the currency the company's embroidery machines are priced in, has affected and
is likely to continue to affect and exert pressure on our machine sales pricing
competitiveness.
Operating Expenses. For the six months ended July 30, 2005, operating
expenses decreased by $0.2 million to $8.0 million from $8.2 million for the six
months ended July 31, 2004. The decrease in SG & A expenses for the six months
ended July 30, 2005 is directly related to the Company's continuing efforts to
control operating costs. Included in operating expenses for the six months ended
July 31, 2005 was $147,000 in severance costs associated with our continuing
reorganization. Operating expense for the six months ended July 31, 2004
included a reversal of the provision for doubtful accounts of $100,000.
Interest Expense (Income). For the six months ended July 30, 2005 interest
expense was $0.08 million as compared to interest expense of $0.08 million for
the six months ended July 31, 2004. Interest expense is primarily associated
with the sale/leaseback transaction of the corporate headquarters.
Other Income (Expense). For the six months ended July 30, 2005 other income
was $0.4 million as compared to other income of $0.09 million for the six months
ended July 31, 2004. The majority of the increase in other income is related to
favorable currency translations during the first six months of fiscal 2006.
Income tax provision. The income tax expense recorded for the six months
ended July 30, 2005 and July 31, 2004 represents taxes due on year end income
for various state and local income taxes, for which the Net Operating Loss
carry-forwards from prior years do not apply.
Income (Loss) from Continuing Operations. Income from Continuing Operations
for the six months ended July 30, 2005 was $0.6 million, an increase of $2.2
million from a $1.6 million loss for the six months ended July 31, 2004. The
increase in sales volume and the maintenance of operating costs directly
contributed to the net income for the first six months of fiscal 2006.
Loss from Discontinued Operations. During the quarter ended April 30, 2004,
the Company determined that its Hometown Threads, LLC subsidiary was not
strategic to the Company's long-term objectives. On October 22, 2004, the
Company sold substantially all of the assets of its Hometown subsidiary to
Embroidery Acquisition LLC, a wholly owned subsidiary of PCA, LLC. As a result,
Hometown Threads, LLC was accounted for as discontinued operations in the
consolidated financial statements for all periods presented. There was no
activity for the discontinued operations of Hometown Threads for six months
ended July 30, 2005. The loss from the discontinued operations of Hometown
Threads was $193,000 for the six months ended of July 31, 2004.
Net Income (Loss. Net income for the six months ended July 30, 2005 was
$0.6 million, an increase of $2.4 million from the net loss of $1.8 million for
the six months ended July 31, 2004.
Fiscal year 2005 as compared to fiscal year 2004
Net Sales. Net sales for fiscal year 2005 were $43.6 million, a decrease of
$2.8 million, or 6.0% compared to $46.4 million for fiscal year 2004. We believe
that the reduction in the sales level for fiscal 2005 is mainly attributable to
an on-going decrease in demand for large multi-head embroidery machines and
greater competition in the small machine market which resulted in lower prices
for embroidery machines. There are no major customers who exceed 10% of
revenues.
Cost of Sales. For fiscal year 2005, cost of sales decreased $1.5 million
or 4.8%, to $29.6 million from $31.1 million for fiscal year 2004. The decrease
was partially a result of the related decrease in net sales for fiscal year 2005
as compared to fiscal year 2004. Our gross margin decreased slightly for fiscal
year 2005 to 32.2%, as compared to 33.0% for fiscal year 2004. The recent
fluctuation of the dollar against the yen, which is the currency our embroidery
machines are priced in, has adversely affected and is likely to continue to
adversely affect our machine sales pricing competitiveness. Embroidery machinery
prices have either been maintained or risen in US dollars due to these exchange
rate fluctuations. As a result, in order for us to maintain various product
margins for our imported embroidery machines, our competitiveness has been
adversely affected. Some, but not, all of our competitors face similar
circumstances.
Operating Expenses. As reported for fiscal year 2005, operating expenses
decreased $1.6 million or 9.1%, to $15.9 million from $17.5 million for fiscal
year 2004. The decrease in operating expenses for the fiscal year ended January
29, 2005 is directly related to our continuing efforts to control operating
costs in relation to the overall decline in sales revenues. During the year
ended January 31, 2004, we reversed, as a reduction of operating expenses,
$716,000 of restructuring costs associated with the completion of the
restructuring plan.
Interest Expense. Interest expense for fiscal year 2005 and fiscal year
2004 remained constant at $0.2 million. Interest expense is primarily associated
with the sale/leaseback transaction of the corporate headquarters.
Other (Income) Expense. Other expense for fiscal 2005 was $147,000 versus
income of $349,000 for fiscal 2004. In fiscal 2005, other expense included a
$119,000 gain on sale of assets offset by $333,000 in currency losses. In fiscal
2004 other income included a $230,000 gain on sale of fixed assets, $216,000 in
currency loss and $322,000 in interest income on the refund of NOL carryback
claims.
Income tax (benefit) provision. The income tax provision reflected an
effective tax rate of 0% for the twelve months ended January 29, 2005 as
compared to an income tax benefit rate of 1.2% for fiscal year 2004. The benefit
rate for the fiscal 2004 year is a direct result of the Job Creation and Worker
Assistance Act temporarily extending the carryback of net operating losses from
two years to five years. This change has enabled us to carryback recent year's
losses and obtain a refund of approximately $6 million. During fiscal 2004, we
received the carryback claim refund from the IRS along with applicable interest
through the refund date. The difference of the above rate to the federal
statutory rate for 2005 is the valuation allowance established on deferred tax
assets since we cannot determine the future utilization of those assets.
Income (Loss) from Discontinued Operations. We executed an Agreement with
Tajima pursuant to which the Company sold all of the common stock (the "Shares")
constituting a 55% equity interest of our TUI subsidiary owned by us to Tajima,
upon the terms and conditions set forth in a certain Purchase and Sale Agreement
by and among us, Tajima and TUI (the "Agreement"). The sale was effective as of
January 31, 2004. Upon the consummation of the sale, Tajima owned 100% of the
issued and outstanding common stock of TUI.
The purchase price (the "Purchase Price") for the Shares was equal to the
Book Value (as defined in the Agreement), calculated in accordance with
generally accepted accounting principles. At the closing, Tajima paid us the sum
of $500,000 (the "Initial Payment") in partial payment of the Purchase Price.
The remaining balance due on the Purchase Price of $4,482,000 was paid promptly
thereafter in accordance with the terms of the Agreement.
In addition, we paid TUI the sum of $7,182,002, representing amounts owed
by us to TUI as of January 31, 2004 (the "Net Intercompany Payable"). The Net
Intercompany Payable was paid as follows:
(a) the Initial Payment ($500,000) was paid by Tajima to TUI on our
behalf,
(b) the assignment by us to TUI of our 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 us of the sum of $4,482,000 in five (5) equal monthly
installments of $735,167 each and a sixth payment of $806,165,
commencing February 29,2004 and continuing through and including July
31, 2004.
The Consolidated Financial Statements have been restated to reflect the
discontinued operations of TUI for all periods presented.
During the quarter ended April 30, 2004, we determined that our Hometown
Threads subsidiary was not strategic to our long-term objectives. On October 22,
2004, we sold substantially all of the assets of Hometown Threads to Embroidery
Acquisition LLC ("Buyer"), a wholly owned subsidiary of PCA, LLC ("PCA")
pursuant to the terms of a certain Asset Purchase Agreement ("Agreement")
entered into between us, Hometown Threads, Buyer and PCA. Prior to the
transaction, Hometown Threads had been engaged in the business of operating and
franchising retail embroidery service centers in Wal-Mart stores and other
retail locations (the "Business"). The purchase price for the assets acquired by
Buyer was $1,500,000. In addition, Buyer agreed to assume certain enumerated
liabilities of Hometown Threads. Pursuant to the Agreement, PCA guaranteed the
obligations of the Buyer. We and Hometown Threads entered a non-competition,
non-disclosure and non-solicitation agreement, we and Hometown Threads are
precluded from directly and indirectly competing with Buyer for seven (7) years
in the United States. We and Hometown Threads are also required to keep
confidential certain Confidential Information (as defined therein) for a period
of ten (10) years. Pursuant to the Hometown Agreement, we, Hometown Threads and
Buyer have entered into a certain supply agreement having a term of five (5)
years. Under the terms of the Supply Agreement, we agreed to supply to Buyer and
Buyer is required to purchase from us all products previously purchased by
Hometown Threads from us and utilized in the Business upon the prices, terms and
conditions contained therein.
As a result of the sale of Hometown Threads, we recognized a gain of
approximately $943,000.
The Buyer has withheld $200,000 from the selling price primarily associated
with a note receivable on the books of Hometown Threads and $142,000 in deferred
income from deposits received for stores not yet opened. We deferred the
recognition of income on these items until the contingencies are resolved during
the six month hold-back period. We expect to resolve the contingencies in the
early part of fiscal 2006; however, we are unable to predict the outcome at this
time.
Hometown Threads was accounted for as discontinued operations in the
consolidated financial statements for all periods presented.
Net Income (Loss). The net loss for fiscal year 2005 was $1,772,000, an
increase of $2.2 million, compared to net income of $444,000 for fiscal year
2004.
Fiscal year 2004 as compared to fiscal year 2003
Net sales. Net sales for fiscal year 2004 were $46.5 million, an increase
of $3.8 million, or 8.8% compared to $ 42.7 million for fiscal year 2003. We
believe that the increase in the sales level for the fiscal year ended January
31, 2004 is primarily attributable to an increased penetration of single head
and small machines in the market as well as the aggressive marketing campaign
targeting new and existing customers with the new value added packages and
renewed focus on growing parts and supply sales.
Cost of sales. For fiscal year 2004, cost of sales increased $1.6 million
or 5.4%, to $31.1 million from $29.5 million for fiscal year 2003. The increase
was a result of the related increase in net sales for fiscal year 2004 as
compared to fiscal year 2003. Our gross margin improved for fiscal year 2004 to
33.0%, as compared to 31.0% for fiscal year 2003. While the fluctuation of the
dollar against the yen has historically had a minimal effect on Tajima equipment
gross margins, since currency fluctuations are generally reflected in pricing
adjustments in order to maintain consistent gross margins on machine revenues,
increased cost of sales reflects the continuing product mix shift from larger
equipment with higher gross margins to smaller equipment with lower gross
margins. The improvement in gross margin is mainly attributable to increased
margins on software sales pursuant to the terms of the purchase agreement with
Pulse, in addition to a reduction in sales of older inventory carried at higher
costs.
Operating Expenses. As reported for fiscal year 2004, operating expenses
increased $0.7 million or 4.1%, to $17.5 million from $16.8 million for fiscal
year 2003. Excluding the reversal of the non-recurring charges for restructuring
costs of $0.7 million, operating expenses were $18.2 million, an increase of
$1.4 million or 8.3% from $16.8 million. This increase was due to expenses
associated with increased sales, increased advertising and marketing programs,
and increased professional fees.
Interest Expense. Interest expense for fiscal year 2004 was $215,000 versus
interest expense of $259,000 for fiscal year 2003. Interest expense is primarily
associated with the sale/leaseback transaction of the corporate headquarters.
Other (Income) Expense. Other income for fiscal 2004 was $349,000 versus
$368,000 for fiscal 2003. In fiscal 2004, other income included a $234,000 gain
on sale of assets interest income of $334,000, primarily from the tax refund was
recognized during fiscal 2004 offset by $219,000 in currency losses. In fiscal
2003 other income included a $214,000 gain on sale of fixed assets, $55,000
currency gain and $94,000 in interest income.
Income tax (benefit) provision. The income tax provision reflected an
effective tax benefit rate of approximately 1.2% for the twelve months ended
January 31, 2004 as compared to an income tax benefit rate of 14.6% for fiscal
year 2003. The benefit rate for the fiscal 2004 year is a direct result of the
Job Creation and Worker Assistance Act temporarily extending the carryback of
Net Operating Losses from two years to five years. This change has enabled us to
carryback its two most recent years losses and obtain a refund of approximately
$6 million. During fiscal 2004, we received the carryback claim refund from the
IRS along with applicable interest through the refund date. The difference of
the above rate to the federal statutory rate for 2004 is the valuation allowance
established on deferred tax assets since we cannot determine the future
utilization of those assets.
Income (Loss) from Discontinued Operations. In the fourth quarter of Fiscal
2002, we determined that our HAPL Leasing subsidiary was not strategic to our
ongoing objectives and discontinued operations. We have made provisions for the
cost of winding down the operations as well as the potential losses that could
be incurred in disposing of its minimum lease payments and residual receivables.
The operating loss in fiscal 2002 includes $4.6 million provision for the
Ultimate Net Loss ("UNL") liability and the sale of the residual receivable
associated with it. The operating loss in fiscal 2003 includes an additional
$4.0 million to account for expected additional losses in liquidating the
leasing subsidiary's remaining lease portfolio. Our Statements of Operations
have been restated to reflect the results of the HAPL Leasing subsidiary as a
loss on discontinued operations. In July 2003, we entered into a transaction
whereby we assigned its interest in the remaining UNL lease portfolio from the
CIT Group/Equipment Financing, Inc. ("CIT") to Beacon Funding and the residual
receivables associated with the lease portfolio for approximately $375,000. We
reversed, as part of discontinued operations, $2.0 million of reserves
associated with the UNL Lease portfolio.
We executed the TUI Agreement with Tajima pursuant to which we sold all of
the common stock (the "Shares") constituting a 55% equity interest of our TUI
subsidiary owned by us to Tajima. The sale was effective as of January 31, 2004.
Upon the consummation of the sale, Tajima owned 100% of the issued and
outstanding common stock of TUI.
The purchase price (the "Purchase Price") for the Shares was equal to the
Book Value (as defined in the TUI Agreement), calculated in accordance with
generally accepted accounting principles. At the closing, Tajima paid us the sum
of $500,000 (the "Initial Payment") in partial payment of the Purchase Price.
The remaining balance due on the Purchase Price of $4,482,000 was paid promptly
thereafter in accordance with the terms of the Agreement.
In addition, we paid TUI the sum of $7,182,002, representing amounts owed
by us to TUI as of January 31, 2004 (the "Net Intercompany Payable"). The Net
Intercompany Payable was paid as follows:
(a) the Initial Payment ($500,000) was paid by Tajima to TUI on our
behalf,
(b) the assignment by us to TUI of our 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 us of the sum of $4,482,000 in five (5) equal monthly
installments of $735,167 each and a sixth payment of $806,165,
commencing February 29,2004 and continuing through and including July
31, 2004.
The Consolidated Financial Statements have been restated to reflect the
discontinued operations of TUI for all periods presented.
During the quarter ended April 30, 2004, we determined that our Hometown
Threads subsidiary was not strategic to our long-term objectives. On October 22,
2004, we sold substantially all of the assets of our Hometown Threads subsidiary
to Embroidery Acquisition LLC ("Buyer"), a wholly owned subsidiary of PCA, LLC
("PCA") pursuant to the terms of a certain Asset Purchase Agreement
("Agreement") entered into between us, Hometown, Buyer and PCA. Prior to the
transaction, Hometown Threads had been engaged in the business of operating and
franchising retail embroidery service centers in Wal-Mart stores and other
retail locations (the "Business"). The purchase price for the assets acquired by
Buyer was $1,500,000. In addition, Buyer agreed to assume certain enumerated
liabilities of Hometown. Pursuant to the Agreement, PCA guaranteed the
obligations of the Buyer. We and Hometown entered a Non-Competition,
Non-Disclosure and Non-Solicitation Agreement, We and Hometown are precluded
from directly and indirectly competing with Buyer for seven (7) years in the
United States. We and Hometown are also required to keep confidential certain
Confidential Information (as defined therein) for a period of ten (10) years.
Pursuant to the Agreement, We, Hometown and Buyer have entered into a certain
Supply Agreement having a term of five (5) years. Under the terms of the Supply
Agreement, we agreed to supply to Buyer and Buyer is required to purchase from
us all products previously purchased by Hometown from us and utilized in the
Business upon the prices, terms and conditions contained therein.
As a result of the sale of the Hometown Threads subsidiary, we recognized a
gain of approximately $943,000.
The Buyer has withheld $200,000 from the selling price primarily associated
with a note receivable on the books of Hometown Threads and $142,000 in deferred
income from deposits received for stores not yet opened. We deferred the
recognition of income on these items until the contingencies are resolved during
the six month hold-back period. We expect to resolve the contingencies in the
early part of fiscal 2006; however, we are unable to predict the outcome at this
time.
Hometown Threads, LLC was accounted for as discontinued operations in the
consolidated financial statements for all periods presented.
Net Income (Loss). The net income for fiscal year 2004 was $444,000, an
increase of $5.1 million, compared to a net loss of $5.5 million for fiscal year
2003. This increase is attributable to the increase in net sales, an increase in
the cost of sales, an increase in operating expenses, reversals of restructuring
accruals, and the change in income (loss) on discontinued operations of $5.1
million.
Liquidity and capital resources
Our working capital decreased $1.3 million or 8.9% to $13.3 million at
January 29, 2005 from $14.7 million at January 31, 2004.
During fiscal 2005, our cash (exclusive of restricted cash) decreased $2.6
million or 29% to $6.4 million from $9.0 million at January 31, 2004. The
majority of the decrease was cash used in financing activities of $2.8 million,
the majority of which was $2.7 million used to collateralize open standby
letters of credit, cash used in operating activities of $0.7 million and net
cash provided by investing activities of $0.9 million
Investing activities provided $0.9 million in cash during fiscal 2005.
Investing activities during fiscal 2005 included $0.2 million in capital
expenditures for the purchase of additional fixed assets, $1.1 million in
proceeds from the sale of Hometown Threads.
Financing activities used $2.8 million during fiscal 2005, which included
$2.65 million in additional collateral to cover Standby Letters of Credit at
Congress Financial Corporation, $0.08 million in dividend payments during the
first quarter of fiscal 2005, $0.15 million in long term debt repayments and
cash of $0.06 million provided by stock options exercised.
Future commitments
The following table shows our contractual obligations and commitments as of
January 29, 2005 Payments due by period (in thousands)
Total Less than 1-3 4-5 More than
Contractual Obligations/Commitments 1 year years years 5 years
- ----------------------------------- ----------- ------------- ------------- ------------ -------------
Capital lease obligations $2,012 $306 $976 $701 $29
Operating lease obligations 1,935 598 883 436 18
Purchase commitments 800 800 0 0 0
Total $4,747 $1,704 $1,859 $1,137 $47
=========== ============= ============= ============ =============
Revolving credit facility and borrowings
We have a Loan and Security Agreement ("the Congress Agreement") with
Congress Financial Corporation ("Congress") for a three year term expiring on
November 26, 2005. The Congress Agreement as amended, August 31, 2004, provides
for a credit facility of $12 million for Hirsch and all subsidiaries. Advances
made pursuant to the Congress Agreement may be used by us and our subsidiaries
for working capital loans, letters of credit and deferred payment letters of
credit. The terms of the Congress Agreement require us to maintain certain
financial covenants. We were in compliance with all financial covenants at
January 29, 2005. We have placed $5.7 million in restricted cash to support
standby letters of credit of approximately $4.5 million at January 29, 2005.
Future capital requirements
Subsequent to the close of fiscal 2002, the Federal Government passed the
Job Creation and Worker Assistance Act temporarily extending the carry back of
Net Operating Losses from two years to five years. This provided approximately
$6.0 million in cash available for operations. Approximately $3.0 million was
received during the fiscal year ended January 31, 2003 and the balance was
received during fiscal 2004, along with applicable interest. We believe these
proceeds, with our existing cash and funds generated from operations, together
with our credit facility, will be sufficient to meet our working capital
requirements. Capital expenditures are expected to be immaterial.
Backlog and inventory
Our ability to fill orders quickly is an important part of our customer
service strategy. The embroidery machines held in inventory by us are generally
shipped within a week from the date the customer's orders are received, and as a
result, backlog is not meaningful as an indicator of future sales.
Inflation
We do not believe that inflation has had, or will have in the foreseeable
future, a material impact upon our operating results.
Liquidity and capital resources July 30, 2005
Our working capital was $13.1 million at July 30, 2005, decreasing $0.2
million, or 0.2%, from $13.3 million at January 29, 2005.
During the six months ended July 30, 2005, our cash and cash equivalents
decreased by $3.1 million to $3.3 million. Net cash of $3.2 million was used by
our operating activities primarily used to increase inventory, $0.7 million was
provided by financing activities primarily related to the reduction of
restricted cash during the six months and cash of $0.5 million was used for
investing activities primarily related to the investment in Sheridan's Series B
Preferred stock.
Our strategy is to mitigate its exposure to foreign currency by utilizing
purchases of foreign currency on the current market as well as forward contracts
to satisfy specific purchase commitments. Inventory purchase commitments may be
matched with specific foreign currency futures contracts or covered by current
purchases of foreign currency. Consequently, we believe that no material foreign
currency exchange risk exists relating to outstanding trade acceptances payable.
The cost of such contracts is included in the cost of inventory. As of July 30,
2005 we did not own any foreign currency futures contracts.
Future Commitments
The following table shows our contractual obligations as of July 30, 2005.
Payments due by period (in thousands)
Contractual Obligations Total Less than 1 - 3 4-5 years More than
1 year years 5 years
- ------------------------------ --------- --------- ---------- ----------- -----------
Capital lease obligations
Principal $1,347 $161 $ 679 $507 $0
Interest 512 150 311 51 0
Operating Lease obligations 1,915 580 567 417 351
Purchase Commitments 3,900 1,200 2,400 300 0
----- ----- ----- --- -
Total $ 7,674 $ 2,091 $ 3,957 $1,275 $ 351
======= ======= ======= ====== =====
Revolving Credit Facility and Borrowings
We have a Loan and Security Agreement (the "Congress Agreement") with
Congress Financial Corporation ("Congress") for three years expiring on November
26, 2005. The Congress Agreement provides for a credit facility of $12 million
for Hirsch and all subsidiaries. Advances made pursuant to the Congress
Agreement may be used us and our subsidiaries for working capital loans, letters
of credit and deferred payment letters of credit. The terms of the Congress
Agreement require us to maintain certain financial covenants. We were in
compliance with our covenants at July 30, 2005. We have placed $4.9 million in
restricted cash to support standby letters of credit of approximately 3.8
million at July 30, 2005 and a $0.6 million standby letter of credit backing the
lease on our facilities in Hauppauge.
Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting policies and
estimates from those disclosed in Item 7 of our Annual Report on Form 10-K for
the year ended January 29, 2005.
Future Capital Requirements
We believe that our existing cash and funds generated from operations,
together with our revolving credit facility, will be sufficient to meet our
working capital and capital expenditure requirements in the near future.
Backlog and Inventory
Our ability to fill orders quickly is an important part of our customer
service strategy. The embroidery machines held in inventory by us are generally
shipped within a week from the date the customer's orders are received, and as a
result, backlog is not meaningful as an indicator of future sales.
Inflation
We do not believe that inflation has had, or will have in the foreseeable
future, a material impact upon our operating results.
COMPARATIVE PER SHARE DATA
Set forth below are net income and book value per common share amounts for
Sheridan and for us on a historical basis, for the combined company on a pro
forma combined basis per Sheridan common share, and for the combined company on
a pro forma combined basis per Hirsch common share. Neither we nor Sheridan paid
a cash dividend during any of the periods presented below.
The pro forma combined data were derived by combining the adjusted
historical consolidated financial information of Hirsch and Sheridan using the
purchase method of accounting for business combinations.
You should read the information below together with our historical
financial statements and related notes contained in the annual reports and other
information that we have filed with the SEC and that we have incorporated by
reference in this document and with the historical financial statements and
notes of Sheridan contained in this document. See "Where You Can Find More
Information." The unaudited pro forma combined data below are for illustrative
purposes only. The financial results may have been different had the companies
always been combined. You should not rely on this information to be indicative
of the historical results that would have been achieved had the companies always
been combined or the future results that the combined company will experience
after the merger.
Six Months Year Ended
Ended July January
30, 2005 29, 2005
-------- --------
HIRSCH HISTORICAL DATA PER COMMON SHARE
Net income (loss) - basic $.07 ($.21)
Net income (loss) - diluted $.06 ($.21)
Book value at end of period $1.73 $1.68
SHERIDAN HISTORICAL DATA, PER COMMON SHARE
Net Income (loss) - basic $(28.78) $(64.41)
Net income (loss) - diluted $(28.78) $(64.41)
Book value at end of period $ 137.54 $ 134.95
HIRSCH AND SHERIDAN COMBINED PRO FORMA
DATA, PER SHERIDAN COMMON SHARE
Net income (loss) - basic $(.07) $(1.04)
Net income (loss) - diluted $(.07) $(1.04)
Book value at end of period $1.64 -
SHERIDAN AND HIRSCH COMBINED PRO FORMA
DATA, PER HIRSCH COMMON SHARE
Net income (loss) - basic $(.13) $(1.86)
Net income (loss) - diluted $(.13) $(1.86)
Book value at end of period $2.91 -
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of July 30, 2005 on:
- an actual basis; and
- a pro forma basis, to reflect:
- the merger of Merger Sub into Sheridan;
- the issuance of approximately 15,047,000 shares of our common
stock to the stockholders of Sheridan in connection with the
merger
You should read this table together with "The Merger" "Hirsch's
Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Sheridan's Management Discussion and Analysis of Financial
Condition and Results of Operations," "Description of Capital Stock" and our and
Sheridan's' consolidated financial statements and related notes included
elsewhere in this document.
JULY 30, 2005
(in thousands)
HIRSCH SHERIDAN PRO FORMA PRO FORMA
ADJUST-
MENTS
------------ -------------- ----------- ------------
Cash and cash equivalents $ 3,320 $ 323 - $ 3,643
Restricted cash 4,900 - - 4,900
------------ -------------- ----------- ------------
Total cash........ 8,220 323 - 8,543
------------ -------------- ----------- ------------
Total debt:
Revolving credit facility $ -- $9,526 - $9,526
Other debt 1,185 11,168 - 12,353
------------ -------------- ----------- ------------
Total debt 1,185 20,694 - 21,879
------------ -------------- ----------- ------------
Minority Interest 96 96
Stockholders' equity:
Preferred Stock, $.01 par value; authorized
1,000,000 shares; issued: none - $1 $(1) (1) -
Class A common stock, $.01 par value shares 90 1 (91) (1) -
authorized, 20,000,000; proforma 50,000,000 shares
of common stock; issued, actual : Class A Common
Stock: 9,076,010;
Class B common stock, $.01 par value shares 6 - (6) (1) -
authorized, 3,000,000; proforma: none; issued,
actual : Class B Common Stock: 550,000
Common Stock $0.01 par value; authorized 50,000,000 - - 234 (1) 234
shares
Additional paid-in capital 41,471 21,238 (31,993) (1) 30,716
Accumulated Deficit (24,896) (8,198) 26,801 (1) (6,293)
Treasury stock, at cost 1,164,000 shares (2,017) - 2,017 (1) -
------------ -------------- ----------- ------------
Total stockholders' equity 14,654 13,042 (3,039) 24,657
------------ -------------- ----------- ------------
Total capitalization $15,839 33,832 $(3,039) $46,632
============ ============== =========== ============
(1) Represents adjustments related to the merger as required under SFAS No. 141
- Business Combinations. These include the elimination of $98,000 of
historical common (Class A and Class B) and preferred stockholders' equity,
$32 million of historical additional paid-in capital, $27 million of
historical accumulated deficit and $2 million in historical treasury stock.
MARKET PRICE OF AND DIVIDENDS ON OUR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Our outstanding common stock consists of two classes, Class A common stock
and Class B common stock. The Class A Common Stock, par value $.01 per share,
trades on the NASDAQ SmallCap Market under the symbol "HRSH". Class B stock is
not traded. The following table sets forth for each period indicated the high
and low closing bid prices for the Class A common stock as reported by the
NASDAQ Stock Market. The following over-the-counter market quotations represent
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
Fiscal 2006 High Low
First Quarter ended April 30, 2005................... $ 1.48 $ 0.85
Second Quarter ended July 30, 2005................... $ 1.61 $ 0.98
Fiscal 2005 High Low
First Quarter ended April 30, 2004................... $ 2.48 $ 1.35
Second Quarter ended July 31, 2004................... $ 1.75 $ 0.81
Third Quarter ended October 30, 2004................. $ 1.13 $ 0.81
Fourth Quarter ended January 29, 2005................ $ 1.63 $ 0.96
Fiscal 2004 High Low
First Quarter ended April 30, 2003................... $ 0.75 $ 0.28
Second Quarter ended July 31, 2003................... $ 1.19 $ 0.65
Third Quarter ended October 31, 2003................. $ 1.25 $ 0.84
Fourth Quarter ended January 31, 2004................ $ 3.12 $ 1.01
As of ______, 2005, we believe that there were approximately _____
beneficial owners of our Class A common stock.
During the third and fourth quarters of fiscal 2004, and the first quarter
of fiscal 2005, we declared and paid a quarterly dividend of $.01 per share on
its common stock. There were no dividends declared for the remaining quarters of
fiscal 2005. The Class A common stock and Class B common stock share ratably in
any dividends declared by us on our common stock. Any stock dividends on the
Class A common stock and the Class B common stock would be paid in shares of
Class A common stock.
The following is our equity compensation plan information:
(a) Number of (c) Number of securities
securities issuable (b) Weighted-average remaining available for
Plan category upon exercise of exercise price of future issuance under equity
outstanding options, outstanding options, compensation plans excluding
warrants and rights warrants and rights column (a)
-------------------- -------------------- ----------------------------
Equity compensation plans approved 1,153,000 $0.55 678,000
by security holders
Equity compensation plans not 100,000 $0.50 0
approved by security holders
--------------------- -------------------- ----------------------------
Total 1,253,000 $0.54 678,000
--------------------- -------------------- ----------------------------
One independent Board member and one past board member were granted
warrants to purchase 50,000 shares each of Class A Common Stock at $0.50 per
share for their past and ongoing services to us. Our board of directors approved
these grants on January 25, 2002. These individuals were also granted certain
registration rights for the shares of Class A Common Stock issuable upon the
exercise of the warrants pursuant to the terms of a registration rights
agreement between us and such independent board members.
DESCRIPTION OF OUR CAPITAL STOCK
Common Stock
The Class A common stock and Class B common stock are substantially
identical except that two-thirds of the directors of the Company will be elected
by the holders of the Class B common stock (presently Henry Arnberg and his
family). Each share of Class B common stock automatically converts to Class A
common stock upon transfer to a non-Class B common stockholder unless
transferred to a spouse or child of a Class B common stockholder or to a trust
created for the benefit of a Class B common stockholder or a spouse or a child
of a Class B common stockholder.
The Class A common stock and Class B common stock are entitled to share
equally in dividends from sources available therefore when, and if declared by
the Board of Directors, and upon liquidation or dissolution of the Company,
whether voluntary or involuntary, and to share equally in the assets of the
Company available for distribution to stockholders. Stockholders have no
preemptive rights. All stock dividends and stock splits on the Class A common
stock and Class B common stock will be paid in shares of Class A common stock.
No further Class B common stock will be issued. All outstanding shares are fully
paid, non-assessable and legally issued. The Board of Directors is authorized to
issue additional shares of Common Stock within the limits authorized by the
Company's Restated Certificate of Incorporation without stockholder action.
At present, 23,000,000 shares of common stock are authorized (20,000,000 -
Class A; 3,000,000 - Class B), and we seek approval to increase the same to
50,000,000 shares, $.01 par value per share, consisting of a single class of
common stock.
These classes would be converted pursuant to the Second Amended and
Restated Certificate of Incorporation into a single class of common stock having
equal voting and other rights. The holders of shares of our new common stock
would be entitled to share ratably in such dividends and distributions as may be
legally declared by the Board of Directors with respect to our new common stock
and in any of our assets available for to stockholders upon its liquidation.
Upon our liquidation, assets will only be available for distribution after
satisfaction or provision for all of our debts and other obligations, including
to holders of preferred stock designated as senior in right of payment upon
liquidation. The holders of shares of our new common stock have one vote per
share, in person or by proxy, at all meetings of stockholders. There are no
cumulative voting rights with respect to the election of our directors, which
means that holders of a majority of the shares of our common stock voting in an
election for directors so long as the holder of a majority of our outstanding
common stock are present in person or by proxy, can elect all of the directors
then to be elected. There are no preemptive, conversion, sinking fund or
redemption rights applicable to our common stock.
Preferred Stock
Our preferred stock may be issued from time to time without stockholder
approval in one or more classes or series, and the Board of Directors is
authorized to fix the dividend rights, dividend rates, any conversion rights or
rights of exchange, any voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price or prices, the liquidation
preferences and any other rights, preferences, privileges and restrictions of
any class or series of Preferred Stock, the number of shares constituting such
class or series and the designation thereof. The shares of any class or series
of Preferred Stock need not be identical. The Company has no present plans to
issue any shares of Preferred Stock.
Depending upon the rights of such preferred stock, the issuance of
preferred stock could adversely effect the holders of common stock by delaying
or preventing a change in control, making removal of the present management more
difficult or imposing restrictions upon the payment of dividends and other
distributions to the holders of common stock.
The Preferred Stock will not be affected by the proposed amendment to
the Revised Certificate of Incorporation.
Section 203 of the Delaware general corporation law
Section 203 of the Delaware General Corporation Law generally restricts a
corporation from entering into certain business combinations with an interested
stockholder (defined as any person or entity that is the beneficial owner of at
least 15% of a corporation's voting stock) or its affiliates for a period of
three years after the date of the transaction in which the person became an
interested stockholder unless (i) the transaction is approved by the board of
directors of the corporation prior to such business combination, (ii) the
interested stockholder acquires 85% of the corporation's voting stock in the
same transaction in which it exceeds 15%, or (iii) the business combination is
approved by the board of directors and by a vote of two-thirds of the
outstanding voting stock not owned by the interested stockholder. The Delaware
General Corporation Law provides that a corporation may elect not to be governed
by Section 203. At present, the Company does not intend to make such an
election. Section 203 may render more difficult a change in control of the
Company or the removal of incumbent management.
Action by written consent
Delaware law permits our stockholders to take action by their written
consent without the need for a stockholders' meeting. The vote required to take
action by written consent is the minimum number of votes that would be necessary
to authorize or take the action at a meeting at which holders of all shares
entitled to vote were present and voted. Therefore, the holders of a majority of
the voting stock can take any action by written consent which would otherwise be
available to our stockholders. The ability of the stockholders to act in writing
without holding an annual or special meeting provides us with flexibility to
make important corporate decisions without the delay and expense of holding a
stockholders' meeting. The possibility of stockholder action without a meeting
may also make it easier for large stockholders to affect our decision making,
because they may be able to direct votes from a majority of our voting shares to
serve their desired purposes without involving other stockholders. It is
anticipated that the five largest stockholders resulting from the Merger will
hold, collectively, approximately 64% of our then outstanding common stock.
Limitation of liability and indemnification agreements
Our current charter provides that to the fullest extent permitted by
Delaware law, our directors will not be liable to us or our stockholders for
monetary damages for breach of fiduciary duty as a director. Under current
Delaware law, a company may not limit the liability of a director:
- for any breach of the director's duty of loyalty to the company or its
stockholders,
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law,
- in respect of certain unlawful dividend payments or stock redemptions
or repurchases, and
- for any transaction from which the director derives an improper
personal benefit.
The effect of this provision of our Restated Certificate of Incorporation
is to eliminate our rights and those of our stockholders (through stockholders'
derivative suits on our behalf) to recover monetary damages against a director
for breach of the fiduciary duty of care as a director, including breaches
resulting from negligent or grossly negligent behavior, except in the situations
described in the bullet points above. This provision does not limit or eliminate
our rights or the rights of any stockholder to seek non-monetary relief, such as
an injunction or rescission, in the event of a breach of a director's duty of
care. In addition, our current charter and bylaws collectively provide that we
will indemnify our directors, officers and employees against losses incurred by
reason of the fact that such person was acting as our director, officer or
employee, as applicable.
We have entered into agreements with our directors and certain of our
officers under which we have agreed to indemnify the director or officer for any
damages, judgments, fines, expenses, costs, penalties or amounts paid in
settlement in connection with any claim, action, suit or proceeding in which the
director or officer is involved as a party or otherwise by reason of the fact
that he is or was a director or officer of us, or of any other corporation or
other entity of which he served as a director or officer at our request, to the
maximum extent permitted by applicable law. In addition, this indemnification
agreement entitles the director or officer to an advance of expenses to the
maximum extent authorized or permitted by law.
Any future limitation on or repeal of our ability to provide
indemnification as set forth in our current charter and bylaws may not be
effective as to directors and officers who are parties to these indemnification
agreements because the indemnification agreements contractually assure their
rights to full protection. We anticipate that we may enter into similar
contracts with our future directors and officers.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following general discussion summarizes the anticipated material U.S.
federal income tax consequences of the merger to holders of our common stock.
This discussion is based upon the Internal Revenue Code, Treasury regulations,
administrative rulings and judicial decisions currently in effect, all of which
are subject to change, possibly with retroactive effect. Further, the discussion
does not address all aspects of U.S. federal income taxation that may be
relevant to a particular stockholder in light of his, her or its personal
investment circumstances or to stockholders subject to special treatment under
the U.S. federal income tax law.
THIS SUMMARY DOES NOT ADDRESS ANY NON-INCOME TAX OR ANY FOREIGN, STATE OR
LOCAL TAX CONSEQUENCES OF THE MERGER. IT DOES NOT ADDRESS THE TAX CONSEQUENCES
OF ANY TRANSACTION OTHER THAN THE MERGER. ACCORDINGLY, WE STRONGLY URGE YOU TO
CONSULT WITH A TAX ADVISOR TO DETERMINE THE PARTICULAR FEDERAL, STATE, LOCAL OR
FOREIGN INCOME OR OTHER TAX CONSEQUENCES OF THESE TRANSACTIONS TO YOU.
The following discussion is not binding on any party or the Internal
Revenue Service. Neither we nor Sheridan has requested a ruling from the
Internal Revenue Service with respect to any of the U.S. federal income tax
consequences of the merger and, as a result, there can be no assurance that the
Internal Revenue Service will not disagree with or challenge any of the
discussion below.
We believe that for U.S. federal income tax purposes, the merger of Merger
Sub with and into Sheridan will be treated as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code. Accordingly, neither we
nor Merger Sub, or Sheridan should recognize gain or loss as a result of the
merger; and our stockholders should recognize no gain or loss.
As a result of limitations imposed by Section 382 of the Internal Revenue
Code, in the event of an ownership change such as that related to the Merger,
our ability to use our net operating losses, which we refer to as "NOLs," for
tax purposes in future years would be limited and, to the extent the NOLs cannot
be fully utilized under these limitations within the carry-forward periods, the
NOLs would expire unutilized. In general, a company reaches the "ownership
change" threshold if the "5% shareholders" increase their aggregate ownership
interest in the company over a three-year testing period by more than 50
percentage points. The ownership interest is measured in terms of total market
value of our capital stock. In connection with the merger, Sheridan's
stockholders will own approximately 62% of our common stock, thereby causing an
"ownership change" under Section 382. Accordingly, our prospective use of our
accumulated and unused NOLs will be limited.
INTERESTS OF OUR DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER
Our directors and executive officers may have interests in the merger that
may differ from, or be in addition to, your interests. These interests include:
- four of our present directors (Henry Arnberg, Paul Gallagher, Marvin
Broitman and Mary Ann Domuracki) will remain on our board after the
merger. Paul Gallagher, our Chief Executive Officer, President and
Chief Operating Officer and Beverly Eichel, our Executive Vice
President - Finance, Chief Financial Officer and Secretary will be
executive officers of the combined company;
Employment Agreements
As a condition to the consummation of the merger, Joseph Bianco, Paul
Gallagher, Anil Narang and Beverly Eichel, will enter into employment agreements
with the Company upon the following terms and conditions:
Joseph Bianco's agreement will be for a term of two years and provide for
an annual salary of $300,000 per year in consideration of which he will act as
our Chief Executive Officer. In addition to his annual salary, Mr. Bianco shall
be entitled to participate in the Company's Annual Incentive Plan for our
executive officer's, which shall be developed and approved by the Compensation
Committee of our Board of Directors within ninety (90) days following the
closing of the Merger and will cover, among other matters, target bonus levels,
maximum bonus levels, and minimum performance thresholds. Mr. Bianco will also
be granted options to purchase 1,000,000 shares of our common stock at an
exercise price equal to the greater of (i) $1.35 or (ii) the fair market value
on the date of the closing of the Merger. Mr. Bianco would be permitted to
participate in our existing benefit plans as may be in effect and shall be
entitled to reimbursement of his reasonable business expenses in accordance with
Company policy. The employment agreement will also provide, upon the termination
of Mr. Bianco's employment without cause, upon his resignation with good reason
and upon a change in control, with a payment equal to one year's base annual
salary plus the average annual payment received by Mr. Bianco under our Annual
Incentive Plan during his prior two years of employment.
Paul Gallagher's agreement will be for a term of two years and provide for
an annual salary of $350,000 per year in consideration of which he will act as
our President and Chief Operating Officer. In addition to his annual salary, Mr.
Gallagher shall be entitled to participate in the Company's Annual Incentive
Plan for our executive officer's, which shall be developed and approved by the
Compensation Committee of our Board of Directors within ninety (90) days
following the closing of the Merger and will cover, among other matters, target
bonus levels, maximum bonus levels, and minimum performance thresholds. Mr.
Gallagher will also be granted options to purchase 667,000 shares of our common
stock at an exercise price equal to the greater of (i) $1.35 or (ii) the fair
market value on the date of the closing of the Merger. Mr. Gallagher would be
permitted to participate in our existing benefit plans as may be in effect and
shall be entitled to reimbursement of his reasonable business expenses in
accordance with Company policy. The employment agreement will also provide, upon
the termination of Mr. Gallagher's employment without cause, upon his
resignation with good reason and upon a change in control, with a payment equal
to one year's base annual salary plus the average annual payment received by Mr.
Gallagher under our Annual Incentive Plan during his prior two years of
employment.
Anil Narang's agreement will be for a term of two years and provide for an
annual salary of $300,000 per year in consideration of which he will act as our
Vice Chairman. In addition to his annual salary, Mr. Narang shall be entitled to
participate in the Company's Annual Incentive Plan for our executive officer's,
which shall be developed and approved by the Compensation Committee of our Board
of Directors within ninety (90) days following the closing of the Merger and
will cover, among other matters, target bonus levels, maximum bonus levels, and
minimum performance thresholds. Mr. Narang will also be granted options to
purchase 1,000,000 shares of our common stock at an exercise price equal to the
greater of (i) $1.35 or (ii) the fair market value on the date of the closing of
the Merger. Mr. Narang would be permitted to participate in our existing benefit
plans as may be in effect and shall be entitled to reimbursement of his
reasonable business expenses in accordance with Company policy. The employment
agreement will also provide, upon the termination of Mr. Narang's employment
without cause, upon his resignation with good reason and upon a change in
control with a payment equal to one year's base annual salary plus the average
annual payment received by Mr. Narang under our Annual Incentive Plan during his
prior two years of employment.
Beverly Eichel's agreement will be for a term of two years and provide for
an annual salary of $275,000 per year in consideration of which she will act as
our Executive Vice President, Chief Financial Officer and secretary. In addition
to her annual salary, Ms. Eichel shall be entitled to participate in the
Company's Annual Incentive Plan for our executive officer's, which shall be
developed and approved by the Compensation Committee of our Board of Directors
within ninety (90) days following the closing of the Merger and will cover,
among other matters, target bonus levels, maximum bonus levels, and minimum
performance thresholds. Ms. Eichel will also be granted options to purchase
333,000 shares of our common stock at an exercise price equal to the greater of
(i) $1.35 or (ii) the fair market value on the date of the closing of the
Merger. Ms. Eichel would be permitted to participate in our existing benefit
plans as may be in effect and shall be entitled to reimbursement of her
reasonable business expenses in accordance with Company policy. The employment
agreement will also provide, upon the termination of Ms. Eichel's employment
without cause, upon her resignation with good reason and upon a change in
control with a payment equal to one year's base annual salary plus the average
annual payment received by Ms. Eichel under our Annual Incentive Plan during her
prior two years of employment.
Robert E. Michalik, who will be a director following the merger, is also a
principal of Kinderhook Industries, LLC. Kinderhook at present has a management
services agreement with Musicrama, Inc., a wholly-owned subsidiary of Sheridan.
As a condition to the merger, that agreement will be amended to provide for a
term of twenty (20) months and for an aggregate fee payable to Kinderhook of
$500,000, payable in equal monthly installments of $25,000 per month.
Governance structure
The Merger Agreement provides for the determination of the composition of
our initial Board of Directors and for the appointment of persons to fill
selected executive officer positions after the Merger. Under these documents, we
will designate two of our current directors will remain on our Board of
Directors after the merger. In addition, Paul Gallagher our Chief Executive
Officer and Beverly Eichel, our Chief Financial Officer will be executive
officers of the combined company. See "Directors and Management Following the
Merger." Sheridan will designate two members for our Board of Directors and the
other five directors will be jointly nominated by us and Sheridan.
Treatment of stock options
The terms of all stock options granted under our existing stock option
plans to our directors and officers will be unaffected by the completion of the
merger.
Indemnification and insurance
For a period of six years following the merger, we will maintain directors'
and officers' liability insurance for the benefit of our current and pre-merger
officers and directors with respect to claims arising from actions or omissions
occurring before the merger. This insurance must contain at least the same
coverage and amounts, and contain terms and conditions no less advantageous, as
the coverage currently provided to these individuals, subject to the limitation
that such insurance coverage can be procured by the Company on commercially
reasonable terms.
RESTRICTIONS ON RESALE OF OUR COMMON STOCK RECEIVED IN
CONNECTION WITH THE MERGER
The shares of our common stock issued to the stockholders of Sheridan in
connection with the merger will not be registered, if at all, until after the
merger is completed. Accordingly, those shares will be subject to restrictions
on transfer under the Securities Act. Any former stockholder of Sheridan may not
sell the shares of our common stock it receives in connection with the merger
except pursuant to:
- an effective registration statement under the Securities Act covering
the resale of those shares;
- an exemption under Securities Act Rule 144 under the Securities Act;
or
- another exemption under the Securities Act.
In general, absent registration, former stockholders of Sheridan would be
required to hold our common stock received in the merger for one year before
they could begin reselling these shares in compliance with the requirements of
Rule 144. In addition, any former stockholder of Sheridan that becomes an
"affiliate" of ours within the meaning of Rule 144 will be subject to volume
limitations and other requirements in Rule 144 with respect to any unregistered
resales of our common stock at any time. Among the Sheridan stockholders, we
expect that Kinderhook and the individuals who will be members of our new
management group will be "affiliates" of ours under for purposes of Rule 144
immediately after the Merger. See "Directors and Management Following the
Merger". For more information about individuals and entities that will be our
affiliates after the merger, including our existing stockholders, see "Security
Ownership of Certain Beneficial Owners and Management."
As a result of a private placement of Sheridan's Series A Preferred Stock
through the Maxim Group, as placement agent, certain Sheridan stockholders were
granted registration rights with respect to the shares of Sheridan's Class A
Common Stock issuable upon conversion of the shares of Series A Preferred Stock
and exercise of warrants received in the private placement. These stockholders
would be entitled to have their securities registered within ninety (90) days of
the earliest to occur of (i) the effective date of an initial public offering by
Sheridan or (ii) the consummation of a transaction in which Sheridan becomes
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended or in which Sheridan's securities become publicly traded. If a
registration statement is not filed by the required date, then payments, as
liquidated damages, to each purchaser in the offering, of an amount equal to
1.5% of the aggregate dollar amount of securities purchased by such investor for
each thirty (30) day period or pro rata for any portion thereof shall be made
until the registration statement is filed. In addition, if the registration
statement is not declared effective by the Securities and Exchange Commission
within one hundred and eighty (180) days following the first to occur of clause
(i) or (ii) above, then pro-rata payments, as liquidated damages, shall be made
to each purchaser of such securities in an amount equal to 1.5% of the aggregate
dollar amount of securities purchased by such investor for each thirty (30) day
period or, pro rata for any portion thereof following the expiration of such
period that the registration statement has not been declared effective. We do
not believe the transactions contemplated by the merger will trigger these
rights.
REGISTRATION RIGHTS AGREEMENT
As a condition to entering into the Merger Agreement, we have agreed to
enter into a registration rights agreement with the holders of at least 5% of
the outstanding Sheridan' capital stock prior to the merger who will receive our
common stock in the merger. The registration rights agreement, the form of which
is an exhibit to the Merger Agreement, obligates us at any time after 180 days
following completion of the merger, and upon the request of a party thereto to
use our commercially reasonable efforts to file a registration statement (short
form, if available, and if not available, a long form registration statement).
Upon being declared effective by the SEC, these registration statements would
generally permit delayed or continuous offerings of all of our common stock
issued to these Sheridan' stockholders in the merger.
Under the registration rights agreement, these Sheridan stockholders will
be entitled to an unlimited number of short-form demand registrations provided
that the minimum amount of securities to be registered is at least $2,500,000
per registration statement and no more three (3) long form demand registrations
provided that the minimum amount of securities to be registered under each
registration statement is at least $7,500,000. These Sheridan stockholders will
also be granted certain "piggy-back" registration rights.
We will pay all expenses incurred in connection with registrations pursued
under the terms of the registration rights agreement, whether or not these
registrations are completed. These expenses include SEC, exchange and blue sky
filing, compliance and listing fees, messenger, delivery, and printing expenses,
all of our out-of-pocket expenses, fees and expenses of our attorneys,
accountants, and other outside advisors, as well as fees of any underwriters'
counsel with respect to blue sky compliance and the reasonable fees and expenses
of one counsel for all selling stockholders. The selling stockholders will pay
all underwriting discounts and commissions with respect to the shares they are
selling for their own accounts.
Under the registration rights agreement, we also will agree to indemnify
the stockholders and their affiliated and controlling parties for violations of
federal and state securities laws and regulations, including material
misstatements and omissions in the offering documents with respect to any
registration, except with respect to any information furnished in writing to us
by a stockholder expressly for use in the registration statement or any holder's
failure to deliver a prospectus timely supplied by us that corrected a previous
material misstatement or omission. In the event indemnification is unavailable
to a party, or insufficient to hold the party harmless, we have further agreed
to contribute to the losses incurred by the party.
DIVIDENDS
We anticipate that we will not pay cash dividends on our common stock after
the merger. In addition, our present loan agreement with Congress Financial
Corporation does not permit the payment of cash dividends without their prior
written consent.
ANTICIPATED ACCOUNTING TREATMENT
The merger will be accounted for using purchase accounting. Generally
accepted accounting principles require that one of the two companies in the
transaction be designated as the acquiror for accounting purposes. Sheridan has
been designated as the acquiror because immediately after the merger, its
stockholders will hold more than 50% of our common stock on a fully diluted
basis. The market value of the Company on July 20, 2005, the date of the
announcement, was $9.3 million. The purchase price will be allocated to our
identifiable assets and liabilities based on their estimated fair market values
at the date of the completion of the Merger, and any excess of our cost over
those fair market values will be accounted for as negative goodwill. The results
of final valuations of property, plant and equipment and intangible and other
assets, and the finalization of any potential plans of restructuring, have not
yet been completed. We may revise the allocation of the purchase price when
additional information becomes available.
REGULATORY MATTERS
We are not aware of any material governmental consents or approvals that
are required prior to the completion of the Merger. We have agreed with Sheridan
that if any additional governmental consents and approvals are required, each
company will use commercially reasonable efforts to obtain these consents and
approvals.
Although we do not expect state regulatory authorities to raise any
significant objections in connection with their review of the merger, we cannot
assure you that we will obtain all required regulatory approvals or that these
regulatory approvals will not contain terms, conditions or restrictions that
would be detrimental to our company after the merger.
Approval and recommendation of our Board of Directors
The Board of Directors, based in part on the opinion of Harris Nesbitt, has
unanimously approved the Merger Agreement. A copy of the Merger Agreement is
Annex A to this proxy statement. A description of the Merger Agreement is
included in "The Merger Agreement." A description of the merger and its
consequences is included in the section of the proxy statement entitled "The
Merger" and beginning on page 57. Proposal 1 is the adoption and approval of the
Merger Agreement by our stockholders.
Our Board of Directors believes the adoption of Proposal 1 is in our best
interests and those of our stockholders and unanimously recommends that you vote
for this proposal. Each proxy card executed and returned will be voted for this
proposal unless contrary instructions are indicated on the proxy card.
PROPOSAL 2 -- AMENDMENTS TO OUR RESTATED CERTIFICATE OF INCORPORATION -
PROPOSALS 2(a)-2(d)
In connection with the merger, you will be asked at the Meeting to consider
and approve amendments to our current Restated Certificate of Incorporation to
replace it with our proposed Second Amended and Restated Certificate of
Incorporation. Upon completion of the merger, you will be asked to exchange your
existing shares of our common stock for the newly created shares of common stock
on a share for share basis. Your rights as a stockholder will continue to be
governed by Delaware law. Our board of directors has unanimously adopted a
resolution approving, and recommending to our stockholders for approval, a
proposal to approve all of the changes to our current charter reflected in the
proposed Second Restated Certificate.
We have separated the significant amendments to the Second Amended and
Restated Certificate of Incorporation that will be effected by the proposed
Second Amended and Restated Certificate of Incorporation as separate Proposals 2
(a)-(d) to allow you to focus on each significant change. However, if any one of
these proposals is not approved, or if the Merger and the issuance of the shares
of our common stock or the amendment of our 2003 Stock Option Plan is not
approved, then none of these amendments will be made, and to the Second Amended
and Restated Certificate of Incorporation will not be filed.
The form of our proposed Second Amended and Restated Certificate of
Incorporation, marked to show all of the changes that are being proposed, is
included in this document as Annex C and is incorporated herein by reference.
The proposed Second Amended and Restated Certificate of Incorporation
includes a number of significant changes to our Second Amended and Restated
Certificate of Incorporation. These changes are broken out for your
consideration as follows:
- -------------------------------------------------------------------------------
Proposal 2(a) To modify the fixed range of the number of our directors to
permit a Board of up to nine (9) members;
- -------------------------------------------------------------------------------
Proposal 2(b) To convert the two classes of common stock authorized under
our current charter (Class A and Class B) and provide for a
single class of common stock having equal voting and other
rights;
- -------------------------------------------------------------------------------
Proposal 2(c) To increase the number of shares of common stock we are
authorized to issue to 50,000,000
- -------------------------------------------------------------------------------
Proposal 2(d) To adopt a Second Amended and Restated Certificate of
Incorporation that includes the foregoing changes in the
event they are approved by the stockholders and makes other
changes set forth in the form of our proposed amended and
Restated Certificate of Incorporation.
- -------------------------------------------------------------------------------
Significant differences exist between your rights as a stockholder under
the Restated Certificate and under the proposed Second Amended and Restated
Certificate of Incorporation. The material differences are summarized below.
However, this discussion of the proposed Second Amended and Restated Certificate
of Incorporation is necessarily general and is not intended to be a complete
statement of all proposed changes that may affect your rights as a stockholder,
and it is qualified in its entirety by reference to the Delaware General
Corporation Law, the Restated Certificate of Incorporation, and the proposed
Second Amended and Restated Certificate of Incorporation.
Recommendation of our Board of Directors
Our Board of Directors believes the adoption of proposals 2(a) through (d)
is in the best interests of the company and our stockholders and unanimously
recommends that you vote for each of these proposals. Each proxy card executed
and returned will be voted for each of these proposals unless contrary
instructions are indicated on the proxy card.
Proposal 2(a) -- Modify the fixed range of the number of our directors
Our Restated Certificate of Incorporation sets the size of our Board of
Directors at between one and seven members, with the exact number of directors
to be specified in the manner set forth in our bylaws and charter. The Restated
Certificate of Incorporation currently authorizes two class of common stock,
Class A and Class B. The holders of Class B common stock have the right to elect
two thirds of the directors on the board while the holders of our Class A common
stock may elect one third of the directors. The current size of our board is
five directors, three of whom were elected by the holders of our Class B common
stock (presently Henry Arnberg, our Chairman of the Board, and two of his family
members) and the remaining two were elected by the holders of our Class A common
stock.
The Second Amended and Restated Certificate of Incorporation sets the size
of the Board of Directors between one and nine members, with the exact number of
directors to be determined by resolution of our Board of Directors. The Merger
Agreement provides for an initial board of nine directors, two of who are our
nominees; two of whom are nominees of Sheridan and five of whom are jointly
nominated by Hirsch and Sheridan.
Proposal 2(b) - Convert Class A common stock and Class B common stock.
The Restated Certificate of Incorporation provides for Class A Common
Stock, which has been publicly held, and which has a right to elect one-third of
the Board of Directors and Class B Common Stock is presently held by Henry
Arnberg and his affiliates and has the right to elect two-thirds of the Board of
Directors.
The Second Amended and Restated Certificate of Incorporation provides that
Class A Common Stock and Class B common stock will each be converted, share for
share, into new Common Stock, all of which will be one class, and all of which
shall, after creation of same, vote, as a class, for the election of the entire
Board of Directors and on all other matters.
The Second Amended and Restated Certificate of Incorporation would convert
different voting classes of common stock, into one class of common stock with
the right to vote, as a class, on all matters on which stockholders are entitled
to vote under Delaware law.
Proposal 2(c) - Increase in authorized common stock.
Our present Restated Certificate of Incorporation authorizes us to issue up
to 23,000,000 shares of Common Stock. At present there are 8,642,000 shares of
Common Stock (both Class A and Class B combined) issued and outstanding. In
addition, following completion of the merger, we will be required to issue
additional 15,047,000 shares of Common Stock to the present holders of Sheridan
common stock. Moreover, we have reserved for issuance or will be required to
reserve for issuance following the merger a total of 924,000 shares of Common
Stock for outstanding warrants and stock options. The total of these exceeds our
currently authorized 23,000,000 shares of common stock (20,000,000 - Class A;
3,000,000 - Class B).
Unless deemed advisable by our Board of Directors, no further requests for
stockholder approval would be sought for the issuance of the additional
27,000,000 shares. The 27,000,000 additional shares could be used for general
corporate purposes, including future financings or acquisitions, and for
issuance of stock options or warrants. Except as noted above, our Board of
Directors has no immediate plans, intentions or commitments to issue additional
shares of common stock for any purpose, including rendering more difficult or
discouraging a merger, tender offer, proxy, contest or other change in control
of the Company.
As of July 30, 2005 there were 9,076,010 shares of Class A common stock
issued and 550,018 shares of Class B common stock issued, of which 1,164,000
were treasury shares. None of the authorized shares of our preferred stock have
been issued. Neither our common stock nor our preferred stock provides
pre-emptive rights to purchase newly issued shares.
Proposal 2(d) - Amend and Restated Certificate of Incorporation
The Second Amended and Restated Certificate of Incorporation includes the
changes described in Proposals 2(a) through (c) and also includes several other
changes in the language of our Second Amended and Restated Certificate of
Incorporation. Except as described in proposals 2(a) through (c), the changes
made by the Second Amended and Restate Certificate of Incorporation are not
substantive. The form of proposed Second Amended and Restated Certificate of
Incorporation included in this document shows you all of these other changes. In
proposal 2(d), we are seeking stockholder approval to amend and restate our
Restated Certificate of Incorporation to reflect the amendments described in
proposals 2(a) through (c), in the event those proposals are approved by the
stockholders, and to reflect the other non-substantive amendments that will be
effected by adoption of the Second Amended and Restated Certificate of
Incorporation.
Vote required
Approval of each of proposals 2(a) through (d) requires the affirmative
vote of the holders of a majority of the shares of each of our Class A and Class
B common stock outstanding, voting separately as a class and entitled to vote at
the Meeting as of the record date, either in person or by proxy. Thus, if you
abstain from voting your shares or direct your proxy or broker to abstain from
voting your shares, or if you do not complete and return a proxy card or
instruction card and do not attend the Meeting and vote, the effect will be a
vote against these proposals. Additionally, broker non-votes, if any, will
effectively be a vote against these proposals. We have conditioned approval of
each of proposals 2(a) through (d) on approval of all of these proposals and on
approval of the Merger as described in Proposal 1 as well as Proposals 3 and 4
described below. If any of these proposals is not approved, none of them will be
implemented, even if one or more of these proposals receives sufficient
stockholder votes for approval.
Appraisal rights
Under Delaware law and the provisions of our Restated Certificate, you are
not entitled to dissenters' rights of appraisal with respect to the proposed
amendments to our Revised Certificate of Incorporation.
PROPOSAL 3 -- APPROVAL OF AMENDMENT TO 2003 STOCK OPTION PLAN
At our Meeting, you will be asked to approve an amendment to the terms of
the Company's 2003 Stock Option Plan (the "2003 Plan") increasing the number of
shares available for issuance thereunder from 750,000 to 5,000,000. The 2003
Plan was adopted by the Board of Directors of the Company in May, 2003 and
approved by the stockholders at the 2003 Annual Meeting.
Under the terms of the Merger Agreement, we will enter into employment
agreements with Messrs. Bianco, Gallagher and Narang and Ms. Eichel pursuant to
which we will be required to issue them options to purchase an aggregate of
3,000,000 shares of our common stock. We will also be obligated to issue options
to purchase up to approximately 924,000 shares of common stock to certain
employees of Sheridan in exchange for the options to purchase Sheridan common
stock held by them prior to the merger. At the present time, the 2003 Plan has
750,000 authorized for issuance thereunder of which options to purchase 263,8000
shares are outstanding as of the date hereof, leaving 486,200 options remaining
available for issuance. Moreover, we anticipate issuing additional options to
employees of the combined company from time to time in the ordinary course of
business following the completion of the merger. In order to meet our
obligations under the Merger Agreement and in order to enable the Company to
continue to attract and retain personnel of the highest caliber, provide
incentives for certain directors, officers and employees of the Company and
certain other persons 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. Our Board has historically
found that the grant of options has proven to be a valuable tool in attracting
and retaining key employees. It believes that such authority, in view of the
significant changes we face as a result of the merger, should be continued
through the adoption of the proposed amendments to the 2003 Plan. The Board
believes that such authority (i) will provide the Company with significant means
to attract and retain talented personnel; (ii) will result in saving cash, which
otherwise would be required to maintain current key employees and adequately
attract and reward key personnel; and (iii) consequently will prove beneficial
to the Company's ability to be competitive.
If the proposed amendments to the 2003 Plan are approved by the
stockholders, additional options will likely be granted under the 2003 Plan, the
timing, amounts and specific terms of which cannot be determined at this time
(other than as described in this proxy statement).
The following summary of the 2003 Plan does not purport to be complete, and
is subject to and qualified in its entirety by reference to the full text of the
2003 Plan, as proposed to be amended, set forth as Exhibit "A" to this Proxy
Statement.
Summary of the 2003 Plan
The 2003 Plan, as proposed to be amended, would have 5,000,000 shares of
Common Stock reserved for issuance upon the exercise of options designated as
either (i) incentive stock options ("ISOs") under the Code or (ii) non-qualified
stock options. ISOs may be granted under the 2003 Plan to employees and officers
of the Company. Non-qualified options may be granted to consultants, directors
(whether or not they are employees), employees or officers of the Company. In
certain circumstances, the exercise of stock options may have an adverse effect
on the market price of the Company's common stock.
The purpose of the 2003 Plan is to encourage stock ownership by certain
directors, officers and employees of the Company and certain other persons
instrumental to the success of the Company and give them a greater personal
interest in the success of the Company. If approved, the 2003 Plan would be
administered by the Stock Option Committee. The Committee, within the
limitations of the 2003 Plan, determines the persons to whom options will be
granted, the number of shares to be covered by each option, whether the options
granted are intended to be ISOs, the duration and rate of exercise of each
option, the option purchase price per share and the manner of exercise, the
time, manner and form of payment upon exercise of an option, and whether
restrictions such as repurchase rights in the Company are to be imposed on the
shares subject to options. Options granted under the 2003 Plan may not be
granted at a price less than the fair market value of the common stock on the
date of the grant (or 110% of fair market value in the case of persons holding
10% or more of the voting stock of the Company). The aggregate fair market value
of shares for which ISOs granted to any person are exercisable for the first
time by such person during any calendar year (under all stock option plans of
the Company and any related corporation) may not exceed $100,000. The 2003 Plan
will terminate in December, 2013 which means no options may be granted after
such date. Options granted under the 2003 Plan will expire not more than five
years from the date of grant; however, any options outstanding on the
termination date of the 2003 Plan will continue until they expire by their
terms. Options granted under the 2003 Plan are not transferable during an
optionee's lifetime but are transferable at death by will or by the laws of
descent and distribution.
Certain Federal Income Tax Consequences of the 2003 Plan
The following is a brief summary of the Federal income tax aspects of stock
options to be granted under the 2003 Plan, as proposed to be amended, 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.
Incentive Stock Options. A participant will recognize no taxable income
upon the grant or exercise of an ISO. Upon a disposition of the shares after the
later of two years from the date of grant and one year after the transfer of the
shares to the participant, (i) the participant will recognize the difference, if
any, between the amount realized and the exercise price as long-term capital
gain or long-term capital loss (as the case may be) if the shares are capital
assets; and (ii) the Company will not qualify for any deduction in connection
with the grant or exercise of the options. The excess, if any, of the fair
market value of the shares on the date of exercise of an ISO over the exercise
price will be treated as an item of adjustment for a participant's taxable year
in which the exercise occurs and may result in an alternative minimum tax
liability for the participant. In the case of a disposition of shares in the
same taxable year as the exercise, where the amount realized on the disposition
is less than the fair market value of the shares on the date of exercise, there
will be no adjustment since the amount treated as an item of adjustment, for
alternative minimum tax purposes, is limited to the excess of the amount
realized on such disposition over the exercise price which is the same amount
included in the regular taxable income.
If common stock acquired upon the exercise of an ISO is disposed of prior
to the expiration of the holding periods described above, (i) the participant
will recognize ordinary compensation income in the taxable year of disposition
on an amount equal to the excess, if any, of the lesser of the fair market value
of the shares on the date of exercise or the amount realized on the disposition
of the shares, over the exercise price paid for such shares; and (ii) the
Company will qualify for a deduction equal to any such amount recognized,
subject to the limitation that the compensation be reasonable. The participant
will recognize the excess, if any, of the amount realized over the fair market
value of the shares on the date of exercise, if the shares are capital assets,
as short-term or long-term capital gain, depending on the length of time that
the participant held the shares, and the Company will not qualify for a
deduction with respect to such excess.
Subject to certain exceptions for disability or death, if an ISO is
exercised more than three months following the termination of the participant's
employment, the option will generally be taxed as a non-qualified stock option.
See "Non-Qualified Stock Options."
Non-Qualified Stock Options. 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.
Recommendation and Vote Required
The Board of Directors recommends that the stockholders approve the
amendment to the 2003 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 foregoing proposal to amend the 2003 Plan. We
have conditioned approval of Proposal 3 on approval of each of Proposals 1, 2
and 4. If any of these proposals is not approved, none of them will be
implemented, even if one or more of these proposals receive sufficient
stockholder votes for approval.
PROPOSAL 4 - ELECTION OF DIRECTORS
Nine 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 nine nominees for the nine board of director positions as fixed
by the Board of Directors.
o Henry Arnberg
o Paul Gallagher
o Joseph J. Bianco
o Robert E. Michalik
o Marvin Broitman
o Mary Ann Domuracki
o Kammy Moalemzadeh
o Edward J. Tobin
o Jose Axtmayer
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. If the merger is not consummated, those directors who are not
currently serving our Board will immediately resign, and we will schedule and
hold a stockholders meeting for the purpose of electing a new board.
Recommendation and vote required
The Board of Directors recommends a vote "for" each of the nominees listed
above. Each of the nominees for Director shall be elected by a plurality of
votes cast at the Meeting by the holders of the Company's common stock.
Board of directors and management following the merger
The following table sets forth the names and ages of the our directors and
executive officers and the positions they will hold following the merger:
Name Age Position
---- --- --------
Henry Arnberg 63 Chairman of the Board of Directors
Joseph J. Bianco 55 Chief Executive Officer, Director
Paul Gallagher 55 President, Chief Operating Officer, Director
Anil K. Narang 41 Vice Chairman
Beverly Eichel 47 Executive Vice President, Chief Financial
Officer and Secretary
Robert E. Michalik 36 Director
Marvin Broitman 66 Director
Mary Ann Domuracki 50 Director
Kammy Moalemzadeh 36 Director
Edward J. Tobin 48 Director
Jose Axtmayer 56 Director
Henry Arnberg has held the position of Chairman of our Board of the Board
of Directors since 1980 and served our President until December 1998 and our
Chief Executive Officer until November 2004. Mr. Arnberg received a Bachelor of
Science in Accounting from the University of Bridgeport in 1965 and an MBA in
Finance and Management from the Adelphi University in 1971.
Joseph J. Bianco will be our Chief Executive Officer and director following
the Merger. Mr. Bianco, currently, is the Co-Chief Executive Officer and
director of Sheridan and has been since its inception in July 2003. Prior
hereto, he was Chairman of Interlink Group until 2001 and Chairman of Cognitive
Arts, Inc. (a leading creator of educational software) from 1997 to 2000. From
1990 to 1996, Mr. Bianco co-founded Alliance Entertainment Corp., with Anil K.
Narang, an independent music distributor where he was Chief Executive Officer.
Mr. Bianco graduated from Yale Law school in 1975.
Paul Gallagher became our Chief Operating Officer in September 2001. In
early 2003, Mr. Gallagher was also appointed the Company's President as well as
a director. On December 1, 2004, Mr. Gallagher was appointed Chief Executive
Officer. For several years 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.
Anil K. Narang will be our Vice Chairman following the merger. Mr. Narang
is currently the Co-Chief Executive Officer of Sheridan. From 1998 to 2001, he
held various position at Interlink Group (a leading distributor of magazines to
booksellers and other retailers) and prior to that he served in a variety of
executive capacities at Alliance Entertainment Corp. from 1990 to 1995 including
Chief Financial Officer, Chief Operating Officer, Vice-Chairman and President.
Mr. Narang co-founded Alliance Entertainment Corp. Mr. Narang holds a BA in
Economics, an MBA in Finance and has a CPA among his other professional
accreditations.
Beverly Eichel has been our Executive Vice President and Chief Financial
Officer since February 1, 2002. Prior thereto, she was Executive Vice President
and Chief Financial Officer of Donnkenny, Inc. from October 1998 to June 2001.
From June 1992 to September 1998, Ms. Eichel served as Executive Vice President
and Chief Financial Officer of Danskin, Inc. and had been its Corporate
Controller from October 1987 to June 1992. Ms. Eichel is a Certified Public
Accountant in the State of New York and a member of the AICPA. Ms. Eichel
received a Bachelor of Science in Accounting from the University of Maryland in
1980.
Robert E. Michalik is a Managing Director of Kinderhook Industries, LLC a
middle market private equity firm that manages $200 million in two funds,
Kinderhook Capital Fund I, LLP and Kinderhook Capital SBIC Fund I, LLP.
Kinderhook Industries, through its funds, is the largest beneficial shareholder
of Sheridan Square Entertainment, Inc where Mr. Michalik is the Chairman of the
Board. Prior to founding Kinderhook Industries, Mr. Michalik was a Managing
Director at Thayer Capital, a middle market buyout fund with over $1.2 billion
of capital under management and prior to being at Thayer Capital, an Associate
at UBS Capital Corporation, the North American merchant bank of the Union Bank
of Switzerland. Mr. Michalik spent two years in the Merger and Acquisitions
group at Morgan Stanley & Co., Inc. Mr. Michalik graduated from Yale University
(B.A., Economics, magna cum laude 1991), and the Harvard Business School (Baker
Scholar, 1995). Mr. Michalik currently serves on the Board of Directors of
Sheridan Square Entertainment, Inc., United Tote Company, Notification
Technologies, Inc., and Raleigh Cycle Ltd.
Marvin Broitman has served as a director of the Company since April 1994,
and is currently Vice President of Uniwave, Inc., a company engaged in the
engineering and manufacturing of automation accessory equipment for textile
machinery since 1968. Mr. Broitman received a Bachelor of Electrical Engineering
degree from City College in 1961 and an MBA from the Harvard Business School in
1968. Mr. Broitman serves on the Audit, Stock Option and Compensation Committees
of the Board of Directors.
Mary Ann Domuracki has served as a director of the Company since September
2001, and is a Managing Director 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 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.
Kammy Moalemzadeh is currently Founder and Managing Partner of Arcadia
Investment Partners, a private investment firm focused on deploying capital on
behalf of family offices and select institutions. Prior to founding Arcadia, Mr.
Moalemzadeh was a Managing Director at Mentmore Venture Partners (MVP). Mr.
Moalemzadeh also spent several years at an affiliated MVP entity focusing on
leveraged transactions, financings, and business development. Previously, Mr.
Moalemzadeh worked in the High Yield and Merchant Banking groups at Donaldson,
Lufkin & Jenrette Securities Corporation. Mr. Moalemzadeh received a B.S. in
Economics with a concentration in Finance from the Wharton School of the
University of Pennsylvania. Prior to Wharton School, he attended Stanford
University.
Edward J. Tobin is a Director of Global Emerging Markets North America,
Inc., a private equity group in New York City. Prior to joining GEM, Mr. Tobin
was Managing Director of Lincklaen Partners, a private venture capital group.
Previously, he had been a portfolio manager with Neuberger and Berman and prior
to that Vice President of Nordberg Capital, Inc., an institutional brokerage
firm. Mr. Tobin received his MBA from the Wharton School, as well as a Master of
Science in Engineering and a Bachelor of Science in Economics from the
University of Pennsylvania.
Jose Axtmayer is a principal at Axtmayer, PSC located in San Juan Puerto
Rico. He is legal counsel for USB Family of Puerto Rico Investment Companies,
and an arbitrator for the World Court for Sports Arbitration of the
International Olympic Committee in Lausanne, Switzerland. Before becoming a
principal at Axtmayer, PSC Mr. Axtmayer was a partner at Axtmayer, Adsuar, Muniz
& Goyco prior to which he as a partner of Goldman, Antonetti Cordova & Axtmayer.
Mr. Axtmayer was admitted to the bar of the Commonwealth of Puerto Rico in 1975,
the bar of the State of New York in 1978 and the bar of the Supreme Court of the
United States in 1992. Mr. Axtmayer received his Juris Doctor from Yale Law
school in 1975 and a M.A. in Economics from Yale University in 1974.
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 $175,000, 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 indemnitees 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.
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
NASDAQ Small Cap Market listing standards, as applicable and as may be modified
or supplemented.
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 five current Board members, three 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 nominees 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.
The Board of Directors met on five (5) occasions during the year ended
January 31, 2005 and had numerous informal telephonic conferences and did not
act by unanimous written consent during the last fiscal year. Each of the Stock
Option Committee and Compensation Committee held one (1) meeting during such
fiscal year and did not act by written unanimous consent.
Directors' compensation
Directors who are employees of the Company or its subsidiaries will 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 will 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 will participate in the Company's 2004 Non-Employee
Director Stock Option Plan. In fiscal 2002, the Board approved the issuance of
50,000 warrants to one of the independent directors for services rendered to the
Company. Such director was also granted certain registration rights associated
with the warrants. The warrants had an exercise price of $.50 per share, which
was the fair market value on the date of grant. In fiscal 2004, each independent
director was issued 10,000 options under the Company's 2004 Non-Employee Stock
Option Plan. The options have an exercise price of $1.01-$1.02 per share, which
was the fair market value as of the date of the grant.
Audit committee report
The current members of the Audit Committee are Marvin Broitman, Mary Ann
Domuracki and Chris Davino. MaryAnn Domuracki serves as our Audit Committee
Chairperson. The Audit Committee Charter is annexed hereto as Exhibit A. The
Audit Committee held four (4) meetings either in person or telephonically and
had numerous informal telephonic conferences during the fiscal year ended
January 29, 2005. The function of the Audit Committee is to recommend annually
to the Board of Directors the appointment of the independent registered public
accounting firm of the Company, discuss and review the scope and the fees of the
prospective annual audit and review the results thereof with the independent
registered public accounting firm, review and approve non-audit services of the
independent registered public accounting firms, 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 independent registered public accounting firm
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 29, 2005, the
Audit Committee:
o Reviewed and discussed the audited financial statements for the year
ended January 29, 2005 with management and BDO Seidman, LLP, the
Company's independent registered public accounting firm; as
appropriate, the Audit Committee reviews, evaluates and discusses with
the Company's management, internal financial and accounting personnel
and the independent registered public accounting firm, the following:
o The plan for, and the independent registered public accounting
firm's 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 registered
public accounting firm discuss with the Audit Committee, and other
communication requirements specified under rules and regulations of
the SEC, Independence Standards Board 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.
Our independent registered public accounting firm 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 us, which are referred to in
"Independent Registered Public Accounting Firm'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 our 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
registered public accounting firm 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 our Annual Report on Form 10-K for
the year ended January 29, 2005 for filing with the Securities and Exchange
Commission.
Compensation Committee Report
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. Marvin Broitman, Mary Ann Domuracki and
Christopher Davino are the members of the Compensation Committee. Mr Broitman
serves as Chairman.
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.
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, 2005,
190,000 stock options were granted to the Company's senior executive officers.
Chief Executive Officer
Mr. Gallagher'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 11, 2004, Mr. Gallagher entered into a two year agreement that
provides for his annual base salary at $325,000 for the first year and $350,000
for the second year.
In addition to his base salary, Mr. Gallagher is eligible to participate in
the short-term and long-term incentive programs outlined above for the other
Named Executives. Mr. Gallagher did not receive a short-term incentive bonus
payment from the Company for fiscal 2005.
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).
Section 16(a) beneficial ownership reporting compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors and persons who own more than ten percent of a class of securities
to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with
the Securities and Exchange Commission. In addition, officers, directors, and
greater than ten percent stockholders are required by the Securities and
Exchange Commission regulations to furnish us with copies of all Section 16
forms the file.
To our knowledge, based solely on our review of the copies of such forms
received by us and representations from certain reporting persons, we believe
that during the fiscal year ended January 29, 2005, all Section 16(a) filing
requirements applicable to our officers, directors and greater than ten percent
beneficial owners were satisfied.
Security ownership of certain beneficial owners and management
The following table sets forth the beneficial ownership of shares of (a)
Class A common stock and Class B common stock as of September 2, 2005, by (i)
each person known to be the beneficial owner of more than 5% of the outstanding
shares of Class A or 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, and (b) for our new common stock the same persons on a pro-forma
assuming the consummation of the merger:
Proforma assuming consummation of the merger
Amount and Amount and
Nature of Percent Nature of Percent
Name and Address of Title of Beneficial of Title of Beneficial of
Beneficial Owner (1) Class (3) Ownership Class Class (4) Ownership Class
- -------------------- --------- --------- ----- --------- --------- -----
Henry Arnberg (1) Class A 981,658 12.4% Common 1,481,676(4,5) 6.34%
Class B 500,018 (3) 91%
Paul Levine (1) Class A 1,074,621 13.6% Common 1,074,621(6) 4.6%
Class B - - -
Paul Gallagher (1) Class A 653,332 8.3% Common 770,000(10) 2.75%
Class B - - -
Marvin Broitman (1) Class A 81,498 1.0% Common 89,166(7) *
Class B - - -
Mary Ann Domurack (1) Class A 23,333 * Common 36,666(8) *
Class B - - -
Christopher J. Davino (1) Class A 3,333 * Common 6,666(9) *
Class B - - -
Beverly Eichel (1) Class A 202,166 2.6% Common 268,000(11) *
Class B - - -
Joseph Bianco (2) Class A - - Common 1,479,332(12) 6.33%
Class B - -
Anil Narang (2) Class A - - Common 1,479,332(13) 6.33%
Class B - -
Robert E. Michalik (2) Class A - - Common 9,625,421(14) 41.16%
Class B - -
Edward J. Tobin (2) Class A - - Common 3,333(15) *
Class B - -
Jose Axtmayer (1) Class A - - Common 3,333(16) *
Class B - -
Kammy Moalemzadeh (1) Class A - - Common 3,333(17) *
Class B - -
MH Investors, LLC (2) Class A - - Common 1,285,469(18) 5.50%
Class B - -
Redux Records, LLC (2) Class A - - Common 1,479,332(19) 6.33%
Class B - -
Goldberg Records, LLC (2) Class A - - Common 1,180,163 5.05%
Class B - -
Kinderhook Capital
Fund I, L.P. (2) Class A - - Common 3,860,961(20) 16.52%
Class B
Kinderhook Capital SBIC Class A - - Common 7,043,275 30.13%
Fund I, L.P. (2) Class B - -
All Executive Officers Class A 3,019,941 38.2% Common
and Directors as a group Class B 500,018 91%
* Less than one percent
(1) All addresses are c/o Hirsch International Corp., 200 Wireless Boulevard,
Hauppauge, New York 11788.
(2) All addresses are c/o Sheridan Square Entertainment, Inc. 130 Fifth Avenue,
New York, NY 10011
(3) The Company's outstanding Common Stock presently 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 identical except that two-thirds of the
directors of the Company elected by the holders of the Class B Common
Stock, as long as the number of outstanding Shares of Class B Common Stock
equals or exceeds 400,000 shares. Warrants and options to purchase shares
held by a person that are exercisable or become exercisable within 60 days
after September 2, 2005 are deemed to be outstanding for the purpose of
calculating the percentage of outstanding shares owned by that person only.
(4) Following the merger, all shares of Class A and Class B common stock shall
be converted to a single class of common stock on a share for share basis.
(5) Includes 400,018 shares of Class B Common Stock held by an estate planning
entity for the benefit of Mr. Arnberg's children. Mr. Arnberg exercises
voting control over these shares.
(6) Includes 100,000 shares of Class A Common Stock owned by trusts created for
the benefit of his minor children as to which he disclaims beneficial
ownership.
(7) Includes options to purchase 10,000 shares of Class A Common Stock at an
exercise price of $0.96, 12,500 shares of Class A Common Stock at an
exercise price of $0.27, 10,000 shares of Class A Common Stock at an
exercise price of $0.92 per share and options to purchase 6,666 shares of
Class A Common Stock at an exercise price of $1.02 per share. Also includes
warrants to purchase 50,000 shares of Class A Common Stock at $0.50 per
share. Does not include options to purchase purchase 3,334 shares of Class
A Common Stock at an exercise price of $1.02 per share.
(8) 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, 10,000 shares of Class A Common Stock at an
exercise price of $0.92 per share and 6,666 shares of Class A Common Stock
at an exercise price of $1.02 per share. Does not include options to
purchase 3,333 shares of Class A Common Stock at an exercise price of $1.02
per share.
(9) Includes options to purchase 6,666 shares of Class A Common Stock at an
exercise price of $1.01 per share. Does not include options to purchase
3,334 shares of Class A Common Stock at an exercise price of $1.01 per
share.
(10) Includes options to purchase 100,000, 300,000 and 75,000 shares of Class A
Common Stock at an exercise price of $0.95, $0.27 and $1.12 per share
respectively. Does not include options to purchase 75,000 shares of Class A
Common Stock at an exercise price of $1.12 per share, respectively. Does
not include options to purchase 667,000 shares of common stock to be issued
in accordance with the terms of the merger agreement at an exercise price
equal to the greater of $1.35 or the fair market value on the date of grant
due to the fact that the vesting of these options has yet to be determined.
(11) Includes options to purchase 50,000, 168,000 and 20,000 shares of Class A
Common Stock at an exercise price of $0.52, $0.27 and $1.12 per share
respectively. Does not include options to purchase 20,000 shares of Class A
Common Stock at an exercise price $1.12 per share, respectively. Does not
include options to purchase 333,333 shares of common stock to be issued in
accordance with the terms of the merger agreement at an exercise price
equal to the greater of $1.35 or the fair market value on the date of grant
due to the fact that the vesting of these options has yet to be determined.
(12) Includes 1,479,332 shares of common stock owned by Redux Records, LLC, with
which entity Mr. Bianco is a principal. Does not include options to
purchase 1,000,000 shares of common stock to be issued in accordance with
the terms of the merger agreement at an exercise price equal to the greater
of $1.35 or the fair market value on the date of grant due to the fact that
the vesting of these options has yet to be determined.
(13) Includes 1,479,332 shares of common stock owned by Redux Records, LLC, with
which entity Mr. Narang is a principal. Does not include options to
purchase 1,000,000 shares of common stock to be issued in accordance with
the terms of the merger agreement at an exercise price equal to the greater
of $1.35 or the fair market value on the date of grant due to the fact that
the vesting of these options has yet to be determined.
(14) Includes 2,578,825 and 7,043,275 shares of common stock owned by Kinderhook
Capital Fund I, L.P. and Kinderhook Capital SBIC Fund I, L.P.,
respectively. Mr. Michalik is a managing director and principal in these
entities. Newly elected directors receive a grant of 10,000 options and an
exercise price equal to the fair market value of a share of our common
stock on the date of grant upon their appointment to our board. One third
of these options vest on the date of grant, one third on the first
anniversary and one third on the second anniversary thereof.
(15) Newly elected directors receive a grant of 10,000 options and an exercise
price equal to the fair market value of a share of our common stock on the
date of grant upon their appointment to our board. One third of these
options vest on the date of grant, one third on the first anniversary and
one third on the second anniversary thereof.
(16) Newly elected directors receive a grant of 10,000 options and an exercise
price equal to the fair market value of a share of our common stock on the
date of grant upon their appointment to our board. One third of these
options vest on the date of grant, one third on the first anniversary and
one third on the second anniversary thereof.
(17) Newly elected directors receive a grant of 10,000 options and an exercise
price equal to the fair market value of a share of our common stock on the
date of grant upon their appointment to our board. One third of these
options vest on the date of grant, one third on the first anniversary and
one third on the second anniversary thereof.
(18) MH Investors, LLC is an entity controlled by Kammy Moalemzadeh, Mr. Narang
and Kinderhook Capital Fund I, L.P.
(19) Mr. Bianco and Mr. Narang are principals in Redux Records, LLC.
(20) Includes 1,282,136 shares owned by Music Holdings, LLC.
We are unaware of any arrangements between stockholders that may result in a
change in control of the Company other than the agreements and transactions
contemplated by the merger agreement.
Certain relationships and related transactions
Effective October 31, 2002, we completed the sale of all of the outstanding
equity interests in our wholly-owned subsidiary, Pulse Microsystems Ltd.
("Pulse"), pursuant to the terms of the purchase agreement by and between us and
2017146 Ontario Limited. All periods presented have been restated to reflect the
discontinued operations of Pulse (See Note 7 to the Consolidated Financial
Statements).
Effective January 31, 2004. we executed the TUI Agreement with Tajima
pursuant to which we sold all of the common stock constituting a 55% equity
interest of its subsidiary owned by it to Tajima. Our Consolidated Financial
Statements have been restated to reflect the discontinued operations of TUI (See
Note 7 to the Consolidated Financial Statements).
During the quarter ended April 30, 2004, we determined that Hometown
Threads was not strategic to our long-term objectives. On October 22, 2004, we
sold substantially all of the assets of Hometown subsidiary to buyer, a wholly
owned subsidiary of PCA, pursuant to the terms of the Hometown Agreement entered
into between us, Hometown Threads, Buyer and PCA. Hometown Threads, LLC was
accounted for as discontinued operations in the consolidated financial
statements for all periods presented.
Prior to January 2003, we had advanced approximately $496,000 for premiums
on split dollar life insurance for Henry Arnberg, the Company's Chairman and
Paul Levine, the former Vice-Chairman of the Board. The spouse of each Messrs.
Arnberg and Levine are the beneficiaries of these respective policies. These
advances are collateralized by the cash surrender value of the policies, which
totaled in the aggregate approximately $555,000 at January 29, 2005 for both
policies. The premiums for these policies are currently being paid out of the
accumulated dividends for the policies.
On April 2, 2004, we entered into a 36 month consulting agreement with Paul
Levine, former Vice-Chairman of the Board of Directors. Under the agreement, Mr.
Levine resigned from the Board of Directors and was relieved of all fiduciary
positions or committees. Mr. Levine is no longer an employee of the Company and
for the term of the agreement is considered an independent contractor. A monthly
fee of $9,166.67 will be paid to Mr. Levine, in addition to the cost of medical
benefits as provided to our executive level employees, premiums for his
disability policy and payments under an automobile lease which expired January
18, 2005. Mr. Levine will provide consulting services for up to 4 days per month
during the term of the agreement including attendance at trade shows, business
development activities, contact with key customer accounts, product assessment
and undertaking special projects.
During the fourth quarter of fiscal 2005, Howard Arnberg, former President
of Hometown Threads, received a lump sum payment in the amount of $92,500. This
payment was made pursuant to a change of control provision in an employment
agreement between Mr. Howard Arnberg and us in connection with the sale of
Hometown Threads in October, 2004. Howard Arnberg in no longer affiliated with
the Company.
On December 1, 2004, we entered into a 36 month consultant agreement with
Henry Arnberg, Chairman of the Board of Directors. Under the agreement, Mr.
Arnberg is no longer an employee of the Company, but will remain Chairman of the
Board of Directors. A monthly fee of $12,500 will be paid to Mr. Arnberg in lieu
of any other compensation for his service on the Board of Directors. Mr. Arnberg
will continue to receive medical benefits as provided to our executive level of
employees, premiums for his disability policy and payments under the current
automobile lease until the lease expires. Mr. Arnberg will provide consulting
services for up to 10 days per month during the term of the agreement including
attendance at trade shows, contact with key customer accounts, product
assessment and undertaking special projects.
On July 19, 2005, we entered into an agreement with Sheridan pursuant to
which it was agreed that we would purchase up to $1 million of Sheridan's newly
authorized Series B Preferred Stock in one or more traunches. Our management
also conditioned the purchase of the Series B Preferred Stock upon the execution
of the Merger Agreement.
As of the date hereof, we have purchased approximately $500,000 worth of
Sheridan's Series B Preferred Stock.
The Series B Preferred Stock is senior to all other equity securities of
Sheridan in terms of dividends, distributions and liquidation preference.
Dividends, whether or not declared, accrue at the rate of 8% per annum of the
sum of the stated value of each share ($25,000) commencing January 1, 2006,
provided that in the event a "Disposition Transaction" (as defined in the
Certificate of Designations of the Series B Preferred Stock) has not occurred by
April 1, 2006, the dividend rate shall increase to 14% per annum and provided
further that if a Disposition Transaction does not occur by July 1, 2006, the
dividend rate shall increase to 18% per annum. Upon consummation of the merger,
the Series B Preferred Stock will be cancelled and of no further force and
effect.
Sheridan and Kinderhook Capital Fund thereof, has the right to redeem the
shares of Series B Preferred Stock for an amount equal to the stated value of
each such share plus all accumulated and unpaid dividends, provided that if
either Sheridan or Kinderhook Capital Fund exercises this right within 90 days
following termination of the Merger Agreement, then the redemption price shall
be equal to 80% of the stated value of each share of Series B Preferred Stock.
Kinderhook Capital Fund is the largest beneficial owner of Sheridan capital
stock, and, we believe, will be the largest holder of our common stock
immediately following the merger.
Executive compensation
The following table sets forth the compensation earned during the three fiscal
years ended January 29, 2005 by the Company's Chairman of the Board and by the
four most highly paid Company's executive officers whose total compensation for
such periods exceeded $100,000 (the "Named Executives"):
Summary Compensation Table
Long-term compensation
Annual Compensation Awards Payouts
Securities
Other Under-
Annual Restricted lying LTIP All Other
Fiscal Compen- Stock Options Pay Compen-
Year Salary ($) Bonus($) sation ($) Awards($) SARs(#) outs($) sation($)
---- ---------- -------- ---------- --------- ------- -------- ---------
Henry Arnberg
Chairman of the Board
of Directors 2005 $218,000 - - - - - $2,919
2004 $250,000 - - - - - $2,060
2003 $279,166 - - - - - $2,060
Paul Gallagher
Chief Executive Officer
and President 2005 $310,000 - - - 150,000 - $4,187
2004 $300,000 $150,000 2 - - - - $3,675
2003 $300,000 $75,000 1 - - 300,000 - $3,675
-
Beverly Eichel
Executive Vice President and
Chief Financial Officer
and Secretary 2005 $265,000 - - - 40,000 - -
2004 $250,000 $87,500 2 - - - - -
2003 $235,000 $35,250 1 - - 218,000 - -
Kristof Janowski
Executive Vice President -
Sales and Marketing 2005 $250,000 - - - - - -
2004 $289,000 $50,000 2 - - - - -
2003 $200,000 $54,000 1 - - 80,600 - -
Nicholas Paccione
Vice President - Operations 2005 $155,000 - - -- - -
2004 $ 82,500 $ 21,500 - - 20,000 - -
2003 - - - - - - -
1 Bonuses were earned in fiscal 2003 but paid in fiscal 2004
2 Bonuses were earned in fiscal 2004 but paid in fiscal 2005
The following table sets forth the individual grants of stock options made
during the fiscal year ended January 29, 2005 by the Company's Chairman of
the Board and the Named Executives:
Options/SAR Grants Table
Percent of
Number of total
Securities Options/SARs Excise
Underlying Granted to at base
Options/SARs Employees in Price Expiration 5% 10%
Name Granted (#) fiscal year ($/Sh) date ($) ($)
---- ----------- ----------- ------ ---- --- ---
Henry Arnberg - - - - - -
Paul Gallagher 150,000 79% $168,000 12/1/2009 $214,000 $225,000
Beverly Eichel 40,000 21% $44,800 12/1/2009 $57,000 $60,000
Kristof Janowski - - - - - -
Nicholas Paccione - - - - - -
Option Exercises and Holdings
The following table sets forth information concerning the exercise of stock
options by the Named Executives during the Company's fiscal year ended January
29, 2005 the number of options owned by the Named Executives and the value of
any in-the-money unexercised stock options as of January 29, 2005.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at Fiscal Year-End ($)
Fiscal Year-End (#)
Share
Acquired on Value
Name Exercise (#)A Realized $ Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------- ---------- ------------------------- -------------------------
Henry Arnberg 0 $0 0/0 $ 0/0
Paul Gallagher 0 $0 358,000/192,000 $ 0/115,500
Beverly Eichel 0 $0 173,000/85,000 $ 0/40,040
Kris Janowski 0 $0 54,000/27,000 $ 0/7,290
Nicholas Paccione 0 $0 7,000/13,000 $ 0/11,180
In connection with the execution of their respective employment agreements,
Mr. Gallagher received options to purchase 150,0000 shares and Ms. Eichel
received options to purchase 40,000 shares of the Company's Class A common
stock.
Mr. Gallagher's employment agreement provides for the payment of an annual
base salary of $325,000 during the first year of the agreement, and $350,000
during the second year of the agreement. The agreement also entitles Mr.
Gallagher to participate in and receive a bonus under the Company's annual
incentive plan for key employees with a possible maximum bonus of up to 100% of
Mr. Gallagher's annual base salary. In addition, the employment agreement
provides for the reimbursement of certain business expenses, the provision of
health insurance and an automobile allowance.
The employment agreement requires Mr. Gallagher to devote his entire
business time and attention to the Company and provides for termination upon his
death or disability (defined as the inability to perform duties for three (3)
consecutive months or six (6) months in any nine (9) month period), or for cause
(as defined in the Gallagher Agreement).
In the event the Company terminates the employment agreement other than for
cause, or materially breaches its obligations thereunder, Mr. Gallagher is
entitled to receive payment of his salary for up to six months plus a pro-rata
portion, based upon his period of service to the Company, of the amount, if any,
he would have been entitled to receive under the Incentive Plan if his
employment had continued until the end of the fiscal year. The employment
agreement also provides that Mr. Gallagher shall not compete with the Company
during the term of the agreement and for a period of one (1) year thereafter. A
change of control provision under which Mr. Gallagher would be entitled to
receive an amount equal to his base salary for a period of one year following
the termination of employment is included, in addition to any and all health and
dental, disability, survivor income and life insurance plan or other benefit
plan maintained by the Company.
Ms. Eichel entered into a two-year employment agreement to serve as the
Company's Vice-President-Finance and Administration, Chief Financial Officer and
Secretary
Ms. Eichel's employment agreement provides for the payment of an annual
salary of $265,000 per year. The agreement also entitles Ms. Eichel to
participate in and receive a bonus under the Company's annual incentive plan for
key employees with a possible maximum bonus of 70% of Ms. Eichel's annual base
salary. In addition, Ms. Eichel's employment agreement provides for the
reimbursement of business expenses including an automobile and cellular phone
allowance, the provision of health insurance and related benefits.
The employment agreement requires Ms. Eichel to devote her entire business
time and attention to the Company and provides for termination upon her death or
disability (defined as the inability to perform duties for three (3) consecutive
months or six (6) months in any nine (9) month period), or for cause (as defined
in the employment agreement). The employment agreement also provides that Ms.
Eichel not compete with the Company during the term of the agreement and for a
period of one (1) years thereafter. A change of control provision under which
Ms. Eichel would be entitled to receive an amount equal to her base salary for a
period of one year following the termination of employment, in addition to any
and all health and dental, disability, survivor income and life insurance plan
or other benefit plan maintained by the Company, is included.
Corporate performance graph
We believe that we are the only publicly-held firm in the embroidery
equipment industry, and therefore do not believe that we can reasonably identify
an embroidery industry-based peer group. We have elected to define a peer group
based on a group of five industrial distributors, trading in similar SIC Codes,
with relatively low market capitalization for a benchmark. The following graph
and table compares the change in the cumulative total stockholder return for the
five-year period beginning on January 31, 2001, and ending on January 31, 2005,
based upon the market price of the Company's Class A common stock, with the
cumulative total return of the NASDAQ Composite Index and the defined peer
group. The peer group includes the following companies: Lancer Corp.; Quipp
Inc.; Paul Mueller Company; Oilgear Company; and Key Technology Inc. The graph
assumes a $100 investment on January 31, 2001 in each of the indices and the
reinvestment of any and all dividends.
[GRAPHIC OMITTED]
Comparison of five-year cumulative total return among Hirsch International
Corp., NASDAQ Composite Index and an industry-based market capitalization-based
peer group
1/31/01 1/31/02 1/31/03 1/31/04 1/31/05
------- ------- ------- ------- -------
Hirsch International Corp. $100 $49 $42 $225 $99
NASDAQ Composite Index 100 70 48 75 74
Peer Group 100 75 79 106 90
PROPOSAL 5 - SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Fees paid to our auditors
The following table sets forth the fees paid to our auditor's BDO Seidman,
LLP for professional services for each of the two fiscal years ended January 29,
2005 and January 31, 2004:
Year Ended Year ended
January 29, 2005 January 31, 2004
---------------- ----------------
Audit Fees $172,500 $175,000
Audit-Related Fees 26,000 29,000
Tax Fees 33,000 55,000
---------------- ----------------
$231,500 $259,000
================ ================
Audit fees include fees billed for (a) the audit of the Company and our
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 our
independent registered public accounting firm. The Audit Committee has also
established pre-approved services for which out management can engage the
independent registered public accounting firm. Any work in addition to these
pre-approved services in a quarter requires the advance approval of the Audit
Committee. The Audit Committee considers whether the provision of permitted
non-audit services is compatible with maintaining BDO Seidman, LLP's
independence. All fees for both audit and tax services were approved by the
Audit Committee.
Recommendation and vote required
The Board of Directors recommends that the stockholders vote "for" the
appointment of BDO Seidman, LLP independent registered public accounting firm,
which served as the our independent registered public accounting firm for the
fiscal year ended January 29, 2005, as independent registered public accounting
firm to audit the Company's consolidated financial statements for the fiscal
year ending January 28, 2006. A representative of BDO Seidman, LLP is expected
to be present at the stockholders' meeting and will be given the opportunity to
make a statement and to answer any questions any stockholder may have with
respect to our consolidated financial statements for the year ended January 29,
2005.
The affirmative vote of a majority of the holders of the Company's Common
Stock present in person or represented by proxy at the stockholders' meeting is
required for the adoption of the foregoing proposal.
OTHER BUSINESS
Our 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 on such matters.
STOCKHOLDERS' PROPOSALS
Any stockholder of the Company who wishes to present a proposal to be
considered at the next annual stockholders meeting and who wishes to have such
proposal presented in the Company's proxy statement for such meeting must submit
such proposal in writing to the Company at 200 Wireless Boulevard, Hauppauge,
New York 11788, on or before _____, 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,
the mailing date of which will be considered the date of submission.
COPY OF ANNUAL REPORT
We 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 our Annual Report on Form 10-K, for its fiscal year ended January 29, 2005.
Such request should be addressed to Stockholder Relations, Hirsch International
Corp., 200 Wireless Boulevard, Hauppauge, New York 11788.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any document we file at the Securities and Exchange Commission's public
reference rooms in Washington, D.C., New York, New York. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on
the public reference rooms. Securities and Exchange Commission filings are also
available to the public at the Securities and Exchange Commission's website at
http://www.sec.gov. Copies of documents filed by us with the Securities and
Exchange Commission are also available at the offices of The NASDAQ Stock
Market, Inc., 1 Liberty Plaza, New York, New York 10006.
INCORPORATION BY REFERENCE
The Securities and Exchange Commission allows us to "incorporate by
reference" into this proxy statement other documents filed with the Securities
and Exchange Commission by us. This means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be a part of this proxy statement,
and later information that we file with the Securities and Exchange Commission
will update and supersede that information. We incorporate by reference the
documents listed below and any documents filed by us under Section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934, as amended, after the date
of this proxy statement and before the date of our meetings:
Filings: Periods
Annual Report on Form 10-K Year ended January 29, 2005
Quarterly Reports on
Form 10-Q Quarters ended April 30, 2005 and July 30, 2005
Current Reports on
Form 8-K Filed July 26, 2005, April 18, 2005,
December 1, 2004, November 24, 2004,
October 22, 2004, September 20, 2004,
September 17, 2004, September 13, 2004,
August 20, 2004, August 25, 2004, June 14,
2004, February 10, 2004
You may request a copy of the documents incorporated by reference into this
proxy statement. Requests for documents should be directed to:
By Mail: Hirsch International Corp.
200 Wireless Blvd
Hauppauge, NY 11788
Attention: Office of the Secretary
By Telephone: (800) 394-4426
This proxy statement does not constitute the solicitation of a proxy in any
jurisdiction to or from any person to whom or from whom it is unlawful to make
such offer, solicitation of an offer or proxy solicitation in such jurisdiction.
The delivery of this proxy statement shall, under any circumstances, create any
implication that there has been no change in the information set forth or
incorporated into this proxy statement by reference or in our affairs since the
date of this proxy statement. The information contained in this proxy statement
with respect to us was provided by the Company.
By Order of the Board of Directors
/s/ Beverly Eichel
----------------------------------
Beverly Eichel, Secretary
INDEX TO FINANCIAL STATEMENTS
[TO BE COMPLETED]
ANNEX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of July 20,
2005, is among Hirsch International Corp., a Delaware corporation ("Hirsch"),
SSE Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
Hirsch ("Merger Sub") and Sheridan Square Entertainment, Inc., a Delaware
corporation ("Sheridan"). Certain capitalized and non-capitalized terms used
herein are defined in Section 8.11.
RECITALS
WHEREAS, the Boards of Directors of Sheridan, Hirsch and Merger Sub each
have, in light of and subject to the terms and conditions set forth herein,
approved this Agreement and the transactions contemplated hereby, including the
Merger (as defined in Section 1.1 below), and declared the Merger advisable and
fair to, and in the best interests of, their respective stockholders;
WHEREAS, pursuant to the Merger, among other things, and subject to the
terms and conditions of this Agreement, all of the issued and outstanding shares
of capital stock of Sheridan (other than shares of Sheridan Series B Preferred
Stock (as defined herein)) shall be converted into the new shares of common
stock, par value $.01 per share, of Hirsch (the "Hirsch Common Stock") provided
for in the amended certificate of incorporation of Hirsch to be adopted prior to
the Effective Time pursuant to Section 1.8(a);
WHEREAS, after the Merger, Sheridan shall become a wholly owned subsidiary
of Hirsch.
WHEREAS, for federal income tax purposes, it is intended that the
Merger qualifies as a reorganization under the provisions of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, concurrently with the execution of this Agreement, Hirsch and
Sheridan shall enter into a transaction (the "Series B Transaction") pursuant to
which Hirsch shall purchase up to $1,000,000 shares of Series B Convertible
Preferred Stock of Sheridan (the "Sheridan Series B Preferred Stock"); and
NOW, THEREFORE, in consideration of the foregoing premises and of the
mutual covenants, representations and warranties contained herein, and subject
to the terms and conditions set forth herein, the parties hereto, intending to
be legally bound, hereby agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. At the Effective Time (as defined in Section 1.2)
and upon the terms and subject to the conditions set forth in this Agreement and
in accordance with applicable provisions of the Delaware General Corporation Law
(the "Delaware Law"), Merger Sub shall be merged with and into Sheridan (the
"Merger"), with Sheridan being the surviving corporation of the Merger (the
"Surviving Corporation") and becoming a wholly-owned subsidiary of Hirsch.
Following the Merger, the separate existence of Merger Sub shall cease.
Section 1.2 Effective Time. At the Closing (as defined in Section 1.3), the
parties shall cause the Merger to be consummated by executing and filing a duly
executed certificate of merger substantially in the form attached hereto as
Exhibit A and other appropriate documents (the "Certificate of Merger") with
respect to the Merger, with the Secretary of State of the State of Delaware, in
such form as Sheridan and Hirsch reasonably determine is required by and in
accordance with the relevant provisions of Delaware Law. The Merger shall become
effective upon the filing of the Certificate of Merger or such later date as may
be set forth therein (the "Effective Time").
Section 1.3 The Closing. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of Ruskin Moscou
Faltischek, P.C., 190 EAB Plaza, East Tower, 15th Floor, Uniondale, New York
11556 as soon as practicable following satisfaction or waiver of all of the
conditions to the obligations of the parties to consummate the transactions
contemplated hereby, or at such other time and place as Hirsch and Sheridan
shall mutually agree (the date on which such closing occurs being herein
referred to as the "Closing Date"); provided, however, that this Agreement has
not been terminated pursuant to Article VI hereof.
Section 1.4 Merger Consideration.
(a) For purposes of this Agreement, the following terms have the following
meanings:
"Effective Time Sheridan Share Number" means the sum of (i) the number of
Sheridan Common Shares plus (ii) the aggregate number of Sheridan Common Share
Equivalents as of immediately prior to the Effective Time attributable to all of
the Sheridan Preferred Shares.
"Exchange Ratio" means (i) the number of Merger Shares divided by (ii) the
Effective Time Sheridan Share Number.
"Merger Shares" means 15,046,697 shares of Hirsch Common
Stock, all unencumbered and free and clear of all liens, charges, pledges,
security interests or any other restrictions, except for those as may be imposed
by federal and state securities laws.
"Sheridan Certificate of Incorporation" means Sheridan's Certificate of
Incorporation, as in effect as of the date hereof.
"Sheridan Class A Stock" means Sheridan's Class A Common Stock, par value
$.01 per share.
"Sheridan Class B Stock" means Sheridan's Class B Common Stock, par value
$.01 per share.
"Sheridan Common Share Equivalents" means with respect to any Sheridan
Preferred Share as of any time, that number of shares of Sheridan Class A Stock
that would be issuable with respect to such Sheridan Preferred Share if such
Sheridan Preferred Share was converted into shares of Sheridan Class A Stock as
of such time pursuant to an Automatic Conversion Event (as such term is defined
in the Sheridan Certificate of Incorporation) and Sheridan elected for the
holder of such Sheridan Preferred Share to receive the then accrued and unpaid
dividends on such Sheridan Preferred Share in additional shares of Sheridan
Class A Stock in the manner provided for in the Sheridan Certificate of
Incorporation.
"Sheridan Common Shares" means the 107,422.72 shares of Sheridan Common
Stock issued and outstanding as of the date hereof.
"Sheridan Common Stock" means the Sheridan Class A Stock and the Sheridan
Class B Stock.
"Sheridan Preferred Shares" means the 901.90621 shares of Sheridan Series A
Preferred Stock issued and outstanding as of the date hereof.
"Sheridan Series A Preferred Stock" means Sheridan's Series A Convertible
Preferred Stock, par value $1.00 per share.
The number of Merger Shares shall be subject to adjustment as provided in
Sections 1.4(b) and 1.4(c) below. At the Effective Time, by virtue of the
Merger, and without further action by any Person or entity, (i) each issued and
outstanding share of Sheridan Class A Stock shall automatically be converted
into the right to receive that number of shares of Hirsch Common Stock equal to
the Exchange Ratio, (ii) each issued and outstanding share of Sheridan Class B
Stock shall automatically be converted into the right to receive that number of
shares of Hirsch Common Stock equal to the Exchange Ratio, (iii) each issued and
outstanding share of Sheridan Series A Preferred Stock shall automatically be
converted into the right to receive that number of shares of Hirsch Common Stock
equal to the number of Sheridan Common Share Equivalents attributable to such
share of Sheridan Series A Preferred Stock as of immediately prior to the
Effective Time multiplied by the Exchange Ratio, and (iv) each issued and
outstanding share of Sheridan Series B Preferred Stock shall automatically be
cancelled without consideration therefore. Fractional shares of Hirsch Common
Stock that would otherwise by issuable hereunder to any holder of Sheridan
Common Shares and/or Sheridan Preferred Shares (such holders, individually, a
"Sheridan Stockholder", and collectively, the "Sheridan Stockholders") with
respect to all Sheridan Common Shares and/or Sheridan Preferred Shares owned by
such Sheridan Stockholder as of immediately prior to the Effective Time shall be
rounded to the nearest whole number (with any fractional share greater than or
equal to one-half share being rounded up). For purposes of this Agreement, the
Sheridan Series A Preferred Stock and the Sheridan Series B Preferred Stock
shall be referred to herein from time to time as the "Sheridan Preferred Stock."
(b) If, between the date of this Agreement and the Effective Time, either
(i) the outstanding shares of common stock of Hirsch shall have been changed
into a different number of shares or a different class by reason of any stock
dividend, subdivision, reclassification, recapitalization, split, combination or
exchange of shares, or any similar event, or (ii) the number of outstanding
voting shares or shares of common stock of Hirsch changes for any reason,
including without limitation the issuance of additional voting shares or shares
of common stock in a financing or for the acquisition of assets or business (in
each case, other than as a result of the exercise of options or warrants to
purchase shares of common stock of Hirsch that are outstanding as of the date
hereof), then the number of Merger Shares shall be appropriately adjusted to the
extent necessary, and in a manner reasonably acceptable to Hirsch and Sheridan,
to give affect to the relative values of Hirsch and Sheridan as contemplated by
the Parties as of the date hereof.
(c) If, between the date of this Agreement and the Effective Time, other
than in connection with the Series B Transaction, (i) the outstanding shares of
Sheridan Common Stock or Sheridan Series A Preferred Stock shall have been
changed into a different number of shares or a different class by reason of any
stock dividend, subdivision, reclassification, recapitalization, split,
combination or exchange of shares, or any similar event, or there is the
issuance of additional shares in a financing, or (ii) the number of shares of
Sheridan Common Stock issuable upon conversion of each share of Sheridan Series
A Preferred Stock shall have been changed pursuant to contract, an anti-dilution
adjustment provision contained in Sheridan's certificate of incorporation or
otherwise (other than as a result of the continuing accrual of dividends on the
Sheridan Series A Preferred Stock), or (iii) the number of outstanding shares of
Sheridan Series A Preferred Stock changes for any reason, including, without
limitation, the issuance of additional shares of Sheridan Series A Preferred
Stock (in each case, other than as a result of the exercise of options or
warrants to purchase shares of Sheridan Common Stock that are outstanding as of
the date hereof), then the number of Merger Shares shall be appropriately
adjusted to the extent necessary, and in a manner reasonably acceptable to
Hirsch and Sheridan, to give affect to the relative values of Hirsch and
Sheridan as contemplated by the Parties as of the date hereof.
Section 1.5 Effects of the Merger. The Merger shall have the effects set
forth in this Agreement, the Certificate of Merger and the applicable provisions
of Delaware Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, all of the properties, rights, privileges,
powers and franchises of Merger Sub shall vest in the Surviving Corporation, and
all debts, liabilities and duties of Merger Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
Section 1.6 Conversion of Securities. In addition to the conversion of the
Sheridan Common Stock and the Sheridan Series A Preferred Stock set forth in
Section 1.4(a), at the Effective Time, each outstanding share of common stock,
par value $0.01 per share, of Merger Sub shall, by virtue of the Merger and
without any action on the part of Sheridan, Hirsch or Merger Sub, be converted
into one fully paid and non-assessable share of common stock of the Surviving
Corporation.
Section 1.7 Directors and Officers.
(a) Hirsch. As of the Effective Time, the officers of Hirsch shall be as
set forth on Schedule 1.7(a) of the Hirsch Disclosure Schedule (as defined in
Article II), each of whom shall serve in such capacity until their respective
successors are duly appointed and qualified. The directors of Hirsch shall be as
follows: Henry Arnberg, Paul Gallagher, Joseph Bianco, Robert Michalik and five
(5) other individuals who shall be mutually agreed upon by the parties (the
"Independent Directors") provided that the Independent Directors shall qualify
as "independent" directors under the rules and regulations of the Securities and
Exchange Commission (the "SEC") and, provided that Hirsch's securities are
listed on a national securities exchange or automatic quotation system, the
rules of such national securities exchange or automatic quotation system.
(b) Surviving Corporation. As of the Effective Time, the officers and
directors of the Surviving Corporation shall be as set forth on Schedule 1.7(b)
of the Sheridan Disclosure Schedule, each of whom shall serve in such capacity
until their respective successors are duly elected or appointed and qualified.
Section 1.8 Certificate of Incorporation and Bylaws.
(a) Hirsch. Hirsch hereby agrees that the certificate of incorporation and
bylaws of Hirsch in effect immediately prior to the Effective Time to be
approved at a special meeting of Hirsch's stockholders shall be as set forth on
Exhibit B and Exhibit C, respectively, attached hereto and shall remain in full
force and effect after the Effective Time. Hirsch further agrees that pursuant
to the terms of such certificate of incorporation, prior to the Effective Time,
each share of Hirsch's Class A Common Stock and each share of Hirsch's Class B
Common Stock will be converted into one share of Hirsch Common Stock.
(b) Surviving Corporation. Effective immediately following the Merger, the
certificate of incorporation and bylaws of Merger Sub as in effect immediately
prior to the Effective Time shall be the certificate of incorporation and bylaws
of the Surviving Corporation, until amended in accordance with applicable law.
Section 1.9 Exchange of Shares. At or following the Closing, each Sheridan
Stockholder shall deliver to Hirsch any certificates representing outstanding
shares of Sheridan Common Stock and/or Sheridan Series A Preferred Stock that
they own (collectively, "Sheridan Certificates"), duly endorsed in proper form
for transfer together with a transmittal letter in a customary form that is
mutually agreeable to Hirsch and Sheridan and will be sent by Hirsch to the
Sheridan Stockholders in advance of, or promptly after, the Closing, and Hirsch
shall issue or cause its transfer agent to issue to each Sheridan Stockholder
immediately upon receipt of such Sheridan Certificates, certificates
representing the applicable Merger Shares into which the shares represented by
the Sheridan Certificates were converted pursuant to Section 1.4 hereof and all
Sheridan Certificates so surrendered shall subsequently be cancelled. Pending
surrender of the Sheridan Certificates, each such certificate shall be deemed
for all corporate purposes to evidence the Merger Shares into which such
certificate shall have been converted in the Merger.
Section 1.10 Lost Certificates. If any Sheridan Certificates shall have
been lost, stolen or destroyed, upon the making of an affidavit of that fact by
the Person claiming such Certificate to be lost, stolen or destroyed and, if
required by the Surviving Corporation, the posting by such Person of a bond in
such reasonable amount as the Surviving Corporation may direct as indemnity by
such Person against any claim that may be made against the Surviving Corporation
with respect to such Certificate, Hirsch will deliver in exchange for such lost,
stolen or destroyed Certificate the applicable Merger Shares with respect to the
Sheridan Common Stock formerly represented thereby and any unpaid dividends and
other distributions deliverable in respect thereof, pursuant to this Agreement.
Section 1.11 Options and Warrants.
(a) At or following the Closing, each holder of a Sheridan Stock Option or
Warrant (as such terms are defined below) may deliver the option and/or warrant
agreements of such holder to Hirsch for cancellation, in which case, Hirsch
shall issue to such option and/or warrant holder a new option or warrant
agreement in accordance with the terms set forth herein.
(b) At the Effective Time, each outstanding employee option to acquire
Sheridan Common Stock ("Sheridan Stock Option") set forth in Schedule 2.2(a) of
the Sheridan Disclosure Schedule shall be adjusted, in accordance with the terms
of this Merger Agreement and without any action on the part of the holders of
such Sheridan Stock Options, to be exercisable to purchase shares of Hirsch
Common Stock as provided below. Following the Effective Time, each Sheridan
Stock Option shall continue to have, and shall be subject to, the same terms and
conditions set forth in the agreement pursuant to which such Sheridan Stock
Option was subject immediately prior to the Effective Time, except (i) each
Sheridan Stock Option shall be exercisable for that number of shares of Hirsch
Common Stock equal to the product of (x) the aggregate number of shares of
Sheridan Common Stock for which such Sheridan Stock Option was exercisable and
(y) the Exchange Ratio, rounded to the nearest whole number (with any fractional
share greater than or equal to one-half share being rounded up) and (ii) the per
share exercise price of such Sheridan Stock Option shall be the aggregate
exercise price for the shares of Sheridan Common Stock underlying such Sheridan
Stock Option immediately prior to the Effective Time divided by the number of
shares of Hirsch Common Stock for which it is then exercisable (rounded up to
the nearest whole cent), subject to further adjustment as set forth therein.
Following the Closing, the Sheridan Stock Options shall become options under the
Hirsch 2003 Stock Option Plan, as amended, and Hirsch and each holder of
Sheridan Stock Options will enter into an appropriate option agreement to
reflect the foregoing.
(c) At the Effective Time, each outstanding warrant to acquire Sheridan
Common Stock (a "Warrant") shall be adjusted, in accordance with the terms of
such Warrant and this Merger Agreement and without any action on the part of the
holders of such Warrant, to be exercisable to purchase shares of Hirsch Common
Stock (the "Warrant Shares") as provided below. Following the Effective Time,
each Warrant shall continue to have, and shall be subject to, the same terms and
conditions set forth in the agreement pursuant to which such Warrant was subject
immediately prior to the Effective Time, except (i) each Warrant shall be
exercisable for that number of shares of Hirsch Common Stock equal to the
product of (x) the aggregate number of shares of Sheridan Common Stock for which
such Warrant was exercisable and (y) the Exchange Ratio, rounded down to the
nearest whole number (with any fractional share greater than or equal to
one-half share being rounded up), and (ii) the per share exercise price of such
Warrant shall be the aggregate exercise price for the shares of Sheridan Common
Stock underlying such Warrant immediately prior to the Effective Time divided by
the number of shares of Hirsch Common Stock for which it is then exercisable
(rounded up to the nearest whole cent), subject to further adjustment as set
forth therein.
Section 1.12 Tax Consequences. It is intended by the parties hereto that
the Merger shall constitute a reorganization within the meaning of Section
368(a) of the Code. Each party hereto shall use its commercially reasonable
efforts to cause the Merger to be so qualified, shall report the transactions
contemplated by this Agreement in a manner consistent with such reorganization
treatment and will not take any position inconsistent therewith in any Tax
Return (as hereinafter defined), refund claim, litigation or otherwise, unless
required to do so by applicable law, rule or regulation.
Section 1.13 Sheridan Stock Transfer Books. The stock transfer books of
Sheridan shall be closed immediately upon the Effective Time and there shall be
no further registration of transfers of shares thereafter on the records of
Sheridan. On or after the Effective Time, any Sheridan Certificates presented to
Hirsch for any reason shall be converted into the Merger Shares with respect to
the shares formerly represented by such Certificates and any unpaid dividends or
other distributions to which the holders thereof are entitled.
Section 1.14 No Further Rights. At and after the Effective Time, holders of
Sheridan Certificates shall cease to have any rights as stockholders of the
Surviving Corporation.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Except as set forth on the Schedule delivered by Sheridan to Hirsch and
Merger Sub in connection with the execution and delivery of this Agreement (the
"Sheridan Disclosure Schedule"), Sheridan hereby represents and warrants to
Hirsch and Merger Sub, and except as set forth in the disclosure Schedule
delivered by Hirsch and Merger Sub to Sheridan in connection with the execution
and delivery of this Agreement (the "Hirsch Disclosure Schedule"), Hirsch and
Merger Sub hereby represent and warrant to Sheridan, in each case as set forth
in this Article II, with the party making such representations and warranties
being referred to as the "Representing Party" and such Representing Party's
Disclosure Schedule as the "Representing Party's Disclosure Schedule."
Notwithstanding the foregoing, any representation or warranty which expressly
refers to Hirsch or its Subsidiaries is being made solely by Hirsch and Merger
Sub and any representation or warranty which expressly refers to Sheridan or its
Subsidiaries is being made solely by Sheridan.
Section 2.1 Organization; Qualification.
(a) The Representing Party is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and has the corporate power and authority required for it to own
its properties and assets and to carry on its business as it is now being
conducted. The Representing Party is duly qualified to do business and is in
good standing in each jurisdiction in which the ownership of its properties or
the conduct of its business requires such qualification, except for
jurisdictions in which the failure to be so qualified or in good standing would
not, individually or in the aggregate, be reasonably likely to have a Material
Adverse Effect on the Representing Party or delay consummation of the
transactions contemplated by this Agreement or otherwise prevent the
Representing Party from performing its obligations hereunder. As used in this
Agreement, "Material Adverse Effect" means any change, effect, event,
occurrence, state of facts or developments that materially adversely affects the
assets, liabilities, business, results of operations, condition (financial or
otherwise) or prospects of the Representing Party and its Subsidiaries, taken as
a whole. Material Adverse Effect shall not include any effect arising out of or
attributable to (i) general economic conditions affecting the United States or
foreign securities or currency markets generally, (ii) changes in applicable
laws or accounting rules, or (iii) changes resulting from earthquake, sabotage,
war or acts of terrorism. Each Representing Party has made available to the
other party copies of its certificate of incorporation and bylaws. Such copies
of each Representing Party's and its Subsidiaries certificate of incorporation
and bylaws are complete and correct and in full force and effect, and the
Representing Party is not in violation of any of the provisions of its
certificate of incorporation or bylaws.
(b) Each of the Representing Party's Subsidiaries is listed in Schedule
2.1(b) of the Representing Party's Disclosure Schedule and is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization. Each of the Representing Party's
Subsidiaries has the corporate power and authority required for it to own its
properties and assets and to carry on its business as it is now being conducted
and is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its properties or the conduct of its
business requires such qualification, except for jurisdictions in which the
failure to be so qualified or in good standing would not, individually or in the
aggregate, be reasonably likely to have a Material Adverse Effect on the
Representing Party. All outstanding shares of capital stock of, or other
ownership interests in, the Representing Party's Subsidiaries are duly
authorized, validly issued, fully paid and non-assessable and, with respect to
such shares or ownership interests that are owned by the Representing Party and
its subsidiaries, are owned free and clear of all liens, claims, mortgages,
encumbrances, pledges and security interests of any kind. Except as set forth on
Schedule 2.1(b) of the Representing Party's Disclosure Schedule, all the
outstanding shares of capital stock of, or other ownership interests in, the
Representing Party's Subsidiaries are wholly-owned by the Representing Party.
Section 2.2 Capital Stock.
(a) Schedule 2.2(a) of the Representing Party's Disclosure Schedule sets
forth as of the date hereof: (i) the number of authorized shares of each class
or series of capital stock of the Representing Party; (ii) the number of shares
of each class or series of capital stock of the Representing Party which are
issued and outstanding (and if convertible into securities of the Representing
Party, into how many of such securities each such share of capital stock is
convertible into); (iii) the number of shares of each class or series of capital
stock which are held in the treasury of such Representing Party; (iv) the number
of shares of each class or series of capital stock of the Representing Party
which are reserved for issuance (except for shares reserved for issuance under
stock option plans or other benefit plans), indicating each specific
reservation; and (v) the number of shares of each class or series of capital
stock of such Representing Party which are subject to stock options or other
rights to purchase or receive capital stock granted under such Representing
Party's stock option plan or other stock based employee or non-employee director
benefit plans, indicating the name of the plan, the date of grant, the number of
shares and the exercise price thereof. Except as set forth on Schedule 2.2(a) of
the Representing Party's Disclosure Schedule, there are no unpaid dividends or
unpaid distributions on any shares of capital stock.
(b) All the outstanding shares of capital stock of the Representing Party
are, and the Merger Shares to be issued in the Merger will be when issued in
accordance with the terms of this Agreement, duly authorized, validly issued,
fully paid and non-assessable and issued in compliance with all applicable U.S.
state and federal securities laws. Except as set forth in Schedule 2.2(b) of the
Representing Party's Disclosure Schedule, as of the date of this Agreement (i)
there are no authorized or outstanding options, warrants, calls, preemptive
rights, subscriptions or other rights, agreements, arrangements or commitments
of any character relating to the issued or unissued capital stock of the
Representing Party or any of its Subsidiaries, obligating the Representing Party
or any of its Subsidiaries to issue, transfer or sell or cause to be issued,
transferred or sold any shares of capital stock or other equity interest in the
Representing Party or any of its Subsidiaries or securities convertible into or
exchangeable for such shares or equity interests, or obligating the Representing
Party or any of its Subsidiaries to grant, extend or enter into any such option,
warrant, call, subscription or other right, agreement, arrangement or
commitment, (ii) there are no outstanding contractual obligations of the
Representing Party or any of its Subsidiaries to repurchase, redeem or otherwise
acquire any shares of capital stock of the Representing Party or any Subsidiary
of the Representing Party or to provide funds to make any investment (in the
form of a loan, capital contribution or otherwise) in any Subsidiary of the
Representing Party or other entity, and (iii) there are no shareholder
agreements, voting trusts or other agreements to which the Representing Party is
a party or to which it is bound relating to the voting or registration of any
shares of the capital stock of the Representing Party.
(c) The Representing Party is not in violation of, nor has it violated, any
federal or state securities laws in connection with any transaction relating to
the Representing Party, including without limitation, the acquisition of any
stock, business or assets of any third party or the issuance of any capital
stock of the Representing Party.
Section 2.3 Corporate Authority Relative to this Agreement; No Violation.
(a) Sheridan has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder. The execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby
have been duly and validly authorized by the Board of Directors of Sheridan and
the requisite approval of the stockholders of Sheridan (the "Sheridan
Stockholder Approval") and, except for the filing of the Certificate of Merger,
no other corporate proceedings on the part of Sheridan are necessary to
authorize the consummation of the transactions contemplated hereby. This
Agreement has been duly and validly executed and delivered by Sheridan and,
assuming this Agreement constitutes a valid and binding agreement of Hirsch,
constitutes a valid and binding agreement of Sheridan, enforceable against
Sheridan in accordance with its terms, except as enforceability thereof may be
limited by (i) bankruptcy laws and other similar laws affecting creditors'
rights generally or (ii) general principles of equity.
(b) Hirsch has the corporate power and authority to enter into this
Agreement and to carry out its obligations hereunder. The execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby
have been duly and validly authorized by the Board of Directors of Hirsch, and
other than the obtaining the requisite approval of the stockholders of Hirsch
(the "Hirsch Stockholder Approval") and the filing of the Certificate of Merger,
no other corporate proceedings on the part of Hirsch are necessary to authorize
the consummation of the transactions contemplated hereby. This Agreement has
been duly and validly executed and delivered by Hirsch and, assuming this
Agreement constitutes a valid and binding agreement of Sheridan, constitutes a
valid and binding agreement of Hirsch, enforceable against Hirsch in accordance
with its terms, except as enforceability thereof may be limited by (i)
bankruptcy laws and other similar laws affecting creditors' rights generally or
(ii) general principles of equity.
(c) Except as set forth in Schedule 2.3(c) of the Representing Party's
Disclosure Schedule or as may be required under, and other applicable
requirements of, the Securities Act of 1933, as amended (the "Securities Act"),
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules and regulations promulgated thereunder, state securities or blue sky laws,
and the rules and regulations of The Nasdaq Stock Market (or such other
securities exchange as Hirsch's securities may be listed), and the filing of the
Certificate of Merger under Delaware Law, none of the execution, delivery or
performance of this Agreement by the Representing Party, the consummation by the
Representing Party of the transactions contemplated hereby or compliance by the
Representing Party with any of the provisions hereof will (i) conflict with or
result in any breach of any provision of the certificate of incorporation,
bylaws or similar organizational documents of the Representing Party or any of
its Subsidiaries, (ii) require any filing with, or permit, authorization,
consent or approval of, any federal, regional, state or local court, arbitrator,
tribunal, administrative agency or commission or other governmental or other
regulatory authority or agency, whether U.S. or foreign (a "Governmental
Entity"), (iii) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, amendment, cancellation or acceleration) under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, lease,
license, contract, agreement or other instrument or obligation to which the
Representing Party or any of its Subsidiaries is a party or by which any of them
or any of their properties or assets may be bound, or (iv) violate any order,
writ, injunction, decree, judgment, permit, license, ordinance, law, statute,
rule or regulation ("Law") applicable to the Representing Party, any of its
Subsidiaries or any of their properties or assets, excluding from the foregoing
clauses (ii), (iii) and (iv) such filings, permits, authorizations, consents,
approvals, violations, breaches or defaults which are not, individually or in
the aggregate, reasonably likely to have a Material Adverse Effect on the
Representing Party or prevent or delay the consummation of the transactions
contemplated hereby.
Section 2.4 Reports and Financial Statements.
(a) Hirsch has previously furnished or otherwise made available (by
electronic filing or otherwise) to Sheridan true and complete copies of
Hirsch's: (i) Annual Reports on Form 10-K filed with the SEC for each of the
fiscal years ended January 31, 2003, 2004 and January 29, 2005; (ii) Quarterly
Reports on Form 10-Q filed with the SEC for the fiscal quarters occurring since
the Form 10-K for the year ended January 31, 2004; (iii) each definitive proxy
statement filed with the SEC since January 31, 2003; and (iv) all Current
Reports on Form 8-K filed with the SEC since February 1, 2004.
As of their respective dates, such reports and proxy statements filed with
the SEC by Hirsch (collectively with, and giving effect to, all amendments,
supplements and exhibits thereto, the "SEC Reports") (i) complied as to form in
all material respects with the applicable requirements of the Securities Act and
the Exchange Act, and (ii) did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading. The audited consolidated financial statements
and unaudited consolidated interim financial statements included in the SEC
Reports (including any related notes and schedules) fairly present in all
material respects the financial position of Hirsch and its consolidated
Subsidiaries as of the dates thereof and the results of operations and cash
flows for the periods or as of the dates then ended (subject, in the case of the
unaudited interim financial statements, to normal recurring adjustments), in
each case in accordance with past practice and generally accepted accounting
principles in the United States ("GAAP") consistently applied during the periods
involved (except as otherwise disclosed in the notes thereto). Since December
31, 2003, Hirsch has timely filed all reports, registration statements and other
filings required to be filed by it with the SEC under the rules and regulations
of the SEC. The net realizable value of the net assets, as calculated in
accordance with GAAP, is not less than $12 million on the date hereof.
(b) Sheridan has delivered to Hirsch copies of its consolidated audited
balance sheets in draft form for the period of July 29, 2003 (inception) to
December 31, 2003 and for the twelve months ended December 31, 2004, together
with the related statements of income, stockholders' equity and changes in cash
flow for such period and the three (3) months ended March 31, 2005 (unaudited),
and audited financial statements in draft form of Musicrama, Inc., Sheridan's
predecessor, for the twelve months ended December 31, 2002 and for the period of
January 1, 2003 to July 29, 2003 (such financial statements being hereinafter
referred to as the "Financial Statements"). The Financial Statements, including
the notes thereto, (i) were prepared in accordance with GAAP throughout the
periods covered thereby, and (ii) present fairly in all material respects the
financial position, results of operations and changes in cash flow of Sheridan
and its consolidated Subsidiaries, and its predecessor, as the case may be, as
of such dates and for the periods then ended. All firms providing audit opinions
to Sheridan for the above mentioned Financial Statements are registered with the
Public Company Accounting Oversight Board, and Sheridan shall use its best
efforts to cause such firms to issue unqualified audit opinions as soon as
reasonably practicable with respect to the above-mentioned draft Financial
Statements.
Section 2.5 No Undisclosed Liabilities. Neither the Representing Party nor
any of its Subsidiaries has any liabilities or obligations of any nature
required to be set forth on a balance sheet of the Representing Party under
GAAP, whether or not accrued, contingent or otherwise, and there is no existing
condition, situation or set of circumstances which would be reasonably expected
to result in such a liability or obligation, except (a) liabilities or
obligations with respect to Hirsch reflected in the SEC Reports and with respect
to Sheridan reflected in the Financial Statements or (b) liabilities and
obligations arising subsequent to the date of the Financial Statements of such
Representing Party in the ordinary course of business.
Section 2.6 No Default; Compliance with Applicable Laws. Except as set
forth in Schedule 2.6 of the Representing Party's Disclosure Schedule, the
ownership and operation of the businesses of the Representing Party and each of
its Subsidiaries is not in conflict with, or in default or violation of, any
term, condition or provision of (i) its respective certificate of incorporation
or bylaws or similar organizational documents, (ii) any Sheridan Material
Contracts or Hirsch Material Contracts (as defined in Section 2.17), as
applicable to Sheridan and its Subsidiaries and Hirsch and its Subsidiaries,
respectively, or (iii) any federal, state, local or foreign statute, Law,
concession, grant, franchise, Permit (as defined in Section 2.9) or other
governmental authorization or approval applicable to the Representing Party or
any of its Subsidiaries, excluding from the foregoing clauses (ii) and (iii),
defaults or violations which would not, either individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect on the Representing
Party.
Section 2.7 Environmental Matters.
(a) Each of the Representing Party and its Subsidiaries has obtained all
licenses, permits, authorizations, approvals and consents from Governmental
Entities ("Environmental Permits") which are required under any applicable
Environmental Law and necessary for it to carry on its business or operations as
now conducted, except for such failures to have Environmental Permits which,
individually or in the aggregate, do not have a Material Adverse Effect on the
Representing Party. Each of such Environmental Permits is in full force and
effect, and each of the Representing Party and its Subsidiaries is in compliance
in all material respects with the terms and conditions of all such Environmental
Permits and with all applicable Environmental Laws.
(b) There are no Environmental Claims pending, or to the knowledge of the
Representing Party, threatened, against the Representing Party or any of its
Subsidiaries, or, to the knowledge of the Representing Party, any Person whose
liability for any such Environmental Claim the Representing Party or any of its
Subsidiaries has or may have retained or assumed either contractually or by
operation of law.
(c) There are no past or present actions, activities, circumstances,
conditions, events or incidents, including, without limitation, the release,
threatened release or presence of any Hazardous Material, that would form the
basis of any Environmental Claim against the Representing Party or any of its
Subsidiaries, or for which the Representing Party or any of its Subsidiaries is
liable.
(d) As used in this Agreement: (i) "Environmental Claim" means any claim,
action, lawsuit or proceeding by any Person which seeks to impose liability
(including, without limitation, liability for investigatory costs, cleanup
costs, governmental response costs, natural resources, damages, property
damages, Personal injuries or penalties) arising out of, based on or resulting
from (A) the presence, or release or threatened release, of any Hazardous
Materials at any location, whether or not owned or operated by the Representing
Party or any of its Subsidiaries, or (B) circumstances which would give rise to
any violation, or alleged violation, of any Environmental Law; (ii)
"Environmental Law" means any law or order of any Governmental Entity relating
to (A) the generation, treatment, storage, disposal, use, handling,
manufacturing, transportation or shipment of Hazardous Materials, or (B) the
environment or to emissions, discharges, releases or threatened releases of
Hazardous Materials into the environment; and (iii) "Hazardous Materials" means
(A) any petroleum or petroleum products, radioactive materials or friable
asbestos; (B) any chemicals or other materials or substances which are now
defined as or included in the definition of "hazardous substances," "hazardous
wastes," "hazardous materials," "extremely hazardous wastes," "restricted
hazardous wastes," "toxic substances," or "toxic pollutants" under any
Environmental Law; and (C) pesticides.
Section 2.8 Litigation. Except as set forth in Schedule 2.8 of the
Representing Party's Disclosure Schedule, (i) there is no suit, claim, action,
proceeding or investigation pending or, to the Representing Party's knowledge,
threatened against the Representing Party, its Subsidiaries or any of its assets
or properties, (ii) the Representing Party and its Subsidiaries are not subject
to any outstanding order, writ, injunction or decree, and (iii) there is no
action, suit, proceeding or investigation pending or, to the Representing
Party's knowledge, threatened against any current or former officer, director,
employee, consultant, contractor or agent of the Representing Party (in his or
her capacity as such) which gives rise or could reasonably be expected to give
rise to a claim for contribution or indemnification against the Representing
Party, excluding from the foregoing clauses anything which is not, individually
or in the aggregate, reasonably likely to have a Material Adverse Effect on the
Representing Party or prevent or delay the consummation of the transactions
contemplated hereby.
Section 2.9 Permits. The Representing Party holds, and has at all times
held, all permits, licenses, variances, exemptions, orders, and approvals of all
Governmental Entities necessary for the lawful conduct of its business (the
"Permits"), except for such Permits the absence of which would not reasonably be
expected to have a Material Adverse Effect on the Representing Party. The
Representing Party is in material compliance with the terms of the Representing
Party's Permits. No investigation or review by any Governmental Entity in
respect of the Representing Party is pending or, to the Representing Party's
knowledge, threatened, nor has the Representing Party received notice from any
Governmental Entity of its intention to conduct the same.
Section 2.10 Employee Plans.
(a) Schedule 2.10(a) of the Representing Party's Disclosure Schedule sets
forth a true, correct and complete list of:
(i) all "employee benefit plans," as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), which the
Representing Party has any obligation or liability, contingent or otherwise (the
"Benefit Plans");
(ii) all employees, consultants and independent contractors of the
Representing Party; and
(iii) all employment, consulting, termination, profit sharing, severance,
change of control, individual compensation or indemnification agreements, and
all bonus or other incentive compensation, deferred compensation, salary
continuation, disability, severance, stock award, stock option, stock purchase,
educational assistance, legal assistance, club membership, employee discount,
employee loan, credit union or vacation agreements, policies or arrangements
under which the Representing Party has any obligation or liability (contingent
or otherwise) in respect of any current or former officer, director, employee,
consultant or contractor of the Representing Party (the "Employee
Arrangements").
Benefit Plans and Employee Arrangements which cover current or former
employees, consultants, contractors, officers, or directors (or their
equivalent) of the Representing Party are separately identified on Schedule
2.10(a) of the Representing Party's Disclosure Schedule.
(b) In respect of each Benefit Plan and Employee Arrangement of the
Representing Party, a complete and correct copy of each of the following
documents (if applicable) has been delivered to Hirsch and Sheridan (as the case
may be): (i) the most recent plan and related trust documents, and all
amendments thereto; (ii) the most recent summary plan description, and all
related summaries of material modifications thereto; (iii) the most recent Form
5500 (including, schedules and attachments); (iv) the most recent Internal
Revenue Service ("IRS") determination, opinion or notification letter; (v) each
of the stock option grant agreements used to make grants under the Representing
Party's Option Plans, and all amendments thereto; (vi) each written employment,
consulting or individual severance or other compensation agreement, and all
amendments thereto; and (vii) the most recent actuarial reports (including for
purposes of Financial Accounting Standards Board report nos. 87, 106 and 112).
(c) None of the Benefit Plans or Employee Arrangements is subject to Title
IV of ERISA, constitutes a defined benefit retirement plan or is a
multi-employer plan described in Section 3(37) of ERISA, and the Representing
Party does not have any obligation or liability (contingent or otherwise) in
respect of any such plans, including, without limitation, any unfunded or
withdrawal liability. The Representing Party is not a member of a group of
trades or businesses under common control or treated as a single employer
pursuant to Section 414 of the Code.
(d) The Benefit Plans and their related trusts intended to qualify under
Sections 401 and 501(a) of the Code, respectively, have either received a
favorable determination, opinion or notification letter from the IRS with
respect to each such Benefit Plan as to its qualified status under the Code, or
has remaining a period of time under applicable Treasury regulations or IRS
pronouncements in which to apply for such a letter and make any amendments
necessary to obtain a favorable determination as to the qualified status of each
such Benefit Plans. Any voluntary employee benefit association which provides
benefits to current or former employees of the Representing Party, or their
beneficiaries, is and has been qualified under Section 501(c)(9) of the Code.
(e) All contributions or other payments required to have been made by the
Representing Party to or under any Benefit Plan or Employee Arrangement by
applicable Law or the terms of such Benefit Plan or Employee Arrangement (or any
agreement relating thereto) have been timely and properly made.
(f) The Benefit Plans and Employee Arrangements have been maintained and
administered in all material respects in accordance with their terms and
applicable Laws. In particular, no individual who has performed services for the
Representing Party has been improperly excluded from participation in any
Benefit Plan or Employee Arrangement.
(g) There are no pending or, to the Representing Party's knowledge,
threatened actions, claims, or proceedings against or relating to any Benefit
Plan or Employee Arrangement (other than routine benefit claims by Persons
entitled to benefits thereunder), and, to the knowledge of the Representing
Party, there are no facts or circumstances which could form the basis for any of
the foregoing.
(h) Except as set forth on Schedule 2.10(h) of the Representing Party's
Disclosure Schedule, the Representing Party does not have any obligation or
liability (contingent or otherwise) to provide post-retirement life insurance or
health benefits coverage for current or former officers, directors, employees,
consultants or contractors of the Representing Party except (i) as may be
required under Part 6 of Title I of ERISA at the sole expense of the participant
or the participant's beneficiary, (ii) a medical expense reimbursement account
plan pursuant to Section 125 of the Code, or (iii) through the last day of the
calendar month in which the participant terminates employment with the
Representing Party.
(i) None of the assets of any Benefit Plan is stock of the Representing
Party or any of its affiliates, or property leased to or jointly owned with the
Representing Party or any of its affiliates.
(j) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment becoming due to any employee, consultant or contractor (current, former,
or retired) of the Representing Party, (ii) increase any benefits under any
Benefit Plan or Employee Arrangement or trigger any withdrawal liability
thereunder or (iii) result in the acceleration of the time of payment of,
vesting of, or other rights in respect of any such benefits (except as which may
be required by the partial or full termination of any Benefit Plan intended to
be qualified under Section 401 of the Code).
(k) The Representing Party has delivered to the other a true and correct
list of the following for each employee, consultant and contractor of the
Representing Party as of the date hereof: base salary, any bonus obligations,
immigration status, hire date, time-off balance, an indication of the existence
of a signed assignment of invention agreement for each employee and including
effective date and term for the contract, pay rate, termination provisions,
indication that they have not received W-2 statements from the Representing
Party, indication that they have not received Representing Party employee
benefits and indication of a signed assignment of invention agreement for each
consultant and contractor.
(l) The Representing Party and its Subsidiaries have complied with all
applicable immigration Laws and similar Laws of the United States and any other
country in which its employees work.
Section 2.11 Labor Matters.
(a) Except as set forth on Schedule 2.11(a) of the Representing Party's
Disclosure Schedule, the Representing Party is not a party to any labor or
collective bargaining agreement, and no employees of the Representing Party are
represented by any labor organization. Within the preceding three years, there
have been no representation or certification proceedings, or petitions seeking a
representation proceeding, pending or, to the Representing Party's knowledge,
threatened in writing to be brought or filed with the National Labor Relations
Board or any other labor relations tribunal or authority. Within the preceding
three years, to the Representing Party's knowledge, there have been no
organizing activities involving the Representing Party in respect of any group
of employees of the Representing Party.
(b) There are no strikes, work stoppages, slowdowns, lockouts, material
arbitrations or material grievances or other material labor disputes pending or,
to the knowledge of the Representing Party, threatened against or involving the
Representing Party. There are no unfair labor practice charges, grievances or
complaints pending or, to the Representing Party's knowledge, threatened by or
on behalf of any employee or group of employees of the Representing Party and,
to the knowledge of the Representing Party, there are no facts or circumstances
which could form the basis for any of the foregoing.
(c) Except as set forth on Schedule 2.11(c) of the Representing Party's
Disclosure Schedule, there are no complaints, charges or claims against the
Representing Party pending or, to the Representing Party's knowledge, threatened
to be brought or filed with any Governmental Entity or arbitrator based on,
arising out of, in connection with, or otherwise relating to the employment or
termination of employment of any individual by the Representing Party, and, to
the knowledge of the Representing Party, there are no facts or circumstances
which could form the basis for any of the foregoing.
(d) The Representing Party is in material compliance with all Laws relating
to the employment of labor, including all such Laws relating to wages, hours,
the Worker Adjustment and Retraining Notification Act, as amended ("WARN Act"),
collective bargaining, discrimination, civil rights, safety and health, workers'
compensation and the collection and payment of withholding and/or Social
Security Taxes and any similar Tax.
(e) There has been no "mass layoff" or "plant closing" as defined by WARN
Act in respect of the Representing Party within the six months prior to the date
hereof.
(f) As used in this Section 2.11, "Representing Party" shall mean the
Representing Party and its Subsidiaries.
Section 2.12 Absence of Certain Changes or Events. Except as set forth in
Schedule 2.12 of the Representing Party's Disclosure Schedule, since April 30,
2005 (i) the businesses of the Representing Party and its Subsidiaries have been
conducted in all material respects in the ordinary course consistent with past
practice and (ii) there has not been:
(a) a material adverse change in the assets, liabilities, business, results
of operations, condition (financial or otherwise) or prospects of the
Representing Party and its Subsidiaries, taken as a whole, or any event,
occurrence or development which has had or could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on the Representing
Party;
(b) any declaration, setting aside or payment of any dividend or other
distribution in respect of any shares of capital stock of the Representing
Party, or any repurchase, redemption or other acquisition by the Representing
Party of any Representing Party securities;
(c) any incurrence or assumption by the Representing Party of any
indebtedness for borrowed money (or any renewals, replacements, or extensions
that increase the aggregate commitments thereunder) except (i) in the ordinary
and usual course of business consistent with past practice, or (ii) in
connection with any capital expenditure permitted by Section 3.1, or (iii) any
guarantee, endorsement, or other incurrence or assumption of liability (whether
directly, contingently or otherwise) by the Representing Party for the
obligations of any other Person;
(d) any creation or assumption by the Representing Party of any Lien on any
material asset of the Representing Party other than Permitted Liens (as defined
in Section 8.11);
(e) any making of any loan, advance or capital contribution to or
investment in any Person by the Representing Party other than loans or advances
to employees, contractors or consultants of the Representing Party made in the
ordinary and usual course of business consistent with past practice;
(f) (i) any contract or agreement entered into by the Representing Party on
or prior to the date hereof relating to any material acquisition or disposition
of any assets or business or (ii) any modification, amendment, assignment,
termination or relinquishment by the Representing Party of any contract, license
or other right (including any insurance policy naming it as a beneficiary or a
loss payable payee) other than those contemplated by this Agreement;
(g) any (i) grant of any severance or termination pay to any director,
officer, employee, consultant or contractor of the Representing Party; (ii)
entering into of any employment, deferred compensation or other similar
agreement (or any amendment to any such existing agreement) with any director,
officer, employee, consultant or contractor of the Representing Party; (iii)
increase in benefits payable under any existing severance or termination pay
policies or employment agreements; or (iv) increase in compensation, bonus or
other benefits payable to directors, officers, employees, consultants or
contractors of the Representing Party other than, in the case of clause (iv)
only, increases prior to the date hereof in compensation, bonus or other
benefits payable to employees, consultants or contractors of the Representing
Party in the ordinary and usual course of business consistent with past practice
or merit increases in salaries of employees, consultants or contractors at
regularly scheduled times in customary amounts consistent with past practices;
(h) any adoption, entering into, amendment, alteration or termination of
(partially or completely) any Benefit Plan or Employee Arrangement except as
contemplated by this Agreement or to the extent required by applicable Law;
(i) any (i) making or revoking of any election relating to Taxes (as
hereinafter defined), (ii) settlement or compromise of any material claim,
action, suit, litigation, proceeding, arbitration, investigation, audit or
controversy relating to Taxes, or (iii) change to any material methods of
reporting income or deductions for federal income tax purposes;
(j) any capital expenditures in excess of $500,000 in the aggregate;
(k) any lease, license or grant to any Person of any rights in any of the
Representing Party's assets or properties;
(l) any amendment of the certificate of incorporation or bylaws of the
Representing Party;
(m) any sufferance of any damage, destruction or loss (whether or not
covered by insurance) to any material assets of the Representing Party;
(n) any strike, slowdown or demand for recognition by a labor organization
by or with respect to any of the employees of the Representing Party;
(o) any issuance, or authorization for issuance, of any equity securities
of the Representing Party, except for stock options issued to the Representing
Party's officers, directors and employees pursuant to the Representing Party's
existing stock option plans or agreements or as otherwise provided in the
Agreement; and
(p) any resignation or termination of employment of any officer, key
consultant or employee of a Representing Party.
Section 2.13 Proxy Statement. The information concerning each respective
Representing Party which is included in the proxy statement (the "Proxy
Statement") to be sent to the stockholders of Hirsch in connection with the
special meeting of Hirsch's stockholders to consider this Agreement and the
Merger (the "Hirsch Stockholders Meeting"), as such information relates to the
Representing Party providing such information, shall not, on the date the Proxy
Statement is first mailed to stockholders of Hirsch and at the time of the
Hirsch Stockholders Meeting, contain any statement which, at such time and in
light of the circumstances under which it was made, is false or misleading with
respect to any matter or omit to state any material fact necessary in order to
make the statements contained in the Proxy Statement not false or misleading or
omit to state any material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of proxies for the Hirsch
Stockholders Meeting which has become false or misleading.
Section 2.14 Tax Matters.
(a) For purposes of this Agreement: (i) "Taxes" means any and all federal,
state, local, foreign or other taxes of any kind (together with any and all
interest, penalties, additions to tax and additional amounts imposed with
respect thereto) imposed by any taxing authority, including, without limitation,
taxes or other charges on or with respect to income, franchises, windfall or
other profits, gross receipts, property, sales, use, capital stock, payroll,
employment, social security, workers' compensation, unemployment compensation or
net worth, and taxes or other charges in the nature of excise, withholding, ad
valorem or value added, and (ii) "Tax Return" means any return, report or
similar statement (including attached schedules) required to be filed with
respect to any Tax, including, without limitation, any information return, claim
for refund, amended return or declaration of estimated Tax.
(b) All federal, state, local and foreign Tax Returns required to be filed
by or on behalf of the Representing Party, or each affiliated, combined,
consolidated or unitary group of which the Representing Party is a member (an
"Affiliated Group") have been timely filed or requests for extensions have been
timely filed and any such extension has been granted and has not expired, and
all such filed Tax Returns are complete and accurate. All Taxes due and owing by
the Representing Party or any Representing Party's Affiliated Group, including
estimates and withheld Taxes, have been paid, or adequately reserved in
accordance with GAAP. There is no audit or examination in process or pending and
there has been no notification of any request for such audit or other
examination and there is no deficiency, refund litigation, proposed adjustment
or matter in controversy with respect to any Taxes due and owing by the
Representing Party or any Representing Party's Affiliated Group. All assessments
for Taxes due and owing by the Representing Party or any Representing Party's
Affiliated Group with respect to completed and settled examinations or concluded
litigation have been paid.
(c) The Representing Party has not (i) entered into a closing agreement or
other similar agreement with a taxing authority relating to Taxes of the
Representing Party or any Representing Party's Affiliated Group with respect to
a taxable period for which the statute of limitations is still open, or (ii)
with respect to U.S. federal income Taxes, granted any waiver of any statute of
limitations with respect to, or any extension of a period for the assessment of,
any income Tax, in either case, that is still outstanding. There are no Liens
relating to Taxes upon the assets of the Representing Party or any Representing
Party's Affiliated Group. Neither the Representing Party nor any Representing
Party's Affiliated Group is a party to or is bound by any Tax sharing agreement,
Tax indemnity obligation or similar agreement in respect of Taxes.
(d) Neither the Representing Party nor any Representing Party's Affiliated
Group has taken any action or knows of any fact, agreement, plan or other
circumstance that is reasonably likely to prevent the Merger from qualifying as
a reorganization within the meaning of Section 368(a) of the Code.
(e) Schedule 2.14 of the Representing Party's Disclosure Schedule lists
each Tax Return of the Representing Party or any Affiliated Group for which an
accurate copy of the actual Tax Return as filed with the relevant taxing
authority has been made available by the Representing Party to the other on or
before the date hereof.
(f) Neither the Representing Party nor any Affiliated Group has requested
or received any private letter ruling from the Internal Revenue Service or
comparable rulings from other taxing authorities.
(g) Neither the Representing Party nor any member of any Affiliated Group
has constituted either a "distributing corporation" or a "controlled
corporation" (within the meaning of Section 355(a)(1)(A) of the Code) in a
distribution of stock (to any Person or entity that is not a member of any
Affiliated Group) qualifying for tax-free treatment under Section 355 of the
Code (i) within the two-year period ending on the date hereof or (ii) in a
distribution which could otherwise constitute part of a "plan" or "series of
related transactions" (within the meaning of Section 355(e) of the Code) in
conjunction with the Merger.
(h) Neither the Representing Party nor any member of any Affiliated Group
has any employment, severance or termination agreements, other compensation
arrangements, or Benefit Plans currently in effect which provide for the payment
of any amount (whether in cash or property or the vesting of property) as a
result of any of the transactions contemplated by this Agreement that
individually or collectively (either alone or upon the occurrence of any
additional or subsequent event), could give rise to a payment which is
nondeductible by reason of Section 280G of the Code.
(i) Neither the Representing Party nor any member of any Affiliated Group
has filed any consent agreement under Section 341(f) of the Code or agreed to
have Section 341(f)(4) applied to any disposition of assets owned by the
Representing Party or any Affiliated Group.
(j) Neither the Representing Party nor any member of any Affiliated Group
has been at any time a United States Real Property Holding Corporation within
the meaning of Section 897(c)(2) of the Code.
Section 2.15 Absence of Questionable Payments. Neither the Representing
Party nor, to the Representing Party's knowledge, any director, officer, agent,
employee, consultant, contractor or other Person acting on behalf of the
Representing Party or its Subsidiaries, has used any corporate or other funds
for unlawful contributions, payments, gifts, or entertainment, or made any
unlawful expenditures relating to political activity to government officials or
others or established or maintained any unlawful or unrecorded funds in
violation of the Foreign Corrupt Practices Act of 1977, as amended, or any other
domestic or foreign Law. Neither the Representing Party nor its Subsidiaries, or
to the Representing Party's knowledge, any director, officer, agent, employee,
consultant, contractor or other Person acting on behalf of the Representing
Party or its Subsidiaries, has accepted or received any unlawful contributions,
payments, gifts or expenditures.
Section 2.16 Title and Related Matters. Except as set forth on Schedule
2.16 of the Representing Party's Disclosure Schedule, the Representing Party or
one of its Subsidiaries has good and valid title to, or a valid and enforceable
leasehold or contractual interest in, all of the properties and assets reflected
in the latest balance sheet included, in the case of Sheridan in the Financial
Statements and in the case of Hirsch in the SEC Reports, or acquired after the
date thereof (except for properties or assets sold or otherwise disposed of
since the date thereof in the ordinary course of business), free and clear of
all Liens, other than statutory Liens securing payments not yet due or
delinquent or the validity of which is being contested in good faith by
appropriate proceedings, and such imperfections or irregularities in title that
do not materially and adversely affect the current use of the properties or
assets subject thereto or affected thereby, affect the ability to convey title
thereto or otherwise materially impair the business operations currently
conducted at such properties. As of the date hereof, Schedule 2.16 of the
Representing Party's Disclosure Schedule contains a complete and correct list of
all real property owned or leased by the Representing Party or any of its
Subsidiaries, of which copies of leases have been delivered or made available to
the other party, and a complete and correct list of each title insurance policy
insuring title to any of such real properties owned. All rents and mortgages due
have been paid.
Section 2.17 Material Contracts.
(a) Sheridan Contracts.
(i) Schedule 2.17(a)(i)(a) of the Sheridan Disclosure Schedule sets forth a
list of all agreements Sheridan or its Subsidiaries would be required to file as
material contracts under Item 601 of Regulation S-K were Sheridan subject to the
Exchange Act and the disclosure requirements of Regulation S-K (the "Sheridan
Material Contracts") to which Sheridan or its Subsidiaries are a party. Sheridan
has heretofore delivered to Hirsch true, correct and complete copies of all
Sheridan Material Contracts except as the parties may have otherwise agreed.
Except as set forth on Schedule 2.17(a)(i)(b) of the Sheridan Disclosure
Schedule, Sheridan is not a party to nor bound by any severance or other
agreement with any employee, consultant or contractor pursuant to which such
Person would be entitled to receive any additional compensation or an
accelerated payment of compensation as a result of the consummation of the
transactions contemplated hereby.
(ii) Each of the Sheridan Material Contracts constitutes the valid and
legally binding obligation of Sheridan, enforceable in accordance with its
terms, and is in full force and effect, except as may be limited by (A)
bankruptcy laws and other similar laws affecting creditors' rights generally and
(B) general principles of equity. Sheridan is not in breach or default in any
material respect of any provisions of any Sheridan Material Contract and, to
Sheridan's knowledge, no event has occurred which with notice or lapse of time
would constitute a material breach or default by Sheridan or permit termination,
modification or acceleration thereunder, and which with respect to each of the
foregoing, could not be timely cured by Sheridan. Sheridan does not have any
knowledge of any termination or breach or anticipated termination or breach by
the other parties to any Sheridan Material Contract or commitment to which it is
a party or to which any of its assets are subject. There exists no breach or
default in any material respects of any provisions of any other contract,
arrangement, agreement or understanding to which Sheridan or its Subsidiaries is
a party which, either individually or in the aggregate would have a Material
Adverse Effect.
(iii) No party to any such Sheridan Material Contract has given notice to
Sheridan of or made a claim against Sheridan in respect of any breach or default
thereunder.
(iv) No terms and conditions of any contract, agreement or other
arrangement or understanding between Sheridan and any other Person in effect on
the date of this Agreement prevent, delay or materially restrict Sheridan's or
any Subsidiary of Sheridan's ability to deploy any material portion of its
assets or resources as it deems appropriate, and after the Closing shall
prevent, delay or materially restrict Sheridan's or any Subsidiary of Sheridan's
ability to deploy any material portion of its assets or resources as it deems
appropriate.
(b) Hirsch Contracts.
(i) Schedule 2.17(b) of the Hirsch Disclosure Schedule and the SEC Reports
contain true and accurate copies of all of the agreements to which Hirsch or its
Subsidiaries are required to file as material contracts under Item 601 of
Regulations S-K (the "Hirsch Material Contracts"), including a brief summary
including the parties, subject matter, terms and payments thereunder. Hirsch has
heretofore delivered to Sheridan true, correct and complete copies of all Hirsch
Material Contracts except as the parties may have otherwise agreed. Except as
set forth on Schedule 2.17(b) of the Hirsch Disclosure Schedule, Hirsch is not a
party to nor bound by any severance or other agreement with any employee,
consultant or contractor pursuant to which such Person would be entitled to
receive any additional compensation or an accelerated payment of compensation as
a result of the consummation of the transactions contemplated hereby.
(ii) Each Hirsch Material Contract constitutes the valid and legally
binding obligation of Hirsch, enforceable in accordance with its terms, and is
in full force and effect, except as may be limited by (A) bankruptcy laws and
other similar laws affecting creditors' rights generally and (B) general
principles of equity. Hirsch is not in breach or default in any material
respects of any provisions of any Hirsch Material Contract and, to Hirsch's
knowledge, no event has occurred which with notice or lapse of time would
constitute a material breach or default by Hirsch or permit termination,
modification or acceleration thereunder, and which with respect to each of the
foregoing, could not be timely cured by Hirsch. Hirsch does not have any
knowledge of any termination or material breach or anticipated termination or
material breach by the other parties to any Hirsch Material Contract or
commitment to which it is a party or to which any of its assets are subject.
There exists no breach or default in any material respect of any provisions of
any contract, arrangement, agreement or understanding to which Hirsch or its
Subsidiaries are a party which either individually or in the aggregate would
have a Material Adverse Effect.
(iii) No party to any Hirsch Material Contract has given notice to Hirsch
of or made a claim against Hirsch in respect of any breach or default
thereunder.
(iv) No terms and conditions of any contract, agreement or other
arrangement or understanding between Hirsch and any other Person in effect on
the date of this Agreement prevent, delay or materially restrict Hirsch's or any
Subsidiary of Hirsch's ability to deploy any material portion of its assets or
resources as it deems appropriate, and after the Closing shall prevent, delay or
materially restrict Hirsch's or any Subsidiary of Hirsch's ability to deploy any
material portion of its assets or resources as it deems appropriate.
Section 2.18 Insurance. Schedule 2.18 of the Representing Party's
Disclosure Schedule sets forth a true and complete list and brief summary
description (including information on the premiums payable in connection
therewith, the scope and amount of the coverage provided thereunder, and the
expiration dates) of directors and officers liability and general liability
insurance policies maintained by the Representing Party. Such policies have been
issued by insurers which, have an A.M. Best rating of "A" or better, and provide
coverage for the operations conducted by the Representing Party of a scope and
coverage consistent with customary industry practice. Complete and correct
copies of each such policy have been delivered by Sheridan to Hirsch and by
Hirsch to Sheridan. All such policies are in full force and effect and no notice
of cancellation has been given with respect to any such policy. All premiums due
thereon have been paid in a timely manner. There are no pending claims or, to
the knowledge of the Representing Party, threatened claims, under any of the
Representing Party's insurance policies.
Section 2.19 Subsidies. No grants, subsidies or similar arrangements exist
directly or indirectly between or among the Representing Party, on the one hand,
and any domestic or foreign Governmental Entity or any other Person, on the
other hand. The Representing Party has not requested, sought, applied for or
entered into any grant, subsidy or similar arrangement directly or indirectly
from or with any domestic or foreign Governmental Entity or any other Person.
Section 2.20 Intellectual Property.
(a) For purposes of this Agreement, "Intellectual Property" means:
(i) all issued patents, reissued or reexamined patents, revivals of
patents, utility models, certificates of invention, registrations of patents and
extensions thereof, regardless of country or formal name (collectively, "Issued
Patents");
(ii) all published or unpublished nonprovisional and provisional patent
applications, reexamination proceedings, invention disclosures and records of
invention (collectively "Patent Applications" and, with the Issued Patents, the
"Patents");
(iii) all copyrights, copyrightable works, semiconductor topography and
mask work rights, including all rights of authorship, use, publication,
reproduction, distribution, performance transformation, moral rights and rights
of ownership of copyrightable works, semiconductor topography works and mask
works, and all rights to register and obtain renewals and extensions of
registrations, together with all other interests accruing by reason of
international copyright, semiconductor topography and mask work conventions
(collectively, "Copyrights");
(iv) common law trademarks, registered trademarks, applications for
registration of trademarks, common law service marks, registered service marks,
applications for registration of service marks, trade names, registered trade
names and applications for registrations of trade names and trade dress
(collectively, "Trademarks");
(v) all technology, ideas, inventions, designs, proprietary information,
manufacturing and operating specifications, know-how, formulae, trade secrets,
technical data, computer programs, hardware, software and processes related to
the business of the Representing Party as such business is currently conducted
and as its business is proposed to be conducted;
(vi) all domain names registered by the Representing Party; and
(vii) all other intangible intellectual property assets, properties and
rights (whether or not appropriate steps have been taken to protect, under
applicable law, such other intangible assets, properties or rights).
(b) Hirsch's Intellectual Property, as listed on Schedule 2.20(b) of
Hirsch's Disclosure Schedule, constitutes all of the Intellectual Property
necessary to enable Hirsch to conduct its business as such business is currently
being conducted and as its business is proposed to be conducted. Hirsch owns and
has good and marketable title to, or possesses legally enforceable rights to
use, all Intellectual Property used or currently proposed to be used in the
business of Hirsch as currently conducted or as proposed to be conducted by
Hirsch, free and clear of all liens, claims or encumbrances. No current or
former officer, director, stockholder, employee, consultant, independent
contractor or third party has asserted any right, claim or interest in or with
respect to any Intellectual Property of Hirsch and, to the knowledge of Hirsch,
there is no reasonable basis for any such claim. There is no unauthorized use,
disclosure or misappropriation of any Hirsch Intellectual Property by any
employee or, to Hirsch's knowledge, former employee of Hirsch or, to Hirsch's
knowledge, by any other third party. Except as set forth on Schedule 2.20(b) of
the Hirsch Disclosure Schedule, there are no royalties, fees or other payments
payable by Hirsch to any third Person under any written or oral contract or
understanding by reason of the ownership, use, sale or disposition of Hirsch
Intellectual Property.
(c) With respect to each item of Hirsch Intellectual Property incorporated
into any product of Hirsch or otherwise used in the business of Hirsch (except
"off the shelf" or other software widely available through regular commercial
distribution channels at a cost not exceeding $10,000 on standard terms and
conditions, as modified for Hirsch's operations), Schedule 2.20(c) of the Hirsch
Disclosure Schedule lists:
(i) all Patents and Patent Applications, Trademarks, and Copyrights,
including the jurisdictions in which each such Intellectual Property has been
issued or registered or in which any such application for such issuance and
registration has been filed; and
(ii) the following agreements and documents relating to each of the
products of Hirsch (the "Hirsch Products") or other Hirsch Intellectual
Property: all (A) agreements granting any right to distribute or sublicense a
Hirsch Product on any exclusive or non-exclusive basis, (B) any exclusive or
non-exclusive licenses of Intellectual Property to or from Hirsch, (C)
agreements pursuant to which the amounts actually paid or payable under firm
commitments to Hirsch are $10,000 or more, (D) joint development agreements, (E)
any agreement by which Hirsch grants any ownership right to any Hirsch
Intellectual Property owned by Hirsch, (F) any judicial, administrative,
regulatory or other governmental order relating to Intellectual Property, (G)
any option relating to any Hirsch Intellectual Property, and (H) agreements
pursuant to which any party is granted any rights to access source code or to
use source code, including without limitation any rights to create derivative
works of Hirsch Products.
(d) Schedule 2.20(d) of the Hirsch Disclosure Schedule contains an accurate
list as of the date of this Agreement of all licenses, sublicenses and other
agreements to which Hirsch is a party and pursuant to which Hirsch is authorized
to use any Intellectual Property owned by any third party, excluding "off the
shelf" or other software at a cost not exceeding $10,000 and widely available
through regular commercial distribution channels on standard terms and
conditions and third-party software distributed by Hirsch in the ordinary course
of business ("Third Party Intellectual Property").
(e) Except as set forth on Schedule 2.20(e) of the Hirsch Disclosure
Schedule, to the knowledge of Hirsch, there is no unauthorized use, disclosure,
infringement or misappropriation of any Hirsch Intellectual Property, including
any Third Party Intellectual Property by any third party, including any employee
or former employee of Hirsch. Other than in respect of agreements with Hirsch's
officers and directors, Hirsch has not entered into any agreement to indemnify
any other Person against any charge of infringement of any Intellectual
Property, other than indemnification provisions contained in standard sales or
agreements to end users arising in the ordinary course of business. There are no
royalties, fees or other payments payable by Hirsch to any Person by reason of
the ownership, use, sale or disposition of Intellectual Property.
(f) Except as set forth on Schedule 2.20(f) of the Hirsch Disclosure
Schedule, Hirsch is not in breach of any license, sublicense or other agreement
relating to Hirsch Intellectual Property or Third Party Intellectual Property
rights beyond any applicable cure periods. Neither the execution, delivery or
performance of this Agreement or any ancillary agreement contemplated hereby nor
the consummation of the Merger or any of the transactions contemplated by this
Agreement will contravene, conflict with or result in an infringement or
termination of any Hirsch Intellectual Property, including any Third Party
Intellectual Property.
(g) Except as set forth on Schedule 2.8 of the Sheridan Disclosure
Schedule, all Patents, registered Trademarks, registered service marks,
registered Copyrights and registered domain names held by the Representing Party
are valid and subsisting. All maintenance and annual fees have been fully paid
and all fees paid during prosecution and after issuance of any patent comprising
or relating to such item have been paid in the correct entity status amounts.
The Representing Party is not infringing, misappropriating or making unlawful
use of, or received any notice or other communication (in writing or otherwise)
of any actual, alleged, possible or potential infringement, misappropriation or
unlawful use of any proprietary asset owned or used by any third party, which
would have a Material Adverse Effect on the Representing Party. There is no
proceeding pending or, to the Representing Party's knowledge, threatened nor has
any claim or demand been made, which challenges the legality, validity,
enforceability or ownership of any item of the Representing Party's Intellectual
Property or Third Party Intellectual Property or alleges a claim of infringement
of any Patents, Trademarks, service marks, Copyrights or violation of any trade
secret or other proprietary right of any third party, which if adversely
determined would have a Material Adverse Effect on the Representing Party. The
Representing Party has not brought a proceeding alleging infringement of the
Representing Party's Intellectual Property or breach of any license or agreement
involving Intellectual Property against any third party.
(h) The Representing Party has taken all commercially reasonable and
customary measures and precautions necessary to protect and maintain the
confidentiality of all the Representing Party Intellectual Property (except such
Representing Party Intellectual Property whose value would be unimpaired by
public disclosure) and otherwise to maintain and protect the full value of all
Intellectual Property it owns or uses. All Intellectual Property not otherwise
protected by Patents or Copyrights ("Confidential Information") owned by the
Representing Party used by or disclosed to a third party has been pursuant to
the terms of a written or oral agreement between the Representing Party and such
third party.
(i) No product liability claims have been communicated in writing to or, to
the Representing Party's knowledge, threatened against the Representing Party.
(j) A complete list of each of the Hirsch Products and Hirsch's proprietary
software ("Hirsch Software"), together with a brief description of each, is set
forth in Schedule 2.20(j) of Hirsch's Disclosure Schedule. The Hirsch Software
and Hirsch Products conform in all material respects with any specification,
documentation, performance standard, representation or statement provided with
respect thereto by or on behalf of Hirsch.
(k) The Representing Party is not subject to any proceeding or outstanding
decree, order, judgment, or stipulation restricting in any manner the use,
transfer, or licensing thereof by the Representing Party, or which may affect
the validity, use or enforceability of such Representing Party Intellectual
Property. Hirsch is not subject to any agreement which restricts in any material
respect the use, transfer, or licensing by Hirsch of the Hirsch Intellectual
Property or Hirsch Products.
(l) Schedule 2.20(l) of the Sheridan Disclosure Schedule contains a list of
(i) all of Sheridan's Trademarks, (ii) substantially all of Sheridan's
Copyrights, which include all Copyrights material to Sheridan's business, and
(iii) all software licenses (except for "off the shelf" or other software widely
available through regular commercial distribution channels at a cost not
exceeding $10,000 on standard terms and conditions), and constitutes
substantially all of the Intellectual Property necessary for Sheridan to conduct
its business as of the date hereof. Sheridan possesses legally enforceable
rights to use all Intellectual Property used or currently proposed to be used in
its business as currently conducted, except where the failure to have such
rights would not individually or in the aggregate have a Material Adverse Effect
on Sheridan.
(m) For purposes of this Section 2.20, the terms "Representing Party,"
"Hirsch" and "Sheridan" shall include their respective Subsidiaries.
Section 2.21 Minute Books; Stock Record Books. True and correct copies of
the Representing Party's and its Subsidiaries minute books and, in the case of
Sheridan and its Subsidiaries, stock record books have been made available to
the other. The minute books of the Representing Party and its Subsidiaries
contain true and complete originals or copies of all minutes of meetings of and
actions by the stockholders, Board of Directors and all committees of the Board
of Directors of the Representing Party and its Subsidiaries, and accurately
reflect in all material respects all corporate actions of the Representing Party
and its Subsidiaries which are required by law to be passed upon by the Board of
Directors or stockholders of the Representing Party and its Subsidiaries.
Section 2.22 Bank Accounts; Powers of Attorney. Schedule 2.22 of the
Representing Party's Disclosure Schedule hereto sets forth a complete and
correct list showing: (a) all banks in which the Representing Party maintains a
bank account or safe deposit box (collectively, "Bank Accounts"); and (b) the
names of all Persons holding powers of attorney from the Representing Party,
true and correct copies thereof which have been delivered to the other.
Section 2.23 Disclosure. The representations and warranties by the
Representing Party in this Agreement and the statements contained in the
schedules, certificates and other writings furnished and to be furnished by the
Representing Party to the other party pursuant to this Agreement, when
considered as a whole and giving effect to any supplements or amendments thereof
prior to the time of signing on the date hereof, do not and will not contain any
untrue statement of a material fact and do not and will not omit to state any
material fact necessary to make the statements herein, in light of the
circumstances under which they were or shall be made, not misleading; it being
understood that as used in this Section 2.23 "material" means material to the
Representing Party and its Subsidiaries, taken as a whole. The term "material"
as used above does not apply to any representation or covenant herein which is
already qualified as to materiality.
Section 2.24 Disputes with Customers. Except as set forth on Schedule 2.24
of the Representing Party's Disclosure Schedule, there are no pending or, to the
best of the Representing Party's knowledge and belief, threatened disputes
between the Representing Party and any of its material locations, vendors,
suppliers, customers or other parties outside of the ordinary course of business
or that in any way relate to the operation of the business of the Representing
Party and which cannot reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on the Representing Party.
Section 2.25 Accounts Receivable. All accounts receivables of the
Representing Party have arisen from bona fide transactions by the Representing
Party in the ordinary course of business and are, to the best of the
Representing Party's knowledge and belief, deemed collectible by the
Representing Party in the ordinary course of business (without, however, the
Representing Party giving any warranty as to any extent of collectability
whatsoever), except to the extent reserved for in the Representing Party's
Financial Statements. Except as set forth on Schedule 2.25 of the Representing
Party's Disclosure Schedule, there are no defenses, claims of disabilities,
offsets, refusals to pay or other rights of offset against any such accounts
receivable. Any allowances that the Representing Party has established
specifically for doubtful accounts have been established on a basis consistent
with the Representing Party's prior practice, credit experience and GAAP
consistently applied. Sheridan and Hirsch have each delivered to each other a
complete and accurate aging list of all of their accounts receivables as of
April 30, 2005.
Section 2.26 Certain Transactions. Except as set forth on Schedule 2.26 of
the Representing Party's Disclosure Schedule, none of the stockholders,
officers, directors or employees of the Representing Party, nor any member of
any such Person's or stockholder's family is presently a party to any
transaction with the Representing Party relating to the business of the
Representing Party, including without limitation, any contract, agreement or
other arrangement (i) providing for the furnishing of services by, (ii)
providing for the rental of real or Personal property from, or (iii) otherwise
requiring payments (other than for services as officers, directors or employees
of the Representing Party), to any such Person or any corporation, partnership,
trust or other entity in which any such Person has a substantial interest as a
stockholder, officer, director, trustee or partner.
Section 2.27 Brokers or Finders.
(a) Sheridan represents, as to itself, its Subsidiaries and its affiliates,
that no agent, broker, investment banker, financial advisor or other firm or
Person is or will be entitled to any brokers' or finder's fee or any other
commission or similar fee in connection with any of the transactions
contemplated by this Agreement. Sheridan agrees to indemnify and hold Hirsch,
including its officers, directors, agents or representatives, harmless from and
against any and all claims, liabilities or obligations with respect to any other
fees, commissions or expenses asserted by any Person on the basis of any act or
statement alleged to have made by such parties or their affiliates.
(b) Except as set forth on Schedule 2.27(b) of the Hirsch Disclosure
Schedule, Hirsch represents, as to itself, its Subsidiaries and its affiliates,
that no agent, broker, investment banker, financial advisor or other firm or
Person is or will be entitled to any brokers' or finder's fee or any other
commission or similar fee in connection with any of the transactions
contemplated by this Agreement. Hirsch agrees to indemnify and hold Sheridan,
including its officers, directors, agents or representatives, harmless from and
against any and all claims, liabilities or obligations with respect to any other
fees, commissions or expenses asserted by any Person on the basis of any act or
statement alleged to have been made by such party or its affiliates.
Section 2.28 No Prior Activities. Except for obligations incurred in
connection with its incorporation or organization or the negotiation and
consummation of this Agreement and the transactions contemplated hereby, Hirsch
represents and warrants that Merger Sub has neither incurred any obligation or
liability nor engaged in any business or activity of any type or kind whatsoever
or entered into any agreement or arrangement with any Person.
Section 2.29 Music Library and Music Products. The representation and
warranty made by Sheridan in Section 7.20 of that certain Credit Agreement,
dated as of December 10, 2004, by and among Sheridan, Fortress Credit Corp., as
agent for the lenders, and the other signatories thereto, relating to the Music
Library and Music Products of Sheridan, was true in all material respects as of
the date of such agreement.
ARTICLE III
COVENANTS RELATED TO CONDUCT OF BUSINESS
Section 3.1 Conduct of Business of Sheridan and Hirsch. Except as
contemplated by this Agreement or in connection with the Series B Transaction,
during the period from the date hereof to the Effective Time (or the termination
of this Agreement pursuant to Article VI), Sheridan on the one hand, and Hirsch
on the other hand, will each conduct its operations in the ordinary and usual
course of business consistent with past practice and, to the extent consistent
therewith, with no less diligence and effort than would be applied in the
absence of this Agreement, use commercially reasonable efforts to preserve
intact its current business organizations, keep available the service of its
current officers and employees, preserve its relationships with customers,
suppliers and others having business dealings with it and preserve its goodwill
through the Effective Time. Without limiting the generality of the foregoing,
and except as otherwise expressly provided in this Agreement or in Schedule 3.1
of the Disclosure Schedule of Sheridan or Hirsch, as the case may be, prior to
the Effective Time, Sheridan and Hirsch, and each of their Subsidiaries, will
not, without the prior written consent of the other party:
(a) amend its certificate of incorporation or bylaws (or other similar
organizational or governing instruments), as each such document is in effect on
the date hereof;
(b) authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase or otherwise) any stock
of any class or any other securities convertible into or exchangeable for any
stock or any equity equivalents (including, any stock options or stock
appreciation rights), except for the issuance or sale of shares pursuant to
outstanding Hirsch or Sheridan stock options and warrants;
(c) (i) split, combine or reclassify any shares of its capital stock; (ii)
declare, set aside or pay any dividend or other distribution (whether in cash,
stock or property or any combination thereof) in respect of its capital stock;
(iii) make any other actual, constructive or deemed distribution in respect of
any shares of its capital stock or otherwise make any payments to stockholders
in their capacity as such; or (iv) redeem, repurchase or otherwise acquire,
directly or indirectly, any of its securities;
(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) (i) incur or assume any long-term or short-term debt or issue any debt
securities; (ii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the obligations of
any other Person; (iii) make any loans, advances or capital contributions to, or
investments in, any other Person (other than customary loans or advances to
employees, consultants or contractors (including recording artists, distributed
labels or other licensees) in the ordinary and usual course of business
consistent with past practice and in amounts not material to the maker of such
loan or advance); (iv) pledge or otherwise encumber shares of its capital stock;
or (v) mortgage or pledge any of its material assets, tangible or intangible, or
create or suffer to exist any Lien thereupon, other than as disclosed in the
schedules hereto and Permitted Liens;
(f) enter into any lease for new office space;
(g) (i) except as may be required by Law or as contemplated by this
Agreement, enter into, adopt or amend or terminate (partially or completely) any
Benefit Plan, Employee Arrangement (including, the repricing of any stock
options or the acceleration or vesting of any stock options), stock appreciation
right, restricted stock, performance unit, stock equivalent or stock purchase
agreement for the benefit or welfare of any director, officer, employee,
consultant or contractor in any manner, (ii) except as required under existing
agreements, increase in any manner the compensation or fringe benefits of any
director, officer, employee, consultant or contractor or pay any benefit not
required by any plan and arrangement as in effect as of the date hereof
(including, the granting of stock appreciation rights or performance units) or
grant any completion bonuses or change of control payments in respect of the
Merger or that will be affected thereby; or (iii) hire, promote or change the
classification or status in respect of any employee or individual; provided,
however, that Hirsch or Sheridan, as the case may be, shall not unreasonably
withhold or delay any consent sought to hire, promote or change the
classification or status of any employee or individual;
(h) acquire, sell, lease or dispose of any assets outside the ordinary
course of business, consistent with past practice or any assets which in the
aggregate are material to Sheridan or Hirsch, as the case may be, enter into any
commitment or transaction outside the ordinary and usual course of business
consistent with past practice or grant any exclusive distribution rights or
enter into or amend, in any material respect, any material contract, commitment,
agreement or understanding;
(i) acquire (by merger, consolidation or acquisition of stock or assets)
any corporation, partnership or other business organization or division thereof
or any equity interest therein;
(j) settle or compromise any pending or threatened suit, action or claim
relating to the transactions contemplated hereby;
(k) take any action (including, any action otherwise permitted by this
Section 3.1) that would prevent or impede the Merger from qualifying as a
"reorganization" under Section 368(a) of the Code;
(l) fail to comply in any material respect with any Law applicable to it or
its assets which would reasonably be expected to, individually or in the
aggregate, have a Material Adverse Effect on its business and operations;
(m) effect a "mass layoff" or "plant closing" as defined in WARN Act;
(n) dispose of or permit to lapse any rights to the use of any Intellectual
Property that is material to Sheridan or Hirsch, as the case may be, or dispose
of or disclose to any Person any trade secret, formula, process or know-how not
theretofore a matter of public knowledge unless, in respect of disclosure, such
Person has executed a confidentiality agreement in form acceptable to Sheridan
or Hirsch, as the case may be;
(o) sell or dispose of any Intellectual Property outside of the ordinary
course of its business;
(p) change any of the banking or safe deposit arrangements described in
Section 2.22 hereto, except in the ordinary course of business;
(q) fail to maintain its books, accounts and records in the usual, regular
and ordinary manner on a basis consistent with prior years; or
(r) take, propose to take, or agree in writing or otherwise to take, any of
the actions described in this Section 3.1 or any action which would make any of
the representations or warranties of Sheridan, Hirsch or Merger Sub, as the case
may be, contained in this Agreement untrue, incomplete or incorrect.
Section 3.2 Access to Information.
(a) Between the date hereof and the Effective Time (or termination of this
Agreement pursuant to Article VI), Sheridan, Hirsch and Merger Sub will each
give the authorized representatives (including counsel, financial advisors and
auditors) of the other reasonable access to all its employees, consultants,
contractors, plants, offices, warehouses and other facilities and to all its
books and records, and will permit the other to make such inspections and
investigations as each may require. Each of Sheridan, Hirsch and Merger Sub will
cause its officers to furnish the other with such financial and operating data
and other information in respect of its business, properties and personnel as
each may from time to time reasonably request, provided that no investigation
pursuant to this Section 3.2(a) shall affect or be deemed to modify any of the
representations or warranties made by each of Sheridan, Hirsch and Merger Sub
pursuant to this Agreement.
(b) Between the date hereof and the Effective Time, Sheridan, Hirsch and
Merger Sub shall each furnish to the other (i) within five business days after
the delivery thereof to management, such monthly financial statements and data
as are regularly prepared for distribution to Sheridan management and Hirsch
management, respectively, and (ii) at the earliest time they are available, such
quarterly and annual financial statements as are regularly prepared for Sheridan
Board of Directors and Hirsch Board of Directors, respectively.
(c) Each of Hirsch, Merger Sub and Sheridan will hold and will cause its
authorized representatives to hold in confidence all documents and information
concerning the other furnished in connection with the transactions contemplated
by this Agreement.
Section 3.3 Continuation of Insurance Coverage. From the date hereof to the
Closing, each of Sheridan and Hirsch shall keep in full force and effect
insurance coverage for its assets and operations comparable in amount and scope
to the coverage now maintained covering its assets and operations.
ARTICLE IV
ADDITIONAL AGREEMENTS
Section 4.1 Proxy Statement.
(a) As promptly as practicable after the date of this Agreement, Hirsch
shall file with the SEC a Proxy Statement with respect to, among other things,
seeking Hirsch Stockholder Approval for the Merger, the approval of the amended
and restated certificate of incorporation of Hirsch attached hereto as Exhibit
B, the appointment of the individuals described in Section 1.7(a) hereof as
directors of Hirsch (with such appointment to be effective as of the Effective
Time) and the related transactions contemplated by this Agreement. Sheridan
shall furnish all information concerning it and the holders of its capital stock
as Hirsch may reasonably request in connection with the preparation of the Proxy
Statement. Hirsch shall use all reasonable efforts to cause the Proxy Statement
to comply with the rules and regulations promulgated by the SEC, to respond
promptly to any comments of the SEC or its staff and to have the Proxy Statement
mailed to Hirsch's stockholders as promptly as practicable. Hirsch shall also
promptly file, use all reasonable efforts to cause to become effective as
promptly as possible and, if required, mail to its stockholders any amendment to
the Proxy Statement that becomes necessary after mailing, the Proxy Statement.
(b) If at any time prior to the Effective Time any event or circumstance
relating to Hirsch, or its respective directors or officers, is discovered by
Hirsch which is required to be set forth in an amendment or supplement to the
Proxy Statement, Hirsch shall promptly inform Sheridan. All documents that
Hirsch is responsible for filing with the SEC in connection with the
transactions contemplated hereby will comply as to form and substance in all
material respects with the applicable requirements of the Securities Act and the
Exchange Act.
(c) If at any time prior to the Effective Time any event or circumstance
relating to Sheridan, or its respective directors or officers, is discovered by
Sheridan which is required to be set forth in an amendment or supplement to the
Proxy Statement, Sheridan shall promptly inform Hirsch. All documents provided
by Sheridan to Hirsch for filing with the SEC in connection with the transaction
contemplated herein will comply as to form and substance in all material
respects with the applicable requirements of the Securities Act and the Exchange
Act.
(d) Hirsch will advise Sheridan, promptly after it receives notice thereof,
of the issuance of any stop order, or any request by the SEC for an amendment of
the Proxy Statement or comments thereon or responses thereto.
(e) Sheridan hereby covenants and agrees to cooperate with Hirsch in the
preparation and filing of the Proxy Statement and will promptly provide all
available financial and other information reasonably requested by Hirsch for
inclusion in the Proxy Statement and that such information shall be complete and
accurate in all material respects.
Section 4.2 Hirsch Voting Agreement and Stockholders' Meeting.
(a) As an inducement to Sheridan to enter into this Agreement, certain
stockholders of Hirsch have concurrently entered into a voting agreement in the
form attached hereto as Exhibit D (the "Hirsch Voting Agreement").
(b) Hirsch shall take all action necessary under all applicable Laws to
call, give notice of and hold the Hirsch Stockholders Meeting as soon as
reasonably practical after the date of this Agreement. Hirsch shall ensure that
all proxies solicited in connection with the Hirsch Stockholders Meeting are
solicited in compliance with all applicable Laws.
(c) The Proxy Statement shall include a statement to the effect that the
Board of Directors of Hirsch recommends that Hirsch's stockholders vote to
approve the issuance of the Merger Shares in the Merger (the recommendation of
Hirsch's board of directors that Hirsch's stockholders vote to approve the
issuance of the Merger Shares in the Merger being referred to as the "Hirsch
Board Recommendation"). Except as provided for in Section 4.14 below, The Hirsch
Board Recommendation shall not be withdrawn or modified in a manner adverse to
Sheridan, and no resolution by the board of directors of Hirsch or any committee
thereof to withdraw or modify the Hirsch Board Recommendation in a manner
adverse to Sheridan shall be adopted or proposed.
Section 4.3 Commercially Reasonable Efforts.
(a) Subject to the terms and conditions of this Agreement, each party will
use commercially reasonable efforts to take, or cause to be taken, all actions
and to do, or cause to be done, all things necessary, proper or advisable under
applicable Laws to consummate the Merger and the other transactions contemplated
by this Agreement. Neither Sheridan, Hirsch nor Merger Sub will take, agree to
take or knowingly permit to be taken any action or do or knowingly permit to be
done anything in the conduct of the business of the companies, or otherwise,
which would be contrary to or in breach of any of the terms or provisions of
this Agreement.
(b) Each of Hirsch, Merger Sub and Sheridan shall use commercially
reasonable efforts to resolve such objections if any, as may be asserted by a
Governmental Entity or other Person in respect of the transactions contemplated
hereby, including, without limitation, under any antitrust or other Law. In
connection with the foregoing, if any administrative or judicial action or
proceeding, including any proceeding by a private party, is instituted (or
threatened to be instituted) challenging any transaction contemplated by this
Agreement, each of Hirsch, Merger Sub and Sheridan shall cooperate in all
respects with each other and use its respective commercially reasonable efforts
to contest and resist any such action or proceeding and to have vacated, lifted,
reversed or overturned any decree, judgment, injunction, or other order, whether
temporary, preliminary or permanent, that is in effect and that prohibits,
prevents or restricts consummation of the transactions contemplated by this
Agreement. Notwithstanding the foregoing or any other provision of this
Agreement, nothing in this Section 4.3(b) shall limit a party's right to
terminate this Agreement pursuant to Section 6.2 so long as such party has up to
then complied in all material respects with its obligations under this Section
4.3(b).
Section 4.4 Exclusivity. Subject to Section 4.14 below, unless Sheridan,
Hirsch or Merger Sub are in breach of this Agreement prior to the Closing, and
such breach has not been cured within 20 days written notice of such breach,
neither Sheridan, Hirsch nor Merger Sub and any of their respective directors,
officers, employees, representatives or agents shall directly or indirectly, (i)
discuss, negotiate, undertake, authorize, recommend, propose or enter into,
either as the proposed surviving, merged, acquiring or acquired corporation, any
transaction involving a merger, consolidation, business combination, purchase or
disposition of any amount of assets or capital stock or other equity interest of
Sheridan, Hirsch or the Merger Sub, as the case may be, other than the
transactions contemplated by this Agreement (an "Acquisition Transaction"), (ii)
facilitate, encourage, solicit or initiate discussions, negotiations or
submissions of proposals or offers in respect of an Acquisition Transaction,
(iii) furnish or cause to be furnished to any Person any information concerning
the business operations, properties or assets of Sheridan, Hirsch or the Merger
Sub, as the case may be, in connection with an Acquisition Transaction, or (iv)
otherwise cooperate in any way with, or assist or participate in, facilitate or
encourage, any effort or attempt by any other Person to do or seek any of the
foregoing. Sheridan, on the one hand, and Hirsch on the other hand, will inform
each other in writing immediately following the receipt by such party or a
representative of any proposal or inquiry with respect to any Acquisition
Transaction.
Section 4.5 Public Announcements. Each of Hirsch, Merger Sub and Sheridan
will consult with one another before issuing any press release or otherwise
making any public statements in respect of the transactions contemplated by this
Agreement, including the Merger, and shall not issue any such press release or
make any such public statement prior to such consultation, except as may be
required by applicable Law or by obligations pursuant to any listing agreement
with Nasdaq, as determined by Hirsch, Merger Sub or Sheridan, as the case may
be, a copy of which shall be sent simultaneously to the other parties upon such
release.
Section 4.6 Private Placement. Sheridan acknowledges that the issuance of
the Merger Shares pursuant to Section 1.4 is intended to be exempt from
registration under the Securities Act, by virtue of Regulation D of the
Securities Act and/or Section 4(2) of the Securities Act, and that its
stockholders, upon receipt of such Merger shares, may not sell such shares,
unless such shares subsequently are registered under the Securities Act or an
exemption from such registration is available. Sheridan understands that the
Merger Shares must be held indefinitely unless they are subsequently registered
under the Securities Act or an exemption from such registration is available.
Sheridan understands and agrees that, in order to ensure compliance with the
restrictions referred to herein, Hirsch may issue appropriate "stop transfer"
instructions to its transfer agent. Sheridan understands that the following
legend (and such other legends as Hirsch deems appropriate) shall be placed on
such shares:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT
AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF
COUNSEL IN A FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNLESS SOLD
PURSUANT TO RULE 144 OF SUCH ACT."
Hirsch shall use commercially reasonable efforts to meet the requirements
of Rule 144(c) of the Securities Act and, if an opinion is required by Hirsch
for transfer of such shares, Hirsch shall retain counsel to determine whether
such an opinion may be rendered.
Section 4.7 Confidentiality. In the course of their business operations,
all parties shall have received, and will continue to receive, information that
gives the other parties an advantage over its competitors, and which is
confidential and proprietary, including, without limitation, each party's
respective names and preferences of customers, products and markets,
technological data, computer programs, know-how, potential acquisitions, sources
of financing, corporate operating and financing strategies, operating plans and
similar related information (collectively, the "Confidential Material"). At no
time during the period commencing on the date hereof shall any party to this
Agreement, whether individually, or jointly with others, for the benefit of
itself, himself, or any third party, publish, disclose, use, or authorize anyone
else to publish, disclose, or use any Confidential Material of the other
parties; provided, however, that any such Confidential Material may be disclosed
only as required by Law or the rules and regulations of the NASDAQ Stock Market,
Inc.. In the event that any party is requested pursuant to, or is required by,
applicable law or regulation or by legal process to disclose any Confidential
Material, such party shall promptly notify the other parties of any anticipated
disclosure obligation and cooperate with the other parties at such other
parties' expense, in any efforts to seek an appropriate protective order or
other reliable assurance that confidential treatment will be accorded to that
portion of the Confidential Material that is required to be disclosed. The
parties acknowledge that any disclosure of any Confidential Material would cause
material and irrevocable harm to the other parties and their respective
business.
Section 4.8 Additional Documents and Further Assurances. At, and from time
to time after, the date of this Agreement, at the request of Hirsch but without
further consideration, Sheridan shall execute and deliver such other instruments
of conveyance, assignment, transfer, and delivery and take such other action as
Hirsch reasonably may request in order to more effectively convey, transfer,
assign and deliver to the Surviving Corporation, and to place the Surviving
Corporation in possession and control of, any of the rights, properties, assets
and business intended to be sold, conveyed, transferred, assigned and delivered
hereunder, or to assist in the collection or reduction to possession of any and
all of such rights, properties, and assets or to enable the Surviving
Corporation to exercise and enjoy all rights and benefits of Sheridan with
respect thereto.
Section 4.9 Notification of Certain Matters. Sheridan shall give prompt
notice to Hirsch and Merger Sub, and Hirsch and Merger Sub shall give prompt
notice to Sheridan, of (a) the occurrence or nonoccurrence of any event the
occurrence or nonoccurrence of which would be likely to cause any representation
or warranty contained in this Agreement to be untrue or inaccurate in any
material respect at or prior to the Effective Time, (b) any material failure of
Sheridan, Hirsch or Merger Sub, as the case may be, to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
hereunder, (c) any notice or other communication from any third party alleging
that the consent of such third party is or may be required in connection with
the transactions contemplated by this Agreement, or (d) any facts or
circumstances that could reasonably be expected to result in a Material Adverse
Effect; provided, however, that the delivery of any notice pursuant to this
Section 4.9 shall not cure such breach or non-compliance or limit or otherwise
affect the rights, obligations or remedies available hereunder to the party
receiving such notice.
Section 4.10 Employee Matters. Hirsch will cause the Surviving Corporation
to honor the obligations of Sheridan under the provisions of all Benefit Plans
and Employee Arrangements set forth in Sheridan's Disclosure Schedule, subject
to Hirsch's right to amend or terminate any such Benefit Plan or Employee
Arrangement in accordance with its terms. After the Effective Time, the
employees of Sheridan will be eligible to participate in Sheridan's Benefit
Plans or, if so determined by Hirsch, Hirsch's applicable Benefit Plans, as such
plans may be in effect from time to time, and, at Hirsch's sole discretion, will
become employees of Hirsch. With respect to each such employee of Sheridan,
service with Sheridan may be counted for purposes of determining periods of
eligibility to participate or to vest in benefits under any applicable Benefit
Plan of Hirsch. Hirsch will grant options to certain Sheridan employees who
continue to be employed following the Closing in the amounts set forth in
Schedule 4.10 of the Hirsch Disclosure Schedule.
Section 4.11 Third Party Consents.
(a) Each of Hirsch, Merger Sub and Sheridan shall use its commercially
reasonable efforts to obtain at the earliest practicable date all consents of
third parties and Governmental Entities necessary to the consummation of the
transactions contemplated hereby (the "Third Party Consents") and will provide
to the other parties hereto copies of each such Third Party Consent promptly
after it is obtained. Each of Hirsch, Merger Sub and Sheridan agrees to
cooperate fully with the other parties hereto in connection with the obtaining
of the Third Party Consents; provided, however, that no party shall be required
to pay any additional sums to secure such Third Party Consents of the other
parties hereto.
(b) In furtherance and not in limitation of the covenants of the parties
contained in Section 4.11(a), if any administrative or judicial action or
proceeding, including any proceeding by a private party, is instituted (or
threatened to be instituted) challenging any transaction contemplated by this
Agreement, each of Hirsch, Merger Sub and Sheridan shall cooperate in all
respects with each other and use its respective commercially reasonable efforts
to contest and resist any such action or proceeding and to have vacated, lifted,
reversed or overturned any decree, judgment, injunction or other order, whether
temporary, preliminary or permanent, that is in effect and that prohibits,
prevents or restricts consummation of the transactions contemplated by this
Agreement.
(c) If any objections are asserted with respect to the transactions
contemplated hereby or if any suit is instituted by any Governmental Entity or
any private party challenging any of the transactions contemplated hereby as
violative of any regulatory Law, each of Hirsch, Merger Sub and Sheridan shall
use its commercially reasonable efforts to resolve any such objections or
challenge as such Governmental Entity or private party may have to such
transactions under such regulatory Law so as to permit consummation of the
transactions contemplated by this Agreement.
Section 4.12 Legal Opinion Certificates. Sheridan, Hirsch and Merger Sub
shall execute and deliver to Ruskin Moscou Faltischek, P.C. counsel to Hirsch,
and Olshan Grundman Frome Rosenzweig & Wolosky LLP, counsel to Sheridan,
certificates at such time or times as are reasonably requested by such law firms
in connection with their respective deliveries of opinions in respect of the
transactions contemplated hereby. Prior to the Effective Time, none of Sheridan,
Hirsch or Merger Sub shall take or cause to be taken any action which would
cause to be untrue (or fail to take or cause not to be taken any action which
would cause to be untrue) any of the representations in such previously-agreed
certificates.
Section 4.13 Blue Sky Laws. Hirsch, Merger Sub and Sheridan shall take such
steps as may be necessary to comply with the securities and blue sky laws of all
jurisdictions which are applicable to the issuance of the Merger Shares. The
parties hereto shall use all reasonable efforts to assist each other in
complying with all applicable securities and blue sky laws.
Section 4.14 Other Potential Acquirors of Hirsch.
(a) Prior to the Effective Time or earlier termination of this Agreement in
accordance with the terms hereof, neither Hirsch nor Sheridan shall permit any
of its respective Subsidiaries to, nor authorize nor permit any officer,
director or employee of, or any investment banker, attorney or other advisor or
representative of it or any of its Subsidiaries ("Representatives") to, directly
or indirectly: (i) solicit, initiate, or encourage the submission of, any
Takeover Proposal (as defined below), or take any other action to facilitate any
inquiries or make any proposal that constitutes, or may reasonably be expected
to lead to, any Takeover Proposal, (ii) engage in negotiations or discussions
with, or furnish any information or data, or afford access to the properties,
books or records of Hirsch or Sheridan or their Subsidiaries to any third party
relating to a Takeover Proposal, or (iii) enter into any agreement with respect
to any Takeover Proposal or recommend any Takeover Proposal. For purposes of
this Agreement, "Takeover Proposal" means any written proposal or offer (whether
or not delivered to a party's stockholders generally) for a merger,
consolidation, recapitalization, liquidation, dissolution or similar
transaction, purchase of substantial assets, tender offer or other business
combination involving the party or any of its Subsidiaries or any proposal or
offer to acquire in any manner, directly or indirectly, a substantial equity
interest in, or a substantial portion of the assets or business of, the party or
any of its Subsidiaries, other than the transactions contemplated by this
Agreement.
(b) Notwithstanding anything to the contrary contained in this Agreement or
any other agreement between the parties and so long as Hirsch is in compliance
with the provisions of Section 4.14(a), if Hirsch and its Board of Directors
prior to the Hirsch Stockholders Meeting determine in good faith after
discussion with its counsel that an unsolicited Takeover Proposal would likely
result in a Superior Proposal (as defined below) and the Board of Directors
determines in good faith that the failure to participate in discussions or
negotiations with or to furnish information to the Potential Acquiror (as
hereinafter defined), would violate the Board of Directors' fiduciary duties
under applicable law, then Hirsch and its Board of Directors: (i) may
participate in discussions or negotiations (including, as a part thereof, make
any counterproposal) with or furnish information to any third party making such
Takeover Proposal (a "Potential Acquiror"), and (ii) shall take and disclose to
Hirsch's stockholders a position with respect to any tender or exchange offer by
a third party, or amend or withdraw such position, pursuant to Rules 14d-9 and
14e-2 of the Exchange Act.
(c) Any non-public information furnished to a Potential Acquiror shall be
pursuant to a confidentiality agreement in form and substance reasonably
acceptable to Hirsch.
(d) The Board of Directors of Hirsch shall not approve or recommend, as the
case may be, or propose to approve or recommend, as the case may be, or enter
into any agreement with respect to, any Takeover Proposal, unless the Board
determines in good faith, after receiving advice from their financial advisor,
that such Takeover Proposal would, if so completed, result in a Superior
Proposal. For purposes of this Section 4.14, "Superior Proposal" means a written
Takeover Proposal made by a third party with respect to which: (i) the Board of
Directors of Hirsch determines, based on such matters that they reasonably deem
relevant, including, without limitation, the likelihood of consummation, the
trading market, and the liquidity of any securities offered in connection with
the Takeover Proposal, that the Takeover Proposal is superior as compared with
the Merger from a financial point of view, and (ii) if the Takeover Proposal (x)
is subject to a financing condition or (y) involves consideration that is not
entirely cash or does not permit stockholders to receive the payment of the
offered consideration in respect of all shares at the same time (unless there is
a cash payment at closing of at least $3.00 per share), Hirsch's Board of
Directors have been furnished with the written opinion of the financial advisor
to the Board (in the case of clause (x)), the Takeover Proposal is readily
financeable and (in the case of clause (y)) that the Takeover Proposal provides
a higher value per share, from a financial point of view, than would be realized
by Hirsch's stockholders pursuant to the Merger.
(e) Except as set forth in Section 4.14(d), the Board of Directors of
Hirsch shall not (x) withdraw or modify, or propose to withdraw or modify, in a
manner adverse to Sheridan, the Board of Directors' approval or recommendation
of the Merger or this Agreement, (y) approve any letter of intent, agreement in
principle, acquisition agreement or similar agreement (other than a
confidentiality agreement in connection with a Superior Proposal which is
entered into by Hirsch in accordance with Section 4.14(b)) relating to any
Takeover Proposal (each, a "Proposal Agreement"), or (z) approve or recommend,
or propose to approve or recommend, any Takeover Proposal. Notwithstanding the
foregoing or anything else to the contrary contained in this Agreement, in
response to a Superior Proposal which was not solicited by Hirsch, and which did
not otherwise result from a breach of Section 4.14(a), the Board of Directors of
Hirsch may, subject to the immediately following sentence, terminate this
Agreement pursuant to and subject to the terms of Section 6.4(c) and,
concurrently with such termination, cause Hirsch to enter into an agreement with
respect to a Superior Proposal, but only if Hirsch's Board of Directors
determines, after consultation with its Superior Proposal counsel, that failure
to terminate this Agreement and accept the Superior Proposal would be
inconsistent with Hirsch's Board of Directors' fiduciary duties to stockholders.
Such actions may be taken by Hirsch's Board of Directors only if it has
delivered to Sheridan prior to or on the date of Hirsch's Stockholders' Meeting,
written notice of the intent of Hirsch's Board of Directors to take the actions
referred to in the preceding sentence, together with a copy of the related
Proposal Agreement and a description of any terms of the Takeover Proposal not
contained therein. The Board of Directors shall not terminate this Agreement and
enter into an Agreement with respect to a Superior Proposal pursuant to this
Section 4.14(e) until the end of the second business day following delivery of
such notice to Sheridan, after which the Board of Directors, taking into account
such matters that they deem relevant (including, without limitation, the
likelihood of consummation, the trading market, and the liquidity of any
securities offered in connection with the Takeover Proposal, as well as any
indications from Sheridan that it will make an alternative proposal), may
proceed with such Superior Proposal and enter into a Proposal Agreement in
connection with the Superior Proposal.
(f) Hirsch promptly, and in any event within 48 hours of receipt of a
Takeover Proposal, shall advise Sheridan orally and in writing of the submission
of such Takeover Proposal, the identity of the person making such Takeover
Proposal and the material terms of such Takeover Proposal; provided, however,
that Sheridan shall not interfere with Hirsch or Hirsch's Board of Directors
with respect to any such Takeover Proposal (including any deliberations related
to such Takeover Proposal or any matter related thereto). Hirsch shall keep
Sheridan fully informed of the status and material terms of any Takeover
Proposal.
Section 4.15 Registration Rights. Hirsch hereby agrees that at the Closing,
Hirsch will grant to each Person that holds in excess of 5% of the outstanding
Sheridan Common Stock on a fully diluted basis (assuming the conversion in full
of all Sheridan Series A Preferred Stock but excluding any outstanding options
or warrants) as of immediately prior to the Effective Time, registration rights
pursuant to the terms of a Registration Rights Agreement substantially in the
form attached hereto as Exhibit E, provided that such Person executes such
agreement at or prior to the Closing.
Section 4.16 Kinderhook Management Agreements. Reference is hereby made to
(i) that certain Management Services Agreement, dated as of July 31, 2003 (the
"Kinderhook-Musicrama MSA"), by and between Kinderhook Industries, LLC
("Kinderhook Industries") and Musicrama, Inc., a subsidiary of Sheridan
("Musicrama") and (ii) that certain Management Services Agreement, dated as of
April 1, 2005 (the "Kinderhook-Sheridan MSA"), by and between Kinderhook
Industries and Sheridan. Hirsch and Sheridan hereby acknowledge and agree (A)
that pursuant to the terms of the Kinderhook-Sheridan MSA, $50,000 in fees will
be payable to Kinderhook Industries as a result of the consummation of the
Merger, (B) that such $50,000 payment will be made by Sheridan or Hirsch (on
behalf of Sheridan) to Kinderhook Industries on the Closing Date, (C) that
pursuant to the terms of the Kinderhook-Musicrama MSA, Musicrama is currently
obligated to pay $50,000 in fees to Kinderhook Industries and, on October 1,
2005, Musicrama will be obligated to pay an additional $25,000 in fees to
Kinderhook Industries, (D) that, to the extent Musicrama has not previously paid
such $50,000 and/or such $25,000 to Kinderhook Industries as of the Closing
Date, such amounts will be paid by Sheridan or Hirsch (on behalf of Musicrama)
to Kinderhook Industries on the Closing Date and (E) that all such fees when
paid to Kinderhook Industries will be deemed fully earned by Kinderhook
Industries for services previously rendered. Notwithstanding anything contained
herein to the contrary, Kinderhook Industries is an express third party
beneficiary of this Section 4.16 and Section 5.1(c) and the provisions of this
Section 4.16 and Section 5.1(c) may not be amended or waived without the prior
written consent of Kinderhook Industries.
ARTICLE V
CONDITIONS TO CONSUMMATION OF THE MERGER
Section 5.1 Conditions to Each Party's Obligations to Effect the Merger.
The respective obligations of each party to consummate the transactions
contemplated by this Agreement are subject to the fulfillment at or prior to the
Effective Time of each of the following conditions, any or all of which may be
waived in whole or in part by the party being benefited thereby, to the extent
permitted by applicable Law:
(a) Stockholder Approval. This Agreement, the Merger and related
transactions shall have been approved and adopted by the Hirsch Stockholder
Approval.
(b) Injunction, etc. As of the Effective Time, there shall not be in effect
any Law of any Governmental Entity of competent jurisdiction restraining,
enjoining or otherwise preventing consummation of the transactions contemplated
by this Agreement and no Governmental Entity shall have instituted any
proceeding which continues to be pending seeking any such Law.
(c) Kinderhook-Musicrama MSA. The Kinderhook-Musicrama MSA shall be amended
to provide that (i) the Kinderhook-Musicrama MSA will have a remaining term of
twenty months commencing on the Closing Date, (ii) that the management fees
payable to Kinderhook Industries for such twenty month period commencing on the
Closing Date will be an aggregate of $500,000, and that such management fees
will be payable to Kinderhook Industries, in advance, in twenty monthly
installments of $25,000 beginning on the Closing Date, (iii) that upon a change
of control of Hirsch, all then remaining unpaid management fees for the
remaining term of the Kinderhook-Musicrama MSA shall immediately be due and
payable to Kinderhook Industries and (iv) the amendments provided in clauses
(i), (ii) and (iii) above shall be expressly conditioned on (A) the consummation
of the Merger, (B) all payments required to be made to Kinderhook Industries
pursuant to Section 4.16 hereof having been made on or prior to the Closing Date
and (C) each of Hirsch and Sheridan guaranteeing the payment of the management
fees payable to Kinderhook Industries pursuant to the Kinderhook-Musicrama MSA,
as amended as provided herein; provided that, notwithstanding anything contained
herein to the contrary, neither Hirsch, Merger Sub nor Sheridan will have the
benefit of the conditions set forth in this Section 5.1(c) unless all payments
required to be made to Kinderhook Industries pursuant to Section 4.16 hereof
have been made on or prior to the Closing Date.
Section 5.2 Conditions to the Obligations of Hirsch and Merger Sub. The
respective obligations of Hirsch and Merger Sub to consummate the transactions
contemplated by this Agreement are subject to the fulfillment at or prior to the
Effective Time of each of the following additional conditions, any or all of
which may be waived in whole or part by Hirsch and Merger Sub to the extent
permitted by applicable Law:
(a) Representations and Warranties. The representations and warranties of
Sheridan contained herein shall be true and correct in each case in all material
respects (other than representations and warranties that contain materiality
qualifications which shall be true and correct in all respects) on and as of the
date when made and as of the Closing (except for representations and warranties
made as of a specified date, which shall speak only as of the specified date),
provided that it shall not be a breach of this condition if such breach of any
representation or warranty does not have a Material Adverse Effect on Sheridan
and its subsidiaries, taken as a whole.
(b) Performance of Agreement. Sheridan shall have performed or complied in
all material respects with all covenants, conditions and other obligations
contained herein required to be performed or complied with by it prior to or at
the time of the Closing.
(c) No Material Adverse Effect. From the date hereof through the Closing
Date, there shall not have occurred any Material Adverse Effect on Sheridan and
its subsidiaries, taken as a whole.
(d) Certificate. Sheridan shall have delivered to Hirsch a certificate,
dated the Closing Date, signed by the Chief Executive Officer or President of
Sheridan, certifying as to the fulfillment of the conditions specified in
Section 5.2(a), Section 5.2(b) and Section 5.2(c).
(e) Opinion of Counsel to Sheridan. Hirsch shall have received an opinion
of Olshan Grundman Frome Rosenzweig & Wolosky LLP, counsel to Sheridan, dated
the Closing Date, in form and substance reasonably satisfactory to Hirsch and
Merger Sub and substantially in the form attached hereto as Exhibit F.
(f) No Court Order. Immediately prior to the Effective Time, no temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction shall be in effect which prevent Sheridan,
Hirsch and/or Merger Sub from consummating the Merger; provided, however, that
each of Hirsch and Merger Sub shall have used reasonable efforts to prevent the
entry of any such injunction and to appeal as promptly as possible any such
injunction or other order that may be entered.
(g) Approvals. Sheridan shall have timely obtained from each Governmental
Entity any and all Third Party Consents, if any, necessary for consummation of
or in connection with the transactions contemplated hereby, including such
approvals, waivers and consents as may be required under the blue sky laws, if
any, and such approvals, waivers and consents are still in full force and
effect, except for such authorizations, consents or approvals, the failure of
which to have been made or obtained does not and could not reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect.
For purposes of this Section 5.2(g), Material Adverse Effect will include
without limitation the loss of contracts and agreements which in the aggregate
represent more than 3% of its consolidated revenues.
Section 5.3 Conditions to the Obligations of Sheridan. The obligations of
Sheridan to consummate the transactions contemplated by this Agreement are
subject to the fulfillment at or prior to the Effective Time of each of the
following conditions, any or all of which may be waived in whole or in part by
Sheridan to the extent permitted by applicable Law:
(a) Representations and Warranties. The representations and warranties of
Hirsch and Merger Sub contained herein shall be true and correct in each case in
all material respects (other than the representations and warranties that
contain materiality qualifications which shall be true and correct in all
respects) on and as of the date when made and as of the Closing (except for
representations and warranties made as of a specified date, which shall speak
only as of the specified date), provided that it shall not be a breach of this
condition if such breach of any representation or warranty does not have a
Material Adverse Effect on Hirsch and its subsidiaries, taken as a whole.
(b) Performance of Agreement. Hirsch shall have performed or complied in
all material respects with all covenants, conditions and other obligations
contained herein required to be performed or complied with by it prior to or at
the time of the Closing.
(c) No Material Adverse Change. Prior to the Closing, there shall not have
occurred any Material Adverse Effect on Hirsch and its subsidiaries, taken as a
whole.
(d) Certificate. Each of Hirsch and Merger Sub shall have delivered to
Sheridan a certificate, dated the Closing Date, signed by its Chief Executive
Officer or President, certifying as to the fulfillment of the conditions
specified in Section 5.3(a), Section 5.3(b) and Section 5.3(c).
(e) Directors and Officers of Hirsch. Hirsch shall have taken, or caused to
have been taken, all necessary corporate action, so that at or immediately after
the Effective Time the directors and officers of Hirsch shall be as set forth on
Schedule 1.7(a) of the Sheridan Disclosure Schedule.
(f) Opinion of Counsel to Hirsch. Sheridan shall have received an opinion
of Ruskin Moscou Faltischek, P.C. counsel to Hirsch, dated the Closing Date, in
the form and substance reasonably satisfactory to Sheridan and substantially in
the form attached hereto as Exhibit G.
(g) No Court Order. Immediately prior to the Effective Time, no temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction shall be in effect which prevent Sheridan,
Hirsch and/or Merger Sub from consummating the Merger; provided, however, that
Sheridan shall have used reasonable efforts to prevent the entry of any such
injunction and to appeal as promptly as possible any such injunction or other
order that may be entered.
(h) Employment Agreements. Each of Joseph Bianco, Paul Gallagher, Beverly
Eichel and Anil Narang shall have entered into an Employment Agreement with
Hirsch containing the material terms set forth on Exhibit H attached hereto and
containing such other customary terms mutually agreed to by the parties.
(i) Approvals. Hirsch and Merger Sub shall have timely obtained from each
Governmental Entity any and all Third Party Consents, if any, necessary for
consummation of or in connection with the transactions contemplated hereby,
including such approvals, waivers and consents as may be required under the blue
sky laws, if any, and such approvals, waivers and consents are still in full
force and effect, except for such authorizations, consents or approvals, the
failure of which to have been made or obtained does not and could not reasonably
be expected to have, individually or in the aggregate, a Material Adverse
Effect. For purposes of this Section 5.3(i), Material Adverse Effect will
include without limitation the loss of contracts and agreements which in the
aggregate represent more than 3% of its consolidated revenues.
ARTICLE VI
TERMINATION; AMENDMENT; WAIVER
Section 6.1 Termination by Mutual Agreement. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, whether before or after the approval of the Merger by Hirsch Stockholder
Approval referred to in Section 5.1(a), by mutual written consent of Sheridan
and Hirsch by action of their respective boards of directors.
Section 6.2 Termination by either Hirsch or Sheridan. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time by action of the board of directors of either Hirsch or Sheridan if:
(a) the Merger shall not have been consummated by December 31, 2005 (the
"Termination Date"); provided, however, that if the Hirsch Stockholders Meeting
has not taken place by such date, Hirsch may not terminate this Agreement if
Sheridan chooses to extend the Termination Date;
(b) if the Hirsch Stockholder Approval shall not have been obtained after
Hirsch convenes and holds the Hirsch Stockholders Meeting and certifies the vote
with respect to the Merger; or
(c) any Law permanently restraining, enjoining or otherwise prohibiting
consummation of the Merger shall become final and non-appealable (whether before
or after the approval of the Merger by Hirsch Stockholder Approval);
provided, however, that the right to terminate this Agreement pursuant to this
Section 6.2 shall not be available to any party that has breached in any
material respect its obligations under this Agreement in any manner that shall
have proximately contributed to the occurrence of the failure of the Merger to
be consummated; and provided further, that the right to terminate this Agreement
pursuant to this Section 6.2 shall not be available to Hirsch in the event that
any of its stockholders who are party to the Hirsch Voting Agreement have
breached their obligations thereunder.
Section 6.3 Termination by Sheridan. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, whether
before or after the approval of the Merger by the Hirsch Stockholder Approval
referred to in Section 5.1(a), by action of the Sheridan Board of Directors, if:
(a) (i) any of Hirsch's representations and warranties shall have been
inaccurate in any material respect as of the date of this Agreement, such that
the conditions set forth in Section 5.3(a) would not be satisfied, or (ii) if
(A) any of Hirsch's representations and warranties become inaccurate in any
material respect as of a date subsequent to the date of this Agreement (as if
made on such subsequent date), such that the conditions set forth in Section
5.3(a) would not be satisfied and (B) such inaccuracy has not been cured by
Hirsch within twenty (20) business days after its receipt of written notice
thereof and remains uncured at the time notice of termination is given, or (iii)
any of Hirsch's covenants contained in this Agreement shall have been breached
in any material respect, such that the conditions set forth in Section 5.3(b)
would not be satisfied; or
(b) the Board of Directors of Hirsch (i) withdraws or modifies adversely
its recommendation of the Merger, or (ii) recommends a Takeover Proposal to
Hirsch's stockholders; or
(c) if, since the date of this Agreement, there shall have occurred any
Material Adverse Effect on Hirsch.
Section 6.4 Termination by Hirsch. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, whether before
or after the approval of the Merger by the Hirsch Stockholder Approval referred
to in Section 5.1(a), by action of the Board of Directors of Hirsch, if:
(a) (i) any of Sheridan's representations and warranties shall have been
inaccurate in any material respect as of the date of this Agreement, such that
the conditions set forth in Section 5.2(a) would not be satisfied, or (ii) if
(A) any of Sheridan's representations and warranties become inaccurate in any
material respect as of a date subsequent to the date of this Agreement (as if
made on such subsequent date), such that the conditions set forth in Section
5.2(a) would not be satisfied and (B) such inaccuracy has not been cured by
Sheridan within twenty (20) business days after its receipt of written notice
thereof and remains uncured at the time notice of termination is given, or (iii)
any of Sheridan's covenants contained in this Agreement shall have been breached
in any material respect, such that the conditions set forth in Section 5.2(b)
would not be satisfied; or
(b) if, since the date of this Agreement, there shall have occurred any
Material Adverse Effect on Sheridan; or
(c) if, as a result of a Superior Proposal, the Board of Directors of
Hirsch determines, in its good faith judgment and in the exercise of its
fiduciary duties, that the failure to terminate this Agreement and accept such
Superior Proposal is a violation of such fiduciary duties and Hirsch has
otherwise complied in all material respects with Section 4.14.
Section 6.5 Effect of Termination and Abandonment. In the event of
termination of this Agreement and the abandonment of the Merger pursuant to this
Article VI, this Agreement (other than this Section 6.5, Section 4.7 and Section
8.4) shall become void and of no effect with no liability on the part of any
party hereto (or of any of its directors, officers, employees, consultants,
contractors, agents, legal and financial advisors, or other representatives);
provided, however, that except as otherwise provided herein, no such termination
shall relieve any party hereto of any liability or damages resulting from any
willful breach of this Agreement.
Section 6.6 Amendment. This Agreement may be amended by action taken by
Sheridan, Hirsch and Merger Sub at any time before or after approval of the
Merger by Hirsch Stockholder Approval but, after any such approval, no amendment
shall be made which changes the amount or form of the Merger consideration. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
Section 6.7 Extension; Waiver. At any time prior to the Effective Time,
each party hereto may (a) extend the time for the performance of any of the
obligations or other acts of the other party, (b) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document, certificate or writing delivered pursuant hereto, or (c) waive
compliance by the other party with any of the agreements or conditions contained
herein. Any agreement on the part of either party hereto to any such extension
or waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party. The failure of any party hereto to assert any of its
rights hereunder shall not constitute a waiver of such rights.
ARTICLE VII
SURVIVAL; ADJUSTMENT
Section 7.1 Survival. The representations and warranties of the parties
hereto contained in this Agreement and in any certificate or other writing
delivered pursuant hereto or in connection herewith shall survive for a period
of 180 days following the Effective Time. The covenants and agreements of the
parties set forth herein shall survive in accordance with their terms.
Notwithstanding the foregoing, if written notice (a "Claims Notice") of any
claim for an adjustment to the relative holdings of the shares of Hirsch Common
Stock held by the Sheridan Stockholders and the Hirsch Stockholders on the
Effective Date (an "Adjustment"), setting forth such claim in reasonable detail
and the amount or estimated amount of such Damages, is given by Hirsch or
Sheridan, as the case may be, in accordance with Section 7.3 of this Agreement
prior to the end of the applicable survival period, any claim specified therein
shall be deemed to survive until such claim is finally resolved.
Section 7.2 Adjustment.
(a) With respect to any breach of any representation or warranty or any
covenant or agreement by either Hirsch, on the one hand, or Sheridan, on the
other hand (a "Breaching Party"), Hirsch shall issue to the Persons who were
stockholders of Hirsch or Sheridan Stockholders, as the case may be, at the
Effective Time (the "Indemnified Parties"), additional shares of Hirsch Common
Stock (the "Adjustment Shares"), subject to the limitations contained in this
Article VII, in an aggregate amount sufficient to compensate the Indemnified
Parties for any damage, cost, liability, fines, penalties and expenses
(including reasonable attorneys' fees and expenses in connection with any
action, suit or proceeding, whether involving a claim by a third party or a
claim solely between the parties hereto) ("Damages"), incurred or suffered by an
Indemnified Party arising out of any such breach. The number of Adjustment
Shares shall be based on the fair market value of such shares as of the close of
business on the date of issuance. The Adjustment Shares shall be issued to the
Indemnified Parties pro rata in proportion to their shareholdings at the
Effective Time.
(b) Notwithstanding anything in this Agreement to the contrary, no claims
for an Adjustment shall be asserted by the Indemnified Parties under this
Article VII, unless and until the aggregate amount of Damages that would
otherwise be subject to the Adjustment hereunder exceeds $150,000, whereupon the
Indemnified Parties shall be entitled to receive the full amount of such
Damages; provided, that the maximum number of Adjustment Shares permitted
hereunder shall not exceed, in the aggregate 1,000,000 shares of Hirsch Common
Stock.
Section 7.3 Procedures. If a party intends to seek an Adjustment pursuant
to this Article VII, the party seeking the Adjustment shall promptly, after
becoming aware of such claim, deliver a Claims Notice to the other party;
provided, that the failure to provide such notice shall not affect the rights of
the party seeking the Adjustment under this Article VII unless such party is
actually prejudiced thereby.
Section 7.4 Exclusive Remedy. In the event that the Closing occurs, the
parties agree that their sole and exclusive remedy with respect to a breach of a
representation or warranty in this Agreement shall be pursuant to the provisions
of this Article VII; provided, however, that the obligations of the parties
under this Agreement shall be enforceable by decree of specific performance
issued by any court of competent jurisdiction, and appropriate injunctive relief
may be applied for and granted in connection therewith.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 Entire Agreement; Assignment.
(a) This Agreement (including exhibits and schedules attached hereto)
constitutes the entire agreement between the parties hereto in respect of the
subject matter hereof and supersedes all other prior agreements and
understandings, both written and oral, between the parties in respect of the
subject matter hereof.
(b) Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by operation of Law (including by merger or
consolidation) or otherwise. Any assignment in violation of the preceding
sentence shall be void. Subject to the preceding sentence, this Agreement will
be binding upon, inure to the benefit of, and be enforceable by, the parties and
their respective successors and permitted assigns and nothing in this Agreement,
express or implied, is intended to or shall confer upon any other Person any
rights, benefits or remedies of any nature whatsoever under or by reason of this
Agreement.
Section 8.2 Notices. All notices, requests, instructions or other documents
to be given under this Agreement shall be in writing and shall be deemed given,
(a) five business days following sending by registered or certified mail,
postage prepaid, (b) when sent if sent by facsimile; provided, however, that the
facsimile is promptly confirmed by telephone confirmation thereof by the
intended recipient, (c) when delivered, if delivered personally to the intended
recipient, and (d) one business day following sending by overnight delivery via
a national courier service, and in each case, addressed to a party at the
following address for such party:
if to Hirsch or Merger Sub, to: Hirsch International Corp.
200 Wireless Boulevard
Hauppauge, New York 11788
Attention: Paul Gallagher
Facsimile: (631) 952-7110
with copies to: Ruskin Moscou Faltischek, P.C.
East Tower, 15 Floor
190 EAB Plaza
Uniondale, NY 11556-0190
Attention: Adam Silvers, Esq.
Facsimile: (516) 663-6719
if to Sheridan: Sheridan Square Entertainment, Inc.
130 Fifth Avenue, 7th Floor
New York, New York 10011
Attention: Joseph Bianco
Facsimile: (212) 414-3231
with copies to: Olshan Grundman Frome Rosenzweig &
Wolosky LLP
Park Avenue Tower
65 East 55th Street
New York, New York 10022
Attention: Robert L. Frome, Esq.
Facsimile: (212) 451-2222
or to such other address or facsimile number as the Person to whom notice
is given may have previously furnished to the other in writing in the manner set
forth above.
Section 8.3 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to the choice of law principles thereof; provided, however, that the
corporate laws of the state of a party's incorporation and/or organization shall
govern for purposes of corporate governance and matters of corporate law.
Section 8.4 Expenses. Sheridan shall be solely responsible for the legal,
accounting and other fees and expenses incurred by Sheridan in connection with
the execution of this Agreement and the consummation of the transactions
contemplated hereby. Hirsch and Merger Sub shall be solely responsible for the
legal, accounting and other fees and expenses incurred by Hirsch and Merger Sub
in connection with execution of this Agreement and the consummation of the
transactions contemplated hereby.
Section 8.5 Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
Section 8.6 Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof. If any
provision of this Agreement, or the application thereof to any Person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other Persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
Section 8.7 Specific Performance. The parties agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement, this being in addition to any other
remedy to which they are entitled at Law or in equity.
Section 8.8 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
Section 8.9 Further Assurances. Each party to this Agreement agrees (a) to
furnish upon request to the other party such further information, (b) to execute
and deliver to the other party such other documents and (c) to do such other
acts and things as the other party reasonably requests for the purpose of
carrying out the intent of this Agreement and the documents and instruments
referred to herein.
Section 8.10 Interpretation.
(a) The words "hereof," "herein," "herewith" and words of similar import
shall, unless otherwise stated, be construed to refer to this Agreement as a
whole and not to any particular provision of this Agreement, and article,
section, paragraph, exhibit, and schedule references are to the articles,
sections, paragraphs, exhibits, and schedules of this Agreement, unless
otherwise specified. Whenever the words "include," "includes," or "including"
are used in this Agreement, they shall be deemed to be followed by the words
"without limitation." All terms defined in this Agreement shall have the defined
meanings contained herein when used in any certificate or other document made or
delivered pursuant hereto, unless otherwise defined therein. The definitions
contained in this Agreement are applicable to the singular as well as the plural
forms of such terms and to the masculine as well as to the feminine and neuter
genders of such terms. Any agreement, instrument, or statute defined or referred
to herein or in any agreement or instrument that is referred to herein means
such agreement, instrument, or statute as from time to time, amended, qualified
or supplemented, including (in the case of agreements and instruments) by waiver
or consent and (in the case of statutes) by succession of comparable successor
statutes and all attachments thereto and instruments incorporated therein.
References to a Person are also to its permitted successors and assigns.
(b) The phrases "the date of this Agreement," "the date hereof," and terms
of similar import, unless the context otherwise requires, shall be deemed to
refer to the date set forth in the opening paragraph of this Agreement.
(c) The parties have participated jointly in the negotiation and drafting
of this Agreement. In the event an ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as if drafted jointly
by the parties and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any provisions of this
Agreement.
Section 8.11 Definitions. As used herein,
(a) "Know" or "knowledge" means, (i) in respect of Hirsch, the knowledge of
the executive officers of Hirsch and its Subsidiaries, and (ii) in respect of
Sheridan, the knowledge of the executive officers of Sheridan and its
Subsidiaries.
(b) "Lien" means, in respect of any asset (including any security) any
mortgage, lien, pledge, charge, security interest, or encumbrance of any kind in
respect of such asset.
(c) "Permitted Lien" means a statutory Lien not yet delinquent; a purchase
money Lien arising in the ordinary course of business consistent with past
practices; a Lien reflected in the financial statements of the applicable party;
or a Lien which does not materially detract from the value or impair the use of
the asset or property in question.
(d) "Person" means an individual, corporation, limited liability company,
partnership, association, trust, unincorporated organization, other entity or
group (as defined in the Exchange Act).
(e) "Subsidiary" means, in respect of any party, any corporation,
partnership or other entity or organization, whether incorporated or
unincorporated, of which (i) such other party or any other subsidiary of such
party is a general partner (excluding such partnerships where such party or any
subsidiary of such party does not have a majority of the voting interest in such
partnership) or (ii) at least a majority of the securities or other interests
having by their terms ordinary voting power to elect a majority of the board of
directors or others performing similar functions in respect of such corporation
or other organization is directly or indirectly owned or controlled by such
party or by any one or more of its subsidiaries, or by such party and one or
more of its subsidiaries.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
duly executed on its behalf as of the date first above written.
SHERIDAN SQUARE ENTERTAINMENT, INC.
By:/s/ Joseph J. Bianco
- -----------------------
Name: Joseph J. Bianco
Title: Co-Chief Executive Officer
HIRSCH INTERNATIONAL CORP.
By:/s/ Paul Gallagher
- -----------------------
Name: Paul Gallagher
Title: President and
Chief Executive Officer
SSE ACQUISITION, CORP.
By: /s/ Paul Gallagher
- -----------------------
Name: Paul Gallagher
Title: President and
Chief Executive Officer
================================================================================
AGREEMENT AND PLAN OF MERGER
dated as of July 20, 2005
among
HIRSCH INTERNATIONAL CORP.,
SSE ACQUISITION CORP.
and
SHERIDAN SQUARE ENTERTAINMENT, INC.
================================================================================
EXHIBITS
Certificate of Merger A
Hirsch Certificate of Incorporation B
Hirsch Bylaws C
Hirsch Voting Agreement D
Registration Rights Agreement E
Opinion of Olshan Grundman Frome Rosenzweig & Wolosky LLP F
Opinion of Ruskin Moscou Faltischek, P.C. G
Terms of Hirsch Officers Employment H
INDEX OF SCHEDULES
HIRSCH DISCLOSURE SCHEDULE
1.7(a) List of Directors and Officers of Hirsch
1.8(a) Amendment to Certificate of Incorporation
2.1(b) List of Subsidiaries
2.2(a) Capitalization
2.2(b) Encumbrances
2.3(c) No Violations
2.6 Compliance with Applicable Laws
2.8 Litigation
2.10(a) Benefit Plans, List of Employees and Employee
Arrangements
2.10(h) Post-retirement Life Insurance or Health Benefits
Coverage
2.11(a) Labor Agreements
2.11(c) Labor Complaints
2.12 Absence of Certain Changes or Events
2.14 Tax Returns
2.16 Title and Related Matters
2.17(b) Material Contracts; Severance or Other Employment
Contracts
2.18 Insurance
2.20(b) Necessary Intellectual Property
2.20(c) List of Intellectual Property
2.20(d) License Agreements
2.20(e) Unauthorized Use of Intellectual Property
2.20(f) Breaches of Intellectual Property Rights
2.20(j) Products and Software
2.22 Bank Accounts
2.24 Customer Disputes
2.25 Offsets to Accounts Receivable
2.26 Related Party Transactions
2.27(b) Brokers or Finders
3.1 Deviation from Ordinary Course of Business
4.10 Hirsch Option Grants
SHERIDAN DISCLOSURE SCHEDULE
1.7(b) List of Officers and Directors of Surviving
Corporation
2.1(b) List of Subsidiaries
2.2(a) Capitalization
2.2(b) Encumbrances
2.3(c) No Violations
2.6 Compliance with Applicable Laws
2.8 Litigation
2.10(a) Benefit Plans, List of Employees and Employee
Arrangements
2.10(h) Post-retirement Life Insurance or Health
Benefits Coverage
2.11(a) Labor Agreements
2.11(c) Labor Complaints
2.12 Absence of Certain Changes or Events
2.14 Tax Returns
2.16 Title and Related Matters
2.17(a)(i)(a) Material Contracts
2.17(a)(i)(b) Severance Agreements
2.18 Insurance
2.20(b) Necessary Intellectual Property
2.20(l) Intellectual Property
2.22 Bank Accounts
2.24 Customer Disputes
2.25 Offsets to Accounts Receivable
2.26 Related Party Transactions
3.1 Deviation from Ordinary Course of Business
GLOSSARY OF DEFINED TERMS
-------------------------
Defined Terms Defined in Section
------------- ------------------
Acquisition Transaction Section 4.4
Adjustment Section 7.1
Adjustment Shares Section 7.2(a)
Affiliated Group Section 2.14(b)
Agreement Preamble
Bank Accounts Section 2.22
Benefit Plans Section 2.10(a)(i)
Breaching Party Section 7.2(a)
Certificate of Merger Section 1.2
Claims Notice Section 7.1
Closing Section 1.3
Closing Date Section 1.3
Code Recitals
Confidential Information Section 2.20(h)
Confidential Material Section 4.7
Copyrights Section 2.20(a)(iii)
Damages Section 7.2(a)
Delaware Law Section 1.1
Effective Time Section 1.2
Effective Time Sheridan Share Number Section 1.4(a)
Employee Arrangements Section 2.10(a)(iii)
Environmental Claim Section 2.7(d)
Environmental Law Section 2.7(d)
Environmental Permits Section 2.7(a)
ERISA Section 2.10(a)(i)
Exchange Act Section 2.3(c)
Exchange Ratio Section 1.4(a)
Financial Statements Section 2.4(b)
GAAP Section 2.4(a)
Governmental Entity Section 2.3(c)
Hazardous Materials Section 2.7(d)
Hirsch Preamble
Hirsch Board Recommendation Section 4.2(c)
Hirsch Common Stock Recitals
Hirsch Disclosure Schedule Article II
Hirsch Material Contracts Section 2.17(b)(i)
Hirsh Products Section 2.20(c)(ii)
Hirsch Software Section 2.20(j)
Hirsch Stockholder Approval Section 2.3(b)
Hirsch Stockholders Meeting Section 2.13
Hirsch Voting Agreement Section 4.2(a)
Indemnified Parties Section 7.2(a)
Independent Directors Section 1.7(a)
Intellectual Property Section 2.20(a)
IRS Section 2.10(b)
Issued Patents Section 2.20(a)(i)
Kinderhook Industries Section 4.16
Kinderhook-Musicrama MSA Section 4.16
Kinderhook-Sheridan MSA Section 4.16
Know Section 8.11(a)
Knowledge Section 8.11(a)
Law Section 2.3(c)
Lien Section 8.11(b)
Material Adverse Effect Section 2.1(a)
Merger Section 1.1
Merger Shares Section 1.4(a)
Merger Sub Preamble
Musicrama Section 4.16
Patent Applications Section 2.20(a)(ii)
Patents Section 2.20(a)(ii)
Permits Section 2.9
Permitted Lien Section 8.11(c)
Person Section 8.11(d)
Potential Acquiror Section 4.14(b)
Proposal Agreement Section 4.14(e)
Proxy Statement Section 2.13
Representatives Section 4.14(a)
Representing Party Article II
Representing Party's Disclosure Schedule Article II
SEC Section 1.7(a)
SEC Reports Section 2.4(a)
Securities Act Section 2.3(c)
Series B Transaction Recitals
Sheridan Preamble
Sheridan Certificate of Incorporation Section 1.4(a)
Sheridan Certificates Section 1.9
Sheridan Class A Stock Section 1.4(a)
Sheridan Class B Stock Section 1.4(a)
Sheridan Common Share Equivalents Section 1.4(a)
Sheridan Common Shares Section 1.4(a)
Sheridan Common Stock Section 1.4(a)
Sheridan Disclosure Schedule Article II
Sheridan Material Contracts Section 2.17(a)(i)
Sheridan Preferred Shares Section 1.4(a)
Sheridan Preferred Stock Section 1.4(a)
Sheridan Series A Preferred Stock Section 1.4(a)
Sheridan Series B Preferred Stock Recitals
Sheridan Stockholders Section 1.4(a)
Sheridan Stockholder Approval Section 2.3(a)
Sheridan Stock Option Section 1.11(b)
Subsidiary Section 8.11(e)
Superior Proposal Section 4.14(d)
Surviving Corporation Section 1.1
Takeover Proposal Section 4.14(a)
Tax Return Section 2.14(a)
Taxes Section 2.14(a)
Termination Date Section 6.2(a)
Third Party Consents Section 4.11(a)
Third Party Intellectual Property Section 2.20(d)
Trademarks Section 2.20(a)(iv)
Warrant Section 1.11(c)
Warrant Shares Section 1.11(c)
WARN Act Section 2.11(d)
TABLE OF CONTENTS
ARTICLE I THE MERGER..................................................2
Section 1.1 The Merger.........................................2
Section 1.2 Effective Time.....................................2
Section 1.3 The Closing........................................2
Section 1.4 Merger Consideration...............................2
Section 1.5 Effects of the Merger..............................4
Section 1.6 Conversion of Securities...........................5
Section 1.7 Directors and Officers.............................5
Section 1.8 Certificate of Incorporation and Bylaws............5
Section 1.9 Exchange of Shares.................................5
Section 1.10 Lost Certificates..................................6
Section 1.11 Options and Warrants...............................6
Section 1.12 Tax Consequences...................................7
Section 1.13 Sheridan Stock Transfer Books......................7
Section 1.14 No Further Rights..................................7
ARTICLE II REPRESENTATIONS AND WARRANTIES.............................7
Section 2.1 Organization; Qualification........................8
Section 2.2 Capital Stock......................................8
Section 2.3 Corporate Authority Relative to this Agreement;
No Violation.......................................9
Section 2.4 Reports and Financial Statements...................11
Section 2.5 No Undisclosed Liabilities.........................11
Section 2.6 No Default; Compliance with Applicable Laws........12
Section 2.7 Environmental Matters..............................12
Section 2.8 Litigation.........................................13
Section 2.9 Permits............................................13
Section 2.10 Employee Plans.....................................13
Section 2.11 Labor Matters......................................16
Section 2.12 Absence of Certain Changes or Events...............17
Section 2.13 Proxy Statement....................................18
Section 2.14 Tax Matters........................................19
Section 2.15 Absence of Questionable Payments...................20
Section 2.16 Title and Related Matters..........................20
Section 2.17 Material Contracts.................................21
Section 2.18 Insurance..........................................23
Section 2.19 Subsidies..........................................23
Section 2.20 Intellectual Property..............................23
Section 2.21 Minute Books; Stock Record Books...................26
Section 2.22 Bank Accounts; Powers of Attorney..................27
Section 2.23 Disclosure.........................................27
Section 2.24 Disputes with Customers............................27
Section 2.25 Accounts Receivable................................27
Section 2.26 Certain Transactions...............................27
Section 2.27 Brokers or Finders.................................28
Section 2.28 No Prior Activities................................28
ARTICLE III COVENANTS RELATED TO CONDUCT OF BUSINESS..................28
Section 3.1 Conduct of Business of Sheridan and Hirsch..........28
Section 3.2 Access to Information...............................31
Section 3.3 Continuation of Insurance Coverage..................31
ARTICLE IV ADDITIONAL AGREEMENTS.................... .................31
Section 4.1 Proxy Statement....................................31
Section 4.2 Hirsch Voting Agreement and Stockholders' Meeting..32
Section 4.3 Commercially Reasonable Efforts....................33
Section 4.4 Exclusivity........................................33
Section 4.5 Public Announcements...............................34
Section 4.6 Private Placement..................................34
Section 4.7 Confidentiality....................................34
Section 4.8 Additional Documents and Further Assurances........35
Section 4.9 Notification of Certain Matters....................35
Section 4.10 Employee Matters...................................35
Section 4.11 Third Party Consents...............................36
Section 4.12 Legal Opinion Certificates.........................36
Section 4.13 Blue Sky Laws......................................36
Section 4.14 Other Potential Acquirors of Hirsch................37
Section 4.15 Registration Rights................................39
Section 4.16 Kinderhook Management Agreements...................39
ARTICLE V CONDITIONS TO CONSUMMATION OF THE MERGER....................39
Section 5.1 Conditions to Each Party's Obligations to Effect
the Merger..........................................39
Section 5.2 Conditions to the Obligations of Hirsch and
Merger Sub..........................................40
Section 5.3 Conditions to the Obligations of Sheridan...........41
ARTICLE VI TERMINATION; AMENDMENT; WAIVER.............................42
Section 6.1 Termination by Mutual Agreement.....................42
Section 6.2 Termination by either Hirsch or Sheridan............42
Section 6.3 Termination by Sheridan.............................43
Section 6.4 Termination by Hirsch...............................43
Section 6.5 Effect of Termination and Abandonment...............44
Section 6.6 Amendment...........................................44
Section 6.7 Extension; Waiver...................................44
ARTICLE VII SURVIVAL; ADJUSTMENT......................................44
Section 7.1 Survival...........................................44
Section 7.2 Adjustment.........................................45
Section 7.3 Procedures.........................................45
Section 7.4 Exclusive Remedy...................................45
ARTICLE VIII MISCELLANEOUS............................................46
Section 8.1 Entire Agreement; Assignment.......................46
Section 8.2 Notices............................................46
Section 8.3 Governing Law......................................47
Section 8.4 Expenses...........................................47
Section 8.5 Descriptive Headings...............................47
Section 8.6 Severability.......................................47
Section 8.7 Specific Performance...............................47
Section 8.8 Counterparts.......................................48
Section 8.9 Further Assurances.................................48
Section 8.10 Interpretation.....................................48
Section 8.11 Definitions........................................48
ANNEX B
Harris Nesbitt Corp.
3 Times Square
New York, NY 10036
July 18, 2005
CONFIDENTIAL
Board of Directors
Hirsch International Corp.
200 Wireless Blvd.
Hauppauge, NY 11788
Ladies and Gentlemen:
Hirsch International Corp. (the "Company"), Sheridan Square Entertainment,
Inc. (the "Target Company") and SSE Acquisition Corp., a wholly owned subsidiary
of the Company, propose to enter into an Agreement and Plan of Merger (the
"Agreement") pursuant to which Merger Sub will be merged with and into the
Target Company (the "Merger"), with the Target Company continuing as the
surviving corporation and a wholly-owned subsidiary of the Company. The
stockholders of the Company immediately prior to the Merger will own
thirty-eight and one tenth percent (38.1%) of the Company immediately following
the Merger and the stockholders of the Target Company immediately prior to the
Merger will own sixty-one and nine tenths percent (61.9%) of the Company
immediately following the Merger (the "Exchange").
You have asked us whether or not, in our opinion, the Exchange is fair to
the stockholders of the Company from a financial point of view.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed the draft Merger Agreement provided to us on July 15, 2005
substantially incorporating the terms set forth in the Term Sheet dated March
30, 2005 between the Company and Target Company.
(2) Reviewed the Company's Form 10-K and related financial information for
the fiscal years ended January 29, 2005 and January 31, 2004 and the Company's
Form 10-Q and the related unaudited financial information for the three months
ended April 30, 2005 and the Definitive Proxy Statement dated August 6, 2004;
(3) Reviewed the Target Company's audited financial information for the
fiscal year ended December 31, 2004 and the period from July 29, 2003 to
December 31, 2003 and the Target Company's unaudited financial information for
the three months ended March 31, 2005;
(4) Reviewed certain financial and operating information relating to the
business, earnings, cash flow, assets, liabilities and prospects of the Company
and the Target Company, furnished to us by the Company and the Target Company;
(5) Reviewed the Confidential Private Placement Memorandum dated December
3, 2004 of the Target Company;
(6) Conducted discussions with members of senior management of the Company
and the Target Company concerning their respective operations, financial
condition and prospects;
(7) Compared the financial performance of the Company and the Target
Company with that of certain companies that we deemed to be reasonably similar
to the Company and the Target Company, respectively;
(8) Compared the proposed financial terms of the transactions contemplated
by the Agreement with the financial terms of certain other mergers and
acquisitions which we deemed to be relevant;
(9) Performed discounted cash flow analyses for the Target Company; and
(10) Reviewed such other financial studies and performed such other
analyses and investigations and took into account such other matters as we
deemed appropriate.
In preparing our opinion, we have relied on the accuracy and completeness
of all information reviewed by us, and we have not independently verified such
information or undertaken an independent valuation or appraisal of the assets
and liabilities of the Company or the Target Company, nor have we been furnished
with any such valuation or appraisal. With respect to the financial projections
supplied to us by the Company and the Target Company, we have assumed that they
have been reasonably prepared on bases reflecting the best currently available
estimates and good faith judgments of senior management of the Company and the
Target Company of the future competitive, operating and regulatory environments
and related financial performance of the Company and the Target Company. We
express no opinion with respect to such projections or the assumptions on which
they are based. Furthermore, we have not conducted a physical inspection of the
properties or facilities of the Company or the Target Company. We have assumed
that the executed version of the Merger Agreement will not differ in any
material respect from the last draft we have reviewed and that the Merger will
be consummated on the terms set forth therein, without waiver or modification of
any material terms. Our opinion is necessarily based on economic, market and
other conditions and circumstances as they exist and can be evaluated on, and
the information made available to us as of, the date hereof. We have assumed no
obligation to update this opinion although any change in conditions could
substantially change our opinion.
This opinion does not constitute a recommendation to any stockholder of the
Company as to how any such stockholder should vote on the Merger. This opinion
does not address the relative merits of the Merger and any other transactions or
business strategies discussed by the Board of Directors of the Company as
alternatives to the Merger or the decision of the Board of Directors of the
Company to proceed with the Merger. No opinion is expressed herein as to the
price at which the securities to be issued in the Merger to the stockholders of
the Company may trade at any time.
Further, you did not request us to, nor did we, either solicit third party
indications of interest or evaluate any specific third party proposals relating
to the acquisition of all or part of the Company. We did not participate in the
negotiations with respect to the Merger or advise you with respect to
alternatives to it.
It is understood that this letter is for the information of the Board of
Directors only and, except for inclusion of this letter in its entirety in a
proxy statement of the Company relating to the Merger, may not be used or quoted
for any other purpose without our prior written consent.
In rendering this opinion, we have not been engaged to act as an agent or
fiduciary of the stockholders of the Company or any other third party. We have
been engaged solely to render this opinion and for no other reason. We will
receive a fee for our services.
On the basis of, and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Exchange is fair to the stockholders of the Company
from a financial point of view.
Very truly yours,
HARRIS NESBITT CORP.
--------------------------
ANNEX C
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HIRSCH INTERNATIONAL CORP.
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Under Sections 242 and 245 of the
Delaware General Corporation Law
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The undersigned, Paul Gallagher and Beverly Eichel, being President and
Secretary, respectively, of HIRSCH INTERNATIONAL CORP., a Delaware Corporation
(the "Corporation") hereby certify as follows:
1. The name of the Corporation is Hirsch International Corp. The name under
which the Corporation was originally formed was Portman-Curson, Inc. The
Certificate of Incorporation was filed by the Department of State of the State
of Delaware on December 7, 1970.
2. The Certificate of Incorporation of the Corporation is hereby amended to
effect, among other things, a change of the Corporation's name and to eliminate
the two classes of Common Stock.
3. That the Board of Directors duly adopted resolutions proposing to amend
and restate this Certificate of Incorporation of the Corporation, declaring said
amendment and restatement to be advisable and in the best interests of the
Corporation and its stockholders, and authorizing the appropriate officers of
the Corporation to solicit the consent of the stockholders therefor, which
resolution setting forth the proposed amendment and restatement is as follows:
FIRST: The name of the Corporation is Hirsch International Corp.
SECOND: The registered office of the Corporation in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle, and The Corporation Trust Company is appointed the
registered agent of this Corporation at the address of its registered office.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a Corporation may be organized under the General Corporation
Law of Delaware.
FOURTH: On the filing date of this Second Amended and Restated Certificate
of Incorporation with the Secretary of State of the State of Delaware, which
shall be the effective date of this Second Amended and Restated Certificate of
Incorporation, each share of Class A Common Stock, $.01 par value and each share
of Class B Common Stock, $.01 par value shall be automatically converted into
one share of Common Stock, $.01 par value ("Common Stock"). The total number of
shares of all classes of stock which the Corporation shall have authority to
issue is 51,000,000 consisting of (i) 50,000,000 shares of Common Stock, and
(ii) 1,000,000 shares of Preferred Stock, $.01 par value per share ("Preferred
Stock") which shall have the following powers, privileges and rights:
a. Common Stock. The aggregate number of shares of Common Stock which the
Corporation may issue is 50,000,000, with a par value of $.01. The shares of
Common Stock shall have identical rights and privileges in every respect. Each
shareholder of record shall be entitled to one vote per share on all matters
submitted to a vote of the shareholders.
b. Preferred Stock. The aggregate number of shares of Preferred Stock which
the Corporation may issue is 1,000,000, with a par value of $.01. The Preferred
Stock may by issued from time to time in series. The shares of each series shall
be subject not only to the provisions of this Article 4c, which is applicable to
all series of preferred shares, but also to the additional provisions with
respect to such series as are fixed from time to time by the Board of Directors.
The Board of Directors is hereby authorized and required to fix, in the manner
and to the fullest extent provided and permitted by law, all provisions of the
shares of each series not otherwise set forth in this Certificate, including,
but not limited to:
(1) Designation of Series-Number of Shares. The distinctive designation of
each series and the number of shares constituting such series, which number may
be increased (except where otherwise provided by the Board of Directors in its
resolution creating such series) or decreased (but not below the number of
shares thereof then outstanding) from time to time by resolution of the Board of
Directors;
(2) Dividend Rates and Rights. The annual rate and frequency of payment of
dividends payable on the shares of all series and the dividend rights applicable
thereto, including, in the event of Cumulative Preferred Stock, the date from
which dividends shall be cumulative on all shares of any series issued prior to
the record date for the first dividend on shares of such series;
(3) Redemption. The rights, if any, of the Corporation to redeem; the terms
and conditions of redemption; and the redemption price or prices, if any, for
the shares of each, any, or all series;
(4) Sinking Fund. The obligation, if any, of the Corporation to maintain a
sinking fund for the periodic redemption of shares of any series and to apply
the sinking fund to the redemption of such shares;
(5) Voluntary Liquidation Preferences. The amount payable on shares of each
series in the event of any voluntary liquidation, dissolution, or winding up of
the affairs of the Corporation;
(6) Conversion Rights. The rights, if any, of the holders of shares of each
series to convert such shares into the Corporation's Common Stock and the terms
and conditions of such conversion; and
(7) Voting Rights. The voting rights, if any, of the holders of the shares
of each series, and any other preferences, and relative, participating,
optional, or other special rights, and any qualifications, limitations, or
restrictions thereof.
On the filing date of this Second Amended and Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware, which shall
be the effective date of this Amendment, each share of Class A Common Stock $.01
par value and each share of Class B Common Stock $.01 par value shall be
converted into one share of Common Stock.
FIFTH: The Corporation is to have perpetual existence.
SIXTH: Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of ss. 291 of Title 8 of the Delaware Code or on the application of
trustees in dissolution or of any receiver or receivers appointed for the
Corporation under the provisions of ss. 279 of Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
the Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
SEVENTH: For the management of the business and for the conduct of the
affairs of the Corporation, and in further definition, limitation, and
regulation of the powers of the Corporation and of its directors and of its
stockholders or any class thereof, as the case may be, it is further provided:
1. The management of the business and the conduct of the affairs of
the Corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be
fixed by, or in the manner provided in, the Bylaws The phrase "whole Board"
and the phrase "total number of directors" shall be deemed to have the same
meaning, to wit, the total number of directors which the Corporation would
have if there were no vacancies. No election of directors need be by
written ballot.
2. After the original or other Bylaws of the Corporation have been
adopted, amended, or repealed, as the case may be, in accordance with the
provisions of ss.109 of the General Corporation Law of the State of
Delaware, and, after the Corporation has received any payment for any of
its stock, the power to adopt, amend, or repeal the Bylaws of the
Corporation may be exercised by the Board of Directors of the Corporation;
provided, however, that any provision for the classification of directors
of the Corporation for staggered terms pursuant to the provisions of subss.
(d) of ss.141 of the General Corporation Law of the State of Delaware shall
be set forth in an initial Bylaw or in a Bylaw adopted by the stockholders
entitled to vote of the Corporation unless provisions for such
classification shall be set forth in this Certificate of Incorporation.
3. Whenever the Corporation shall be authorized to issue only one
class of stock, each outstanding share shall entitle the holder thereof to
notice of, and the right to vote at, any meeting of stockholders. Whenever
the Corporation shall be authorized to issue more than one class of stock
no outstanding share of any class of stock which is denied voting power
under the provisions of the certificate of Incorporation shall entitle the
holder thereof to the right to vote at any meeting of stockholders except
as the provisions of paragraph (2) of Subsection (b) of ss.242 of the
General Corporation Law of the State of Delaware shall otherwise require;
provided, that no share of any such class which is otherwise denied voting
power shall entitle the holder thereof to vote upon the increase or
decrease in the number of authorized shares of said class.
EIGHTH: The personal liability of the directors of the Corporation is
hereby eliminated to the fullest extent permitted by the provisions of paragraph
(7) of subsection (b) of ss.102 of the General Corporation Law of the State of
Delaware, as the same may be amended and supplemented.
NINTH: The Corporation shall, to the fullest extent permitted by the
provisions of ss. 145 of the General Corporation Law of the State of Delaware,
as the same may be amended and supplemented, indemnify any and all persons whom
it shall have power to indemnify under said section from and against any and all
of the expenses, liabilities, or other matters referred to in or covered by said
section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any By-law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors, and administrators of such a person.
TENTH: From time to time any of the provisions of this certificate of
Incorporation may be amended, altered, or repealed, and other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and all
rights at any time conferred upon the stockholders of the Corporation by this
certificate of Incorporation are granted subject to the provisions of this
Article TENTH.
ELEVENTH: This Second Amended and Restated Certificate of Incorporation,
which restates and integrates and further amends the provisions of the
Corporation's Certificate of Incorporation, has been duly adopted in accordance
with Sections 242 and 245 of the General Corporation Law.
IN WITNESS WHEREOF, the undersigned have executed this Second Amended and
Restated Certificate of Incorporation and hereby affirm that the statements made
herein are true under the penalties of perjury, this ____ day of ____________,
2005.
/s/Paul Gallagher
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Paul Gallagher, President, Chief
Executive Officer and Chief
Operating Officer
/s/Beverly Eichel
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Beverly Eichel, Vice President-Finance,
Chief Financial Officer and Secretary
ANNEX D
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HIRSCH INTERNATIONAL CORP.
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SECOND AMENDED AND RESTATED
BY-LAWS
(as of _____________)
*****
I. OFFICES
1.1 The registered office and the registered agent of the Corporation shall
be located at such place as the Board of Directors may from time to time
designate.
1.2 The Corporation may also have offices at such other places both within
and without the State of Delaware as the Board of Directors may from time to
time determine or the business of the Corporation may require.
II. ANNUAL MEETING OF STOCKHOLDERS
2.1 All meetings of Stockholders shall be held at such time and place as
may be fixed from time to time by the Board of Directors.
2.2 Written notice of the Annual Meeting stating the time, place, and
purpose or purposes of the meeting shall be delivered either personally or by
mail, not less than ten (10) nor more than sixty (60) days before the date of
the meeting, to each Stockholder of record entitled to vote at such meeting.
2.3 When a meeting is adjourned to another time or place, it shall not be
necessary to give notice of the adjourned meeting if the time and place to which
the meeting is adjourned are announced at the meeting at which the adjournment
is taken, and at the adjourned meeting only such business is transacted as might
have been transacted at the original meeting. However, if after the adjournment
the Board of Directors establishes a new record date for the adjourned meeting,
a notice of the adjourned meeting shall be given to each Stockholder of record
on the new record date.
2.4 Notice of meeting need not be given to any Stockholder who signs a
waiver of notice, in person or by proxy, whether before or after the meeting.
The attendance of any Stockholder at a meeting, in person or by proxy, without
protesting prior to the conclusion of the meeting the lack of notice of such
meeting, shall constitute a waiver of notice by him.
2.5 Any action required or permitted to be take at a meeting of
Stockholders by statute, the Certificate of Incorporation, or these By-Laws, may
be taken without a meeting upon the written consent of the stockholders entitled
to vote who in the aggregate own the requisite amount of issued and outstanding
shares of stock of the Corporation which constitutes the minimum number of votes
necessary to authorize such action at a meeting at which all Stockholders
entitled to vote thereon were present and voting.
III. SPECIAL MEETING OF STOCKHOLDERS
3.1 Special Meetings of Stockholders for any purpose other than the
election of directors may be held at such time and place within or without the
State of Delaware as shall be stated in the notice of the meeting or in a duly
executed waiver of notice thereof.
3.2 Special Meetings of the Stockholders, for any purpose or purposes,
unless otherwise prescribed by statute or by the Certificate of Incorporation,
may be called by the President or the Board of Directors.
3.3 Written notice of a Special Meeting stating the time, place, and
purpose or purposes of the meeting for which the meting is called, shall be
delivered not less than ten (10) nor more than sixty (60) days before the date
of the meeting, personally, by mail, or by telegram, by or at the direction of
the President, the Secretary, or the officer or persons calling the meeting, to
each Stockholder of record entitled to vote at such meeting.
IV. QUORUM AND VOTING OF STOCK
4.1 The holders of a majority of the shares of stock issued and outstanding
and entitled to vote, represented in person or by proxy, shall constitute a
quorum at all meeting of the Stockholders for the transaction of business,
except as otherwise provided by statute or by the Certificate of Incorporation.
If, however, such quorum shall not be present or represented at any meeting of
the Stockholders, the Stockholders present in person or represented by proxy
shall have the power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally notified.
4.2 If a quorum is present, the affirmative vote of a majority of the
shares of stock represented at the meeting shall be the act of the Stockholders
unless the vote of a greater number of shares of stock is required by law or the
Certificate of Incorporation.
4.3 Each outstanding share of stock, having voting power, shall be entitled
to one vote on each matter submitted to a vote at a meeting of Stockholders,
unless otherwise provided in the Certificate of Incorporation. A Stockholder may
vote either in person or by proxy.
V. DIRECTORS
5.1 The number of Directors which shall constitute the whole Board of
Directors shall be nine, such number to be increased or decreased by an
amendment to these By-Laws. Directors need not be residents of the State of
Delaware or Stockholders of the Corporation. The Directors, other than the first
Board of Directors, shall be elected at the Annual Meeting of the Stockholders,
except as hereinafter provided, and each Director elected shall serve until the
next succeeding Annual Meeting and until his successor shall have been elected
and qualified.
5.2 Unless otherwise provided in the Certificate of Incorporation, any
vacancy occurring in the Board of Directors or an increase in the number of
Directors may be filled by the affirmative vote of a majority of the remaining
Directors though less than a quorum of the Board of Directors. A director
elected to fill a vacancy shall be elected for the unexpired portion of the term
of his predecessor in office. Any directorship to be filled by reason of an
increase in the number of Directors shall be filled by election at any Annual
Meeting or at a Special Meeting of Stockholders called for that purpose. A
Director elected to fill newly created directorship shall serve until the next
succeeding Annual Meeting of Stockholders and until his successor shall have
been elected and qualified. If by reason of death, resignation or other cause,
the Corporation has no Directors in office, any Stockholder or the executor or
administrator of the deceased Stockholder may call a Special Meeting of
Stockholders for the election of Directors and, over his own signature, shall
give notice of said meeting in accordance with these By-Laws.
5.3 One or more or all of the Directors of the Corporation may be removed
for cause by the Stockholders by the affirmative vote of the majority of the
votes cast by the holders of shares entitled to vote for the election of such
Directors.
5.4 The business affairs of the Corporation shall be managed by its Board
of Directors which may exercise all such powers of the Corporation and do all
such lawful acts and things as are not by statute or by the Certificate of
Incorporation or by these By-Laws directed or required to be exercised or done
by the Stockholders.
5.5 The Directors may keep the books and records of the Corporation, except
such as are required by law to be kept within the state, outside of the State of
Delaware, at such place or places as they may from time to time determine.
5.6 The Board of Directors, by the affirmative vote of a majority of the
Directors then in office, and irrespective of any personal interest of any of
its members, shall have the authority to establish reasonable compensation of
all Directors and Officers of the Corporation.
VI. MEETINGS OF THE BOARD OF DIRECTORS
6.1 Meetings of the Board of Directors, regular or Special, may be held
either within or without the State of Delaware, and at such time and place as
shall be determined by the Board.
6.2 Regular meetings of the Board of Directors may be held upon such
notice, or without notice, and at such time and at such place as shall from time
to time be determined by the Board.
6.3 Special Meetings of the Board of Directors may be called by the
President on two (2) days notice to each Director, either personally or by mail
or by telegram; Special Meetings shall be called by the President or Secretary
in like manner and on like notice on the written request of two Directors.
Notice need not be given to any Director who signs a waiver of notice, whether
before or after the meeting.
6.4 Attendance of a Director at any meeting shall constitute a waiver of
notice of such meeting, except where a Director attends for the express purpose
of objecting to the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any regular or Special Meeting of the Board of Directors need be
specified in the notice or waiver of notice of such meeting.
6.5 A majority of the then current number of Directors shall constitute a
quorum for the transaction of business unless a greater or lesser number is
required by statute, these By-Laws or by the Certificate of Incorporation. The
act of a majority of the Directors present at any meeting at which a quorum is
present shall be the act of the Board of Directors, unless the act of a greater
or lesser number is required by statute or by the Certificate of Incorporation
provided, however, that the approval of not less than 70% of the Directors
constituting the Board of Directors shall be required for the Board to take the
following actions: (a) approval of the Corporation's annual budget; (b) the
incurrence of indebtedness in excess of $2.5 million in the aggregate, excluding
indebtedness incurred in the ordinary course of business; (c) issuance of any
additional equity securities or any securities convertible into equity
securities of the Corporation, in excess of $2.5 million in the aggregate, or
the granting of any options, warrants or other right to acquire equity
securities of the Corporation; (d) approval of the sale, lease, exchange or
other disposition of any material asset of the Corporation or any of its
subsidiaries, or the merger, consolidation or liquidation of the Corporation or
any of its subsidiaries; (e) approval of the acquisition of any asset or assets
outside of the ordinary course of business in one or a series of related
transactions having an aggregate purchase price in excess of $5 million; (f)
approval or payment of any dividend on any equity securities of the Corporation,
or the repurchase or redemption of any securities of the Corporation; (g)
approval of any stock split, combination or reclassification of any equity
securities of the Corporation; (h) subject to Section 11.7 below, approval of
any transaction between the Corporation or its subsidiaries and any Affiliate
(as such term is defined in Rule 144 promulgated under the Securities Exchange
Act of 1934, as amended); (i) approval of any amendment to the Corporation's
Certificate of Incorporation or these By-Laws; (j) approval of a change in the
number of Directors that constitute the Board of Directors and (k) approval of
the appointment or removal or any executive officer, or the adoption or
amendment of any employment contract or terms of employment of any executive
officer or any manager with authority substantially equivalent to that of an
executive officer of the Corporation or any subsidiary. If a quorum shall not be
present at any meeting of Directors, the Directors present thereat may adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
6.6 Unless otherwise provided by the Certificate of Incorporation, any
action required to be taken at a Meeting of the Board, or any committee thereof
may be taken without a meeting and, shall be deemed the action of the Board of
Directors or of a committee thereof, if all Directors or committee member, as
the case may be, execute either before or after the action is taken, a written
consent thereto, and the consent is filed with the records of the Corporation.
VII. EXECUTIVE COMMITTEE OF THE BOARD OF DIRECTORS
7.1 The Board of Directors, by resolution adopted by a majority of the
number of Directors then in office, may designate one or more Directors to
constitute an executive committee, which committee, to the extent provided in
such resolution, shall have and exercise all of the authority of the Board of
Directors in the management of the Corporation, subject to the provisions of
Section 6.5 above and except as otherwise required by law. Vacancies in the
membership of the committee shall be filled by the Board of Directors at a
regular or Special Meeting of the Board of Directors. The Executive Committee
shall keep regular minutes of its proceeding and report the same to the Board
when required.
VIII. NOTICES
8.1 Whenever, under the provisions of the statues or of the Certificate of
Incorporation or of these By-Laws, notice is required to be given to any
Director or Stockholder, it shall not be construed to mean personal notice, but
such notice may be given in writing, by mail, addressed to such Director or
Stockholder, at his address as it appears on the records of the Corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail. Notice to
Directors may also be given by telegram.
8.2 Whenever any notice is required to be given by law or under the
Certificate of Incorporation or these By-Laws, a waiver thereof in writing
signed by the person or persons entitled to such notice, whether before or after
the time stated therein, shall be deemed equivalent to the giving of such
notice.
IX. OFFICERS
9.1 The Board of Directors at its first meeting after each Annual Meeting
of Stockholders shall choose the Officers, none of whom need be a member of the
Board of Directors.
9.2 The Board of Directors may appoint such Officers and agents as it shall
deem necessary who shall hold their offices for such terms and shall exercise
such powers and perform such duties as shall be determined from time to time by
the Board of Directors.
9.3 The salaries of all Officers and agents of the Corporation shall be
fixed by the Board of Directors.
9.4 The Officers of the Corporation shall hold office until their
successors are duly chosen and qualified. Any Officer elected or appointed by
the Board of Directors may be removed with or without cause at any time by the
affirmative vote of a majority of the Board of Directors. Any vacancy occurring
in any office of the Corporation shall be filled by the Board of Directors.
THE PRESIDENT
9.5 The President, if one be appointed, shall preside at all meetings of
the Stockholders and in the absence of the Chairman of the Board of Directors,
at the meeting of the Board of Directors, and shall have general and active
management of the business of the Corporation and shall see that all orders and
resolutions of the Board of Directors are carried into effect.
9.6 The President shall execute bonds, mortgages and other contracts
requiring a seal, under the seal of the Corporation, except where required or
permitted by law to be otherwise signed and executed and except where the
singing and execution thereof shall be delegated by the Board of Directors to
some other Office or agent of the Corporation.
THE VICE PRESIDENTS
9.7 The Vice President, if one be elected, or if there shall be more than
one, the Vice Presidents in the order determined by the Board of Directors,
shall, in the absence or disability of the President, perform the duties and
exercise the powers of the President and shall perform such other duties and
have such other powers as the Board of Directors may from time to time
prescribe.
THE SECRETARY AND ASSISTANT SECRETARIES
9.8 The Secretary, if one be elected, shall attend all meetings of the
Board of Directors and all meetings of the Stockholders and record all the
proceedings of the meetings of the Corporation and of the Board of Directors in
a book to be kept for that purpose and shall perform like duties for standing
committees when required. The Secretary shall give, or cause to be given, notice
of all meetings of the Stockholders and Special Meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors or President. The Secretary shall have custody of the corporate
seal of the Corporation and he, or an Assistant Secretary, shall have authority
to affix the same to any instrument requiring it and when so affixed, it may be
attested by his signature or by the signature of such Assistant Secretary. The
Board of Directors may give general authority to any other Office to affix the
seal of the Corporation and to attest the affixing by his signature.
9.9 The Assistant Secretary, if one be elected, or if there be more than
one, the assistant secretaries in the order determined by the Board of
Directors, shall, in the absence or disability of the Secretary, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
9.10 The Treasurer, if one be elected, shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all monies and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors.
9.11 The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Treasurer and of the financial condition of the
Corporation.
9.12 If required by the Board of Directors, the Treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the Corporation.
9.13 The Assistant Treasurer, if one be elected, or, if there shall be more
than one, the Assistant Treasurers in the order determined by the Board of
Directors, shall, in the absence or disability of the Treasurer, perform the
duties and exercise the powers of the Treasurer and shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
CHIEF FINANCIAL OFFICER
9.14 The Chief Financial Officer, if one be elected, shall have such duties
as may from time to time be prescribed by the Board of Directors.
CHIEF EXECUTIVE OFFICER
9.15 The Chief Executive Officer, if one be elected, shall have such duties
as may from time to time be prescribed by the Board of Directors.
CHIEF OPERATING OFFICER
9.16 The Chief Operating Officer, if one be elected, shall have such duties
as may from time to time be prescribed by the Board of Directors.
X. CERTIFICATES FOR SHARES
10.1 The shares of the Corporation shall be represented by certificates
signed by the President or a Vice President and by the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary of the corporation, and
may be sealed with the seal of the Corporation or a facsimile thereof.
10.2 When the Corporation is authorized to issue shares of more than one
class, there shall be set forth upon the face or back of the certificate, or the
certificate shall have a statement that the Corporation will furnish to any
Stockholder upon request and without charge, a full statement of the
designations, preferences, limitations and relative rights of the shares of each
class authorized to be issued and, if the Corporation is authorized to issue any
preferred or special class in series, the variations in the relative rights and
preferences between the shares of each such series so far as the same have been
fixed and determined and the authority of the Board of Directors to fix and
determine the relative rights and preferences of subsequent series.
10.3 The signatures of the Officers of the Corporation upon a certificate
may be facsimiles if the certificate is countersigned by a transfer agent, or
registered by a registrar, other than the Corporation itself or an employee of
the Corporation. In case any Officer who has signed or whose facsimile signature
has been placed upon such certificate shall have ceased to be such Officer
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he were such Officer at the date of its issues.
LOST CERTIFICATES
10.4 The Board of Directors may direct a new certificate to be issued in
place of any certificate theretofore issued by the Corporation alleged to have
been lost or destroyed. When authorizing such issue of a new certificate, the
Board of Directors, in its discretion and as a condition precedent to the
issuance thereof, may prescribe such terms and conditions as it deems expedient,
and may require such indemnities as it deems adequate, to protect the
Corporation from any claim that may be made against it with respect to any such
certificate alleged to have been lost or destroyed.
TRANSFERS OF SHARES
10.5 Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate representing shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, a new
certificate shall be issued to the person entitled thereto, and the old
certificate canceled and the transaction recorded upon the books of the
Corporation.
CLOSING OF TRANSFER BOOKS
10.6 For the purposes of determining Stockholders entitled to notice of or
to vote at any meeting of Stockholder, or any adjournment thereof or entitled to
receive payment of any dividend, or in order to make a determination of
Stockholders for any other proper purpose, the Board of Directors may provide
that the stock transfer books shall be closed for a stated period but not to
exceed, in any case, sixty (60) days. If the stock transfer books shall be
closed for the purpose of determining Stockholders entitled to notice of or to
vote at a meeting of Stockholders, such books shall be closed for at least ten
(10) days immediately preceding such meeting. In lieu of closing the stock
transfer books, the Board of Directors may fix in advance a date as the record
date for any such determination of Stockholders, such date in any case to be not
more than sixty (60) days and, in case of a meeting of Stockholders, not less
than ten (10) days prior to the date on which the particular action, requiring
such determination of Stockholders, is to be taken. If the stock transfer books
are not closed and no record date is fixed for the determination of Stockholders
entitled to notice of or to vote at a meeting of Stockholders, or Stockholders
entitled to receive payment of a dividend, the record date for the determination
of Stockholders entitled to notice of or to vote at a meeting of Stockholders
shall be the close of business on the day next preceding the day on which notice
is given, or, if no notice is given, the day next preceding the day on which the
meeting is held; and the record date for determining Stockholders for any other
purpose shall be at the close of business on the day on which the resolution of
the board relating thereto is adopted. When a determination of Stockholders
entitled to vote at any meeting of Stockholders has been made as provided in
this section. such determination shall apply to any adjournment thereof.
REGISTERED STOCKHOLDERS
10.7 The Corporation shall be entitled to recognize the exclusive right of
a person registered on its books as the owner of shares to receive dividends,
and to vote as such owner, and to hold liable for calls and assessments a person
registered on its books as the owner of shares, and shall not be bound to
recognize any equitable or other claim to or interest in such shares or shares
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Delaware.
LIST OF STOCKHOLDERS
10.8 The Officer or agent having charge of the transfer books for shares
shall make, and certify a complete list of the Stockholders entitled to vote at
a Stockholders' meeting, or adjournment thereof, arranged in alphabetical order
within each class and series, with the address of, and the number of shares held
by each Stockholder, which list shall be produced and kept open at the time and
place of the meeting and shall be subject to the inspection of any Stockholder
during the whole time of the meeting. Such list shall be prima facie evidence as
to who are the Stockholders entitled to examine such list or to vote at any
meeting of the Stockholders.
XI GENERAL PROVISIONS DIVIDENDS
11.1 Subject to the provisions of the Certificate of Incorporation and
these By-Laws relating thereto, if any, dividends may be declared by the Board
of Directors at any regular or Special Meeting, pursuant to law. Dividends may
be paid in cash, in its bonds, in its own shares or other property including the
shares or bonds of other corporations subject to any provisions of law and of
the Certificate of Incorporation.
11.2 Before payment of any dividend, there may be set aside out of any
funds of the Corporation available for dividends such sum or sums as the
Directors from time to time, in their absolute discretion, think proper as a
reserve fund to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for such other
purpose as the Directors shall think conducive to the interest of the
Corporation, and the Directors may modify or abolish any such reserve in the
manner in which it was created.
CHECKS
11.3 All checks or demands for money and notes of the Corporation shall be
signed by such Officer or Officers or such other person or persons as the Board
of Directors may from time to time designate.
FISCAL YEAR
11.4 The fiscal year of the Corporation shall be fixed by resolution of the
Board of Directors.
SEAL
11.5 The Corporation seal shall have inscribed thereon the name of the
Corporation, the year of its organization and the words "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or in any manner reproduced.
INDEMNIFICATION
11.6 (a) The Corporation shall, to the maximum extent permitted from time
to time under the law of the State of Delaware, indemnify and upon request shall
advance expenses to any person who is or was a party to any threatened, pending
or completed action, suit, proceeding or claim, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
or has agreed to be a trustee, director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
trustee, director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees and expenses), judgment, fines, penalties and amounts
paid in settlement incurred in connection with the investigation, preparation to
defend or defense of any such action, suit, proceeding or claim. Such
indemnification shall not be exclusive of other indemnification rights arising
under any by-law, agreement, vote of directors or stockholders or otherwise and
shall inure to the benefit of the heirs and legal representatives of such
person.
(b) The Corporation may purchase and maintain insurance on any person who
is or was a trustee, director, officer, employee or agent of the Corporation or
is or was serving at the request of the Corporation as a trustee, director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against any liability incurred by him in any such
position or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under Paragraph
11.6(a).
AFFILIATED TRANSACTIONS
11.7 All transactions between the Corporation and any of its officers,
directors or Affiliates (except for wholly-owned subsidiaries) must be approved
by not less and 70% of the unaffiliated members of the Board of Directors and be
on terms no less favorable to the Corporation than could be obtained from
unaffiliated third parties and must be in connection with bona fide business
purposes of the Corporation.
11.8 In the event the Corporation makes a loan to an individual affiliate
(other than a short-term advance for travel, business expense, relocation or
similar ordinary operating expenditure), such loan shall be approved by at least
70% of the unaffiliated directors of the Corporation provided that any such loan
must be permitted under applicable law, rule or regulation.
AMENDMENTS
11.9 These By-Laws may be altered, amended, or repealed or new By-Laws may
be adopted by the affirmative vote of not less than 70% of the members of the
Board of Directors at any regular or Special Meeting of the Board of Directors,
subject to any provision in the Certificate of Incorporation reserving to the
Stockholders the power to adopt, amend, or repeal By-Laws, but By-Laws made by
the Board of Directors may be altered or repealed and new By-Laws made by the
Stockholders. The Stockholders may prescribe that any By-Law made by them shall
not be altered or repealed by the Board of Directors.
ANNEX E
VOTING AGREEMENT
VOTING AGREEMENT (the "Agreement"), dated as of July 20, 2005, by and among
Sheridan Square Entertainment, Inc., a Delaware corporation ("Sheridan"), Hirsch
International Corp., a Delaware corporation ("Hirsch"), and the individuals
listed on Schedule A attached hereto (each a "Stockholder" and collectively, the
"Stockholders").
RECITALS
WHEREAS, Sheridan and Hirsch are parties to that certain Agreement and Plan
of Merger of even date herewith (the "Merger Agreement"), pursuant to which SSE
Acquisition Corp., a wholly-owned subsidiary of Hirsch, shall merge with and
into Sheridan, with Sheridan being the surviving corporation and becoming a
wholly-owned subsidiary of Hirsch (the "Merger Transaction"); and
WHEREAS, as an inducement for Sheridan to enter into the Merger Agreement,
the Stockholders have agreed to vote their shares of Hirsch stock in favor of
the Merger Transaction;
WHEREAS, a condition precedent to the execution and delivery of the Merger
Agreement is the execution and delivery of this Agreement; and
WHEREAS, as of the date hereof, each Stockholder is the registered owner
of, or has the power to vote, the number of shares of common stock of Hirsch
("Hirsch Stock") as indicated on Schedule A.
NOW, THEREFORE for valuable consideration, including the execution and
delivery of the Merger Agreement, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
AGREEMENT
1. Voting of Shares.
a. Voting of Shares. At every meeting of the Stockholders of Hirsch called,
and at every adjournment thereof, and on every action or approval by written
consent of the Stockholders of Hirsch, each Stockholder shall vote (or cause to
be voted) the Shares (as defined in Section 1(b) below) owned by such
Stockholder: (i) in favor of the adoption of the Merger Agreement and all of the
other transactions contemplated by the Merger Agreement; (ii) against any
proposal for any merger, consolidation, sale of assets, recapitalization or
other business combination involving Hirsch (other than the Merger Transaction)
or any other action or agreement that would result in a breach of any covenant,
representation or warranty or any other obligation or agreement of Hirsch under
the Merger Agreement or which would result in any of the conditions to Hirsch's
obligations under the Merger Agreement not being fulfilled; and (iii) in favor
of any other matter relating to consummation of the transactions contemplated by
the Merger Agreement provided, however, that the agreements of any such
Stockholder described in (i) through (iii) above shall not apply where such
Stockholder is also a director of Hirsch and, Hirsch has received a Superior
Proposal (as such term is defined in Section 4.14(d) of the Merger Agreement).
b. "Shares" shall mean: (i) all securities of Hirsch (including all shares
of Hirsch Stock and all options, warrants and other rights to acquire Hirsch
Stock) owned by each Stockholder as of the date of this Agreement; and (ii) all
additional securities of Hirsch (including all shares of Hirsch Stock and all
additional options, warrants and other rights to acquire Hirsch Stock) of which
each Stockholder acquires ownership during the period from the date of this
Agreement through the termination of this Agreement. In the event of a stock
dividend or distribution, or any change in Hirsch Stock by reason of any stock
dividend or distribution, or any change in Hirsch Stock by reason of any
split-up, recapitalization, combination, exchange of shares or the like, the
term "Shares" shall be deemed to refer to and include the Shares as well as all
such stock dividends and distributions and any securities into which or for
which any or all of the Shares may be changed or exchanged or which are received
in such transaction.
c. Each Stockholder hereby gives any consents or waivers that are
reasonably required for the approval of the Merger Transaction under the terms
of any agreements to which the Stockholder is a party.
d. Nothing in this Agreement shall limit or restrict any Stockholder in
acting in his capacity as a director of Hirsch or any Subsidiary of Hirsch and
exercising his fiduciary responsibilities, it being understood that this
Agreement shall apply to each Stockholder solely in his capacity as a
stockholder of the Company, and shall not apply to such stockholders actions,
judgment or decisions as a director of Hirsch or any Subsidary of Hirsch.
e. Promptly following the execution of this Agreement, the parties hereto
shall use their reasonable efforts to cause Paul Levine, a substantial
shareholder of Hirsch, to execute and become a party to this Agreement.
2. Restrictions on Transfer of Shares.
a. Prior to the consummation of the Merger Transaction, each Stockholder
hereby agrees not to take any of the following actions, except in accordance
with subsection (b) of this Section 2: (i) tender any of the Stockholder's
Shares or any securities convertible into or exchangeable or exercisable for the
Stockholder's Shares to any person; (ii) sell, transfer, distribute, pledge,
encumber, assign or otherwise dispose of (or enter into any transaction or
device that is designed to, or could reasonably be expected to, result in the
disposition by any person at any time in the future of) any of the Stockholder's
Shares or any securities convertible into, exchangeable or exercisable for the
Stockholder's Shares; (iii) enter into any swap or other derivatives transaction
that transfers to another, in whole or in part, any of the economic benefits or
risks of ownership of any of the Stockholder's Shares; (iv) enforce or permit
the execution of the provisions of any redemption, share purchase or sale,
recapitalization or other agreement with Hirsch (except pursuant to the Merger
Transaction), (v) deposit any of the Stockholder's Shares into a voting trust or
depositary facility or enter into a voting agreement or arrangement with respect
to any Shares or grant any proxy with respect thereto; or (vi) enter into any
contract, option or other arrangement or understanding with respect to or
consent to the offer for sale, sale, transfer, pledge, encumbrance, assignment
or other disposition of, any of its Shares, any securities convertible into,
exchangeable or exercisable for shares of Hirsch Stock or any other capital
stock of Hirsch or any interest in any of the foregoing with any person (any
transaction referred to in clause (i), (ii), (iii), (iv), (v) or (vi) is
hereinafter referred to as a "Transfer").
b. Notwithstanding subsection (a) above, each Stockholder may take an
action described in subsection (a) of this Section 2 if (i) Sheridan gives its
prior written consent to such action or (ii) the proposed transferee shall have
executed a counterpart of this Agreement and shall have agreed to hold such
Shares or interest in such Shares subject to all of the terms and provisions of
this Agreement.
c. No Stockholder shall request that Hirsch or its transfer agent register
the Transfer (book-entry or otherwise) of any certificate or uncertificated
interest representing any of such Stockholder's Shares, and each Stockholder
hereby consents to the entry of stop transfer instructions by Hirsch of any
Transfer of such Stockholder's Shares, unless such Transfer is made in
compliance with this Agreement.
d. Hirsch will not register the Transfer (book-entry or otherwise) of any
certificate or uncertified interest representing any of the Stockholder's Shares
and will enter a stop transfer instruction on any Transfer attempted in
violation of this Agreement.
3. Representations and Warranties; Additional Covenants of the Stockholders.
Each Stockholder hereby represents and warrants, severally and not jointly,
and covenants to Sheridan as follows:
a. Authorization. Stockholder has the power, corporate or otherwise, and
authority to enter into this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby by each Stockholder have been duly and
validly authorized by such Stockholder and no other proceedings, corporate or
otherwise, on the part of the Stockholder is necessary to authorize the
execution and delivery of this Agreement or the performance by the Stockholder
of its obligations hereunder. This Agreement has been duly and validly executed
and delivered by the Stockholder and constitutes the legal, valid and binding
obligation of such Stockholder, enforceable against such Stockholder in
accordance with its terms.
b. No Conflict. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby will not (i)
conflict with or result in any breach of any provision of the certificate of
incorporation, bylaws or similar organizational documents, if any, of each
Stockholder, (ii) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, amendment, cancellation or acceleration) under any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, lease,
license, contract, agreement or other instrument or obligation to which such
Stockholder is a party or by which any of its properties or assets including the
Shares may be bound, or (iii) violate any order, writ, injunction, decree,
judgment, permit, license, ordinance, law, statute, rule or regulation
applicable to such Stockholder or any of its properties or assets, including the
Shares.
c. Title to Shares. Stockholder is the registered or beneficial owner of
its Shares free and clear of any lien or encumbrance, proxy or voting
restriction other than pursuant to this Agreement. Such Shares are all the
securities of Hirsch owned of record or beneficially by such Stockholder on the
date of this Agreement.
d. Accredited Investor. Stockholder is an "accredited investor" within the
meaning of the United States Securities and Exchange Commission ("SEC") Rule 501
of Regulation D, as presently in effect.
e. Reliance by Sheridan. Stockholder acknowledges that the execution and
delivery of this Agreement is a material and substantial inducement for Sheridan
to execute and deliver the Merger Agreement.
f. Certain Actions. Prior to the termination of this Agreement, each
Stockholder agrees not to, directly or indirectly, take any other action that
would make any representation or warranty of such Stockholder contained herein
untrue or incorrect.
g. Acknowledgment and Approval of the Merger Agreement. The Stockholder
hereby acknowledges and agrees that the Stockholder has received a copy of the
Merger Agreement and that the Stockholder has reviewed and understands the terms
thereof.
h. Ownership. Nothing contained in this Agreement shall be deemed to vest
in Sheridan any direct or indirect ownership or incidence of ownership of or
with respect to any of the Stockholder's Shares. Except as otherwise provided
herein, all rights, ownership and economic benefits of and relating to the
Stockholder's Shares shall remain and belong to the Stockholder, and Sheridan
shall not have any authority to manage, direct, superintend, restrict, regulate,
govern, or administer any of the policies or operations of Hirsch or exercise
any power or authority to direct such Stockholder in the voting of any of such
Stockholder's Shares, except as otherwise provided herein, or the performance of
the Stockholder's duties or responsibilities as a Stockholder of Hirsch.
i. No Solicitation. Stockholder will not, directly or indirectly, and will
instruct its agents, representatives, affiliates, employees, officers and
directors not to, directly or indirectly, solicit or initiate any proposal or
offer (including, without limitation, any proposal or offer to the Stockholders
of Hirsch) that constitutes, or may reasonably be expected to lead to, any
acquisition of Hirsch (an "Acquisition"). Stockholder shall notify Sheridan
immediately after receipt by such Stockholder or any of such Stockholder's
agents, representatives, affiliates, employees, officers and directors, of any
proposal for, or inquiry respecting, an Acquisition or any request for nonpublic
information in connection with such a proposal or inquiry, or for access to the
properties, books or records of Hirsch by any person or entity that informs or
has informed Hirsch or any Stockholder that it is considering making or has made
such a proposal or inquiry provided, that if Stockholder is a director or
officer of Hirsch, such disclosure does not, in the opinion of counsel to
Hirsch, violate any fiduciary duty or obligation which Stockholder, in his
capacity as a director or officer of Hirsch, may owe to Hirsch or the other
stockholders of Hirsch. Such notice to Sheridan shall indicate in reasonable
detail the identity of the person making the proposal or inquiry and the terms
and conditions of such proposal or inquiry. Stockholder immediately shall cease
and cause to be terminated all existing discussions or negotiations with any
parties conducted heretofore with respect to an Acquisition, except in respect
of the transactions contemplated by this Agreement, to the extent that such
Stockholder is also an officer or director of Hirsch.
4. General Provisions.
a. Notices. All notices and other communications given or made pursuant
this Agreement shall be in writing and shall be deemed given, (i) five business
days following sending by registered or certified mail, postage prepaid, (ii)
when sent if sent by facsimile; provided, however, that the facsimile is
promptly confirmed by telephone confirmation thereof, (iii) when delivered, if
delivered personally to the intended recipient, and (iv) one business day
following sending by overnight delivery via a national courier service, and in
each case, addressed to a party at the following address for such party (or at
such other addresses as shall be specified by notice given in accordance with
this Section 4):
if to Hirsch: Hirsch International Corp.
200 Wireless Boulevard
Hauppauge, New York 11788
Attention: Paul Gallagher
Facsimile No.: (631) 952-7110
with a copy to: Ruskin Moscou Faltischek, P.C.
East Tower, 15th Floor
190 EAB Plaza
Uniondale, New York 11556-0190
Attention: Adam Silvers, Esq.
Facsimile No.: (516) 663-6719
if to then to the address listed opposite such Stockholder's name
a Stockholder: on Schedule A attached ---------- hereto.
if to Sheridan: Sheridan Square Entertainment, Inc.
130 Fifth Avenue, 7th Floor
New York, New York 10011
Attention: Joseph Bianco
Facsimile No.: (212) 414-3231
with a copy to: Olshan Grundman Frome Rosenzweig & Wolosky LLP
Park Avenue Tower
65 East 55th Street
New York, New York 10022
Attention: Robert L. Frome, Esq.
Facsimile No.: (212) 451-2222
b. Descriptive Headings. The descriptive headings herein are inserted for
convenience of reference only and are not intended to be part of or to affect
the meaning or interpretation of this Agreement.
c. Severability. The provisions of this Agreement shall be deemed severable
and the invalidity or unenforceability of any provision shall not affect the
validity or enforceability of the other provisions hereof. If any provision of
this Agreement, or the application hereof to any person or any circumstance, is
invalid or unenforceable, (i) a suitable and equitable provision shall be
substituted therefor in order to carry out, so far as may be valid and
enforceable, the intent and purpose of such invalid or unenforceable provision
and (ii) the remainder of this Agreement and the application of such provision
to other persons or circumstances shall not be affected by such invalidity or
unenforceability, nor shall such invalidity or unenforceability affect the
validity or enforceability of such provision, or the application hereof, in any
other jurisdiction.
d. Entire Agreement; Amendment; Waiver. This Agreement constitutes the
entire agreement of the parties and supersede all prior agreements and
undertakings, both written and oral, between the parties, or any of them, with
respect to the subject matter hereof. This Agreement may not be amended or
modified except in an instrument in writing signed by, or on behalf of, the
parties hereto. No failure or delay by any party in exercising any right, power
or privilege hereunder shall operate as a waiver hereof, nor shall any single or
partial exercise hereof preclude any other or further exercise hereof or the
exercise of any other right, power or privilege.
e. Assignment. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that neither this Agreement nor any
of the rights, interests or obligations of the parties hereto may be assigned by
any of the parties by operation of law or otherwise without the prior written
consent of the other parties.
f. Specific Performance. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement, this being in addition to any other
remedy to which they are entitled at law or in equity.
g. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to the
choice of law principles hereof.
h. Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto and its successors and permitted
assigns, and nothing in this Agreement, express or implied, is intended to or
shall confer upon any other person any rights, benefits or remedies of any
nature whatsoever under or by reason of this Agreement.
i. Submission to Jurisdiction; Waivers; Consent to Service of Process. Each
of the parties hereto irrevocably agrees that any legal action or proceeding
with respect to this Agreement or for recognition and enforcement of any
judgment in respect hereof brought by another party hereto or its successors or
assigns shall be brought and determined only in a United States or New York
State Court sitting in the counties of New York or Suffolk, State of New York.
Each of the parties hereby irrevocably submits with regard to any such action or
proceeding for itself and in respect to its property, generally and
unconditionally, to the personal jurisdiction of the aforesaid courts in the
event that any dispute arises out of this Agreement or any transaction
contemplated hereby. Any service of process to be made in such action or
proceeding may be made by delivery of process in accordance with the notice
provisions contained in Section 4(a). Each of the parties hereby irrevocably
waives, and agrees not to assert, by way of motion, as a defense, counterclaim
or otherwise, in any action or proceeding with respect to this Agreement, (i)
any claim that it is not personally subject to the jurisdiction of the
above-named courts for any reason other than the failure to serve process in
accordance with this Section 4(i), (ii) that it or its property is exempt or
immune from jurisdiction of any such court or from any legal process commenced
in such courts (whether through service of notice, attachment prior to judgment,
attachment in aid of execution of judgment, execution of judgment or otherwise),
and (iii) to the fullest extent permitted by applicable law that (A) the suit,
action or proceeding in any such court is brought in an inconvenient forum, (B)
the venue of such suit, action or proceeding is improper and (C) this Agreement,
or the subject matter hereof, may not be enforced in or by such courts.
j. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
k. WAIVER OF JURY TRIAL. EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY
CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED
ISSUES AND, THEREFORE, SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES
ANY RIGHT THAT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT
OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES (i) THAT SUCH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS
OF THIS WAIVER, (ii) THAT SUCH PARTY MAKES THIS WAIVER VOLUNTARILY AND (iii)
SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS,
THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 4(k).
l. Termination. This Agreement and all obligations of the parties hereunder
and thereunder, shall terminate immediately, without any further action being
required, upon the earlier of (i) any termination of the Merger Agreement or
(ii) the consummation of the Merger Transaction.
m. Further Assurances. Each party to this Agreement agrees (i) to furnish
upon request to the other party such further information, (ii) to execute and
deliver to the other party such other documents and (iii) to do such other acts
and things as the other party reasonably requests for the purpose of carrying
out the intent of this Agreement and the documents and instruments referred to
herein.
n. Interpretation. The words "hereof," "herein," "herewith" and words of
similar import shall, unless otherwise stated, be construed to refer to this
Agreement as a whole and not to any particular provision of this Agreement.
Section and exhibit references are to the sections and exhibits of this
Agreement unless otherwise specified. Whenever the words "include," "includes,"
or "including" are used in this Agreement, they shall be deemed to be followed
by the words "without limitation." All terms defined in this Agreement shall
have the defined meanings contained herein when used in any certificate or other
document made or delivered pursuant hereto unless otherwise defined therein. The
definitions contained in this Agreement are applicable to the singular as well
as the plural forms of such terms and to the masculine as well as to the
feminine and neuter genders of such terms. Any agreement, instrument, or statute
defined or referred to herein or in any agreement or instrument that is referred
to herein means such agreement, instrument, or statute as from time to time,
amended, qualified or supplemented, including (in the case of agreements and
instruments) by waiver or consent and (in the case of statutes) by succession of
comparable successor statutes and all attachments thereto and instruments
incorporated therein. References to a person are also to its permitted
successors and assigns. The parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the parties and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any provisions
of this Agreement.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
"Sheridan" "Hirsch"
Sheridan Square Entertainment, Inc. Hirsch International Corp.
By: /s/ Joseph J. Bianco By: /s/ Paul Gallagher
-------------------------------- -------------------------------
Name: Joseph J. Bianco Name: Paul Gallagher
Title: Co-Chief Executive Officer Title: President and Chief CEO
"STOCKHOLDERS"
By: /s/ Paul Gallagher
-------------------------------
Name: Paul Gallagher
Title: President and Chief CEO
By: /s/ Henry Arnberg
-------------------------------
Name: Henry Arnberg
Title: Chairman of the Board
[Signature Page to Voting Agreement]
SCHEDULE A
STOCKHOLDERS
Name Address Number and Type of Shares
- ---- ------- -------------------------
Henry Arnberg c/o Hirsch International Corp. 981, 659 shares - Class A Common Stock
200 Wireless Boulevard 400,018 shares - Class B Common Stock
Hauppauge, New York 11787
Paul Gallagher c/o Hirsch International Corp. 295,000 shares - Class A Common Stock
200 Wireless Boulevard
Hauppauge, New York 11787
ANNEX F
HIRSCH INTERNATIONAL CORP.
2003 STOCK OPTION PLAN
1. Plan; Purpose; General. The purpose of this 2003 Stock Option Plan (the
"Plan") is to advance the interests of Hirsch International Corp. (the
"Company") by enhancing the ability of the Company to attract and retain
selected employees, consultants, advisors to the Board of Directors and
qualified directors (collectively the "Participants") by creating for such
Participants incentives and rewards for their contributions to the success of
the Company, and by encouraging such Participants to become owners of shares of
the Company's Common Stock, par value $0.01 per share, as the title or par value
may be amended (the "Shares").
Options granted pursuant to the Plan may be incentive stock options
("Incentive Options") as defined in the Internal Revenue Code of 1986, as
amended (the "Code") or non-qualified options, or both. The proceeds received
from the sale of Shares pursuant to the Plan shall be used for general corporate
purposes.
2. Effective Date of Plan. The Plan will become effective upon approval by
the Board of Directors (the "Board"), and shall be subject to the approval by
the holders of at least a majority of all Shares present in person and by proxy
and entitled to vote thereon at a meeting of stockholders of the Company.
3. Administration of the Plan. The Plan will be administered by the Board
of the Company. The Board will have authority, not inconsistent with the express
provisions of the Plan, to take all action necessary or appropriate thereunder,
to interpret its provisions, and to decide all questions and resolve all
disputes which may arise in connection therewith. Such determinations of the
Board shall be conclusive and shall bind all parties.
The Board may, in its discretion, delegate its powers with respect to the
Plan to an employee benefit plan committee or any other committee (the
"Committee"), in which event all references to the Board hereunder, including
without limitation the references in Section 9, shall be deemed to refer to the
Committee. The Committee shall consist of not fewer than two members. Each of
the members must be a "non-employee director" as that term is defined in Rule
16b-3 adopted pursuant to the Securities Exchange Act of 1934 (the "Exchange
Act"). A majority of the members of the Committee shall constitute a quorum, and
all determinations of the Committee shall be made by the majority of its members
present at a meeting. Any determination of the Committee under the Plan may be
made without notice or meeting of the Committee by a writing signed by all of
the Committee members.
The Board and the Committee, if any, shall have the authority to determine
eligibility, the number of options granted and the exercise price of options.
4. Eligibility. The Participants in the Plan shall be all employees,
consultants, advisors to the Board of Directors and qualified directors of the
Company or any of its present or future subsidiaries (as defined in Section 8)
whether or not they are also officers of the Company. Members of the Committee
are eligible only if they do not exercise any discretion in selecting
Participants who receive grants of options, in determining the number of shares
to be granted to any Participant or in determining the exercise price of any
options, or if counsel to the Company may otherwise advise the Committee that
the taking of any such action does not impair the status of such eligible
Committee members as "non-employee directors" within the meaning of Exchange Act
Rule 16b-3.
5. Grant of Options.
(a) The Board shall grant options to Participants that it, in its sole
discretion, selects. Options shall be granted on such terms as the Board shall
determine except that Incentive Options shall be granted on terms that comply
with the Code and Regulations thereunder.
(b) No options shall be granted after December 1, 2013 but options
previously granted may extend beyond that date.
6. Terms and Conditions of Options.
(a) Exercise Price. The purchase price per Share for Shares issuable upon
exercise of options shall be determined by the Board except that Incentive
Options shall have an exercise price which is a minimum of one hundred (100%)
percent of fair market value on the date of grant. For this purpose, "fair
market value" will be determined as set forth in Section 8. Notwithstanding the
foregoing, if any person to whom an option is to be granted owns in excess of
ten percent of the outstanding capital stock of the Company, then no option may
be granted to such person for less than 110% of the fair market value on the
date of grant as determined by the Board.
(b) Period of Options. Unless earlier terminated, options shall terminate
and no longer be exercisable five years from the date of grant.
(c) Payment for Delivery of Shares. Shares which are subject to options
shall be issued only upon receipt by the Company of full payment of the purchase
price for the Shares as to which the option is exercised. The purchase price
shall be payable by the Participant to the Company either (i) in cash or by
check, bank draft or money order payable to the order of the Company; or (ii)
for Incentive Options, through the delivery of Shares owned by the Participant
for a period of not less than six months and for which the Participant has good
title (free and clear of any liens and encumbrances) having a fair market value
equal to the purchase price; or (iii) for non-qualified options, by a
combination of cash and Shares as provided in (i) and (ii) above.
The Company shall not be obligated to deliver any Shares 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 Shares to be
delivered have 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 Shares have been
approved by the Company's counsel. Without limiting the generality of the
foregoing, the Company may require from the person exercising an option such
investment representation or such agreement, if any, as counsel for the Company
may consider necessary in order to comply with the Securities Act of 1933, as
amended (the "Act") and applicable state securities laws.
A Participant shall have the rights of a shareholder only as to Shares
actually acquired by him under the Plan.
(d) Vesting. The Board may impose such vesting restrictions on options
granted hereunder as it sees fit at the time of grant.
(e) Non-Transferability of Options. Options may not be sold, assigned or
otherwise transferred or disposed of in any manner whatsoever except as provided
in Section 6(g).
(f) Forfeiture of Options upon Termination of Relationship. All previously
unexercised options including options which have not vested shall terminate and
be forfeited automatically upon the termination for any reasons whatsoever of a
Participant's status as an employee, consultant or advisor to the Board. Except
as provided in Section 6(g) below, unexercised options granted to directors
shall not terminate or be forfeited in the event such person is no longer a
director of the Company.
(g) Death. If a Participant dies at a time when he is entitled to exercise
an option, then at any time or times within one year after his death (or such
further period as the Board may allow) such options may be exercised, as to all
or any of the Shares which the Participant was entitled to purchase immediately
prior to his death, by his personal representative or the person or persons to
whom the options are transferred by the will or the applicable laws of descent
and distribution, and except as so exercised such options will expire at the end
of such period.
(h) Loans to Exercise Option. If requested by any Participant to whom a
grant of non-qualified options has been made, the Company or any subsidiary may
loan such person the amount of money necessary to pay the federal income taxes
incurred as a result of the exercise of any options (or guarantee a bank loan
for such purpose), assuming that the Participant is in the maximum federal
income tax bracket six months from the time of exercise and assuming that the
Participant has no deductions which would reduce the amount of such tax owed.
The loan shall be made on or after April 15th of the year following the year in
which the amount of tax is determined as may be requested by the Participant and
shall be made on such terms as the Company or lending bank determines.
(i) Withholding Taxes. To the extent that the Company is required to
withhold taxes for federal income tax purposes in connection with the exercise
of any options, the Company shall have the right to assist the Participant to
satisfy such withholding requirement by (i) the Participant paying the amount of
the required withholding tax to the Company, (ii) the Participant delivering to
the Company Shares of its Common Stock previously owned by the Participant or
(iii) the Participant having the Company retain a portion of the Shares covered
by the option exercise. The number of Shares to be delivered to or withheld by
the Company times the fair market value as defined by Section 9 of this Plan
shall equal the cash required to be withheld. To the extent that the Company
elects to allow the Participant either to deliver or have withheld Shares of the
Company's Common Stock, the Board or the Committee may require him to make such
election only during certain periods of time as may be necessary to comply with
appropriate exemptive procedures regarding the "short-swing" profit provisions
of Section 16(b) of the Exchange Act or to meet certain Code requirements.
7. Shares Subject to Plan.
(a) Number of Shares and Stock to be Delivered. Shares delivered pursuant
to this Plan shall in the discretion of the Board be authorized but unissued
Shares of Common Stock or previously issued Shares acquired by the Company.
Subject to adjustments as described below, the aggregate number of Shares which
may be delivered under this Plan shall not exceed 5,000,000 Shares of Common
Stock of the Company.
(b) Changes in Stock. In the event of a stock dividend, stock split or
combination of Shares, recapitalization, merger in which the Company is the
surviving corporation or other change in the Company's capital stock, the number
and kind of Shares of stock or securities of the Company to be subject to the
Plan and to options then outstanding or to be granted thereunder, the maximum
number of Shares or securities which may be delivered under the Plan, the option
price and other relevant provisions shall be appropriately adjusted by the
Board, whose determination shall be binding on all persons. In the event of a
consolidation or merger in which the Company is not the surviving corporation or
which results in the acquisition of substantially all the Company's outstanding
stock by a single person or entity, or in the event of the sale or transfer of
substantially all the Company's assets, all outstanding options shall thereupon
terminate.
The Board may also adjust the number of Shares subject to outstanding
options, the exercise price of outstanding options and the terms of outstanding
options to take into consideration material changes in accounting practices or
principles, consolidations or mergers (except those described in the immediately
preceding paragraph), acquisitions or dispositions of stock or property or any
other event if it is determined by the Board that such adjustment is appropriate
to avoid distortion in the operation of the Plan.
8. Definitions.
(a) For purposes of the Plan, a subsidiary is any corporation (i) in which
the Company owns, directly or indirectly, stock possessing 50 percent or more of
the total combined voting power of all classes of stock or (ii) over which the
Company has effective operating control.
(b) The fair market value of the Common Stock shall be deemed to 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 average closing bid price appearing on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ");
(ii) if the Shares are not listed on NASDAQ, then the average bid price for
the Company's stock as listed in the National Quotation Bureau's pink sheets;
(iii) if there are no listed bid prices published in the pink sheets, then
the market value shall be based upon the average closing bid price as determined
following a polling of all dealers making a market in the Company's Shares.
9. Indemnification of Board. In addition to and without affecting such
other rights of indemnification as they may have as members of the Board or
otherwise, each member of the Board shall be indemnified by the Company to the
extent legally possible against reasonable expenses, including attorney's fees,
actually and reasonably incurred in connection with any appeal therein, to which
he may be a party by reason of any action taken or failure to act under or in
connection with the Plan, or any option granted thereunder, and against all
judgments, fines and amounts paid by him in settlement thereof; provided that
such payment of amounts so indemnified is first approved by a majority of the
members of the Board who are not parties to such action, suit or proceedings, or
by independent legal counsel selected by the Company, in either case on the
basis of a determination that such member acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company; and except that no indemnification shall be made in relation to matters
as to which it shall be adjudged in such action, suit or proceeding that such
Board member is liable for a breach of the duty of loyalty, bad faith or
intentional misconduct in his duties; and provide, further that the Board member
shall in writing offer the Company the opportunity, at its own expense, to
handle and defend same.
10. Amendments. The Board may at any time discontinue granting options
under the Plan. The Board may at any time or times amend the Plan or amend any
outstanding option or options for the purpose of satisfying the requirements of
any changes in applicable laws or regulations or for any other purpose which may
at the time be permitted by law, provided that (except to the extent explicitly
required or permitted herein above) no such amendment will, without the approval
of the stockholders of the Company, (a) increase the maximum number of Shares
available under the Plan, (b) reduce the option price of outstanding options or
reduce the price at which options may be granted, (c) extend the time within
which options may be granted, (d) amend the provisions of this Section 10 of the
Plan, (e) extend the period of an outstanding option beyond five years from the
date of grant, (f) adversely affect the rights of any Participant (without his
consent) under any options theretofore granted or (g) be effective if
stockholder approval is required by applicable statute, rule or regulation.
ANNEX G
SHERIDAN SQUARE ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FIVE MONTHS ENDING DECEMBER 31, 2003 AND
THE YEAR ENDING DECEMBER 31, 2004
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Directors
Sheridan Square Entertainment, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Sheridan Square
Entertainment, Inc. and Subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year ended December 31, 2004 and for the period from July 29, 2003
(Inception) to December 31, 2003. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sheridan Square
Entertainment, Inc. and Subsidiaries as of December 31, 2004 and 2003, and the
results of its operations and its cash flows for the year ended December 31,
2004 and for the period from July 29, 2003 (Inception) to December 31, 2003 in
conformity with accounting principles generally accepted in the United States.
/s/ Sherb & Co., LLP
----------------------------
Certified Public Accountants
New York, New York
June 22, 2005
SHERIDAN SQUARE ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
-----------------------------------
2004 2003
--------------- ----------------
CURRENT ASSETS
Cash and cash equivalents $ 878,885 $ 5,288,192
Accounts receivable, net of allowances
of $1,673,686 and $1,653,255 at 11,095,892 7,635,459
December 31, 2004 and 2003,
respectively
Inventory 5,890,489 5,073,218
Prepaid expenses 455,875 85,630
Advances to artists 1,928,240 367,086
--------- -------
TOTAL CURRENT ASSETS 20,249,381 18,449,585
---------- ----------
PROPERTY AND EQUIPMENT, at cost
less accumulated depreciation
of $1,095,784 and $1,002,463
at December 31, 2004 and 2003,
respectively 428,536 229,008
--------- -------
OTHER ASSETS
Security deposits and other assets 174,282 88,597
Financing costs, less accumulated
amortization of $377,423 and $93,095 2,552,538 1,101,349
at December 31, 2004 and 2003,
respectively
Goodwill 2,590,000 2,590,000
Non-contractual customer oblgiations,
less accumulated amortization
of $935,836 and $275,246 at
December 31, 2004 and 2003,
respectively 8,973,006 9,633,596
Music catalogs, less accumulated
amortization of $833,940 and $183,767 15,051,041 6,635,833
---------- ---------
at December 31, 2004 and 2003,
respectively
TOTAL OTHER ASSETS 29,340,867 20,049,375
---------- ----------
TOTAL ASSETS $50,018,784 $38,727,968
=========== ===========
See Notes to Consolidated Financial Statements
SHERIDAN SQUARE ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31
----------------------------------
2004 2003
--------------- ---------------
CURRENT LIABILITIES
Accounts payable $ 8,352,433 $ 7,443,197
Accrued expenses 1,405,559 1,629,575
Royalties payable 3,531,247 2,225,093
Reserve for returns 1,966,329 1,608,624
Deferred revenue - current portion 330,217 366,908
Other liabilities 240,996 461,844
Notes payable - current portion 1,366,200 1,579,167
Due on catalog acquisition -
current portion 1,000,000 -
---------- ----------
TOTAL CURRENT LIABILITIES 18,192,981 15,314,408
---------- ----------
LONG TERM LIABILITIES
Deferred revenue less
current portion 147,434 262,136
Due on catalog acquisition -
less current portion 2,000,000 -
Notes payable - less current
portion 15,531,623 7,138,063
Deferred tax liability 2,590,000 2,590,000
--------- ---------
TOTAL LONG TERM LIABILITIES 20,269,057 9,990,199
---------- ----------
TOTAL LIABILITIES 38,462,038 25,304,607
---------- ----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 20,045 -
---------- ----------
See Notes to Consolidated Financial Statements
SHERIDAN SQUARE ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY -- Continued
December 31
December 31
----------------------------------
2004 2003
--------------- ---------------
STOCKHOLDERS' EQUITY
Non-voting preferred stock
Series A1, $1.00 par value; 8,245,000
shares authorized; 8,031,250
shares issued and outstanding; total
liquidation preference of
outstanding shares - $8,031,250 8,031,250 8,031,250
Non-voting preferred stock
Series A2, $1.00 par value; 8,245,000
shares authorized; 4,133,157
shares issued and outstanding; total
liquidation preference of
outstanding shares - $6,968,750 and
$4,133,157 as of December 31,
2004 and December 31, 2003, respectively 6,968,750 4,133,157
Non-voting preferred stock
Series A3, $1.00 par value; 1,500,000
shares authorized; 1,422,368
shares issued and outstanding; total
liquidation preference of
outstanding shares - $1,422,368 1,422,368 1,422,368
Non-voting preferred stock
Series A4, $1.00 par value; 30,000
shares authorized; 28,834 shares
issued and outstanding; total
liquidation preference of 28,834 28,834
outstanding shares - $28,834
Non-voting preferred stock
Series A5, $1.00 par value; 10,000,000
shares authorized; -0- shares
issued and outstanding - -
Non-voting preferred stock
Series A6, $1.00 par value; 20,000
shares authorized; -0- shares
issued and outstanding - -
Non-voting preferred stock
Series B, $1.00 par value;
300,000 shares authorized; 12,598
shares issued and outstanding;
total liquidation preference of
outstanding shares - $1,259,820 12,598 -
Voting common stock
Class A, $0.01 par value; 200,000
authorized; 94,536 shares issued
and outstanding 945 945
Non-Voting common stock
Class B, $0.01 par value; 1,000
authorized; 288 shares
shares issued and outstanding 3 3
Additional paid in capital 1,247,222 -
Accumulated deficit) retained earnings (6,175,269) (193,196)
---------- -------
TOTAL STOCKHOLDERS' EQUITY 11,536,701 13,423,361
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $50,018,784 $38,727,968
=========== ===========
SHERIDAN SQUARE ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Period From July
For The Year Ended 29, 2003 (Inception)
December 31, 2004 to December 31, 2003
----------------- ------------------------
NET SALES $37,991,526 $17,279,270
COST OF SALES 24,762,134 10,605,063
---------- ----------
GROSS PROFIT 13,229,392 6,674,207
---------- ---------
SELLING AND ADMINISTRATIVE
EXPENSES 16,634,503 5,303,317
DEPRECIATION AND AMORTIZATION 1,717,734 629,774
--------- -------
TOTAL EXPENSES 18,352,237 5,933,091
---------- ---------
(LOSS) INCOME FROM OPERATIONS (5,122,845) 741,116
---------- ---------
OTHER EXPENSES
Interest Expense 644,721 174,349
Minority Interest 20,045 -
Abandoned Acquisition Expenses 194,462 -
Lease Settlement Charge - 759,963
---------- ---------
TOTAL OTHER EXPENSES (INCOME) 859,228 934,312
---------- ---------
NET (LOSS) INCOME $ (5,982,073) $(193,196)
============= ==========
See Notes to Consolidated Financial Statements
SHERIDAN SQUARE ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD JULY 29, 2003 (INCEPTION) TO DECEMBER 31, 2004
(Accumulated
Deficit)
Common Stock Preferred Stock Additional
----------------------------- -------------------------------------- Paid In Retained
Shares Class Amount Shares Series Amount Capital Earnings Total
-------- ------ -------- ---------- ------ -------------- --------- ------------ --------
Balance - July 29,
2003 (Inception) - - $ - - - $- $- $- $-
Proceeds from
issuance of
stock 80,312 A 803 8,031,250 A1 8,031,250 - - 8,032,053
Stock issue for
acquisition 14,224 A 142 1,422,368 A3 1,422,368 - - 1,422,510
288 B 3 28,834 A4 28,834 - - 28,837
Proceeds from
sale of stock - - 4,133,157 A2 4,133,157 - - 4,133,157
Net Loss - - - - - (27,950) (27,950)
------ --- ---------- ---------- ------- ----------
Balance -
December 31,
2003 94,824 948 13,615,609 13,615,609 - (27,950) 13,588,607
------ --- ---------- ---------- ------- ----------
Proceeds from
issuance of
stock - - 2,835,593 A2 2,835,593 - - 2,835,593
Proceeds from
issuance of
stock - - 12,598 B 12,598 1,247,222 - 1,259,820
Net Loss - - - - - (5,982,073) 5,982,073)
-------- -------- ---------- -------------- --------- ---------- -----------
Balance -
December 31,
2004 94,824 $948 16,463,800 $16,463,800 1,247,222 $(6,175,269) $11,536,701
======== ======== ========== ============ ========= ============ ===========
See Notes to Consolidated Financial Statements
SHERIDAN SQUARE ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Period From
July 29, 2003
For The Year Ended (Inception) to
December 31, 2004 December 31, 2003
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,982,073) $ (193,196)
Adjustments to reconcile net (loss) income
to net cash used by operating activities:
Depreciation 120,700 77,666
Amortization 1,595,091 552,108
Minority interests 20,045 -
Deferred tax expense 264,000 110,000
(Increase) Decrease in:
Accounts receivable (1,968,895) (2,498,366)
Inventory (639,935) (2,359,563)
Prepaid expenses (370,245) 881,141
Security deposits and other assets 26,466 (88,597)
Advances to artists (1,060,349) 556,758
Increase (Decrease) in:
Accounts payable (234,300) (3,630,998)
Accrued expenses (224,016) 91,090
Royalties payable 1,306,154 2,225,093
Reserve for returns (479,822) 29,234
Other liabilities (642,336) 342,727
Deferred revenue (151,393) 629,044
----------------- ------------------
Net cash used in operating activities (8,684,908) (3,385,859)
----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (239,364) (96,720)
Net payment made to former owners of Musicrama - (9,000,000)
Cost of acquiring subsidiaries (128,811) (576,422)
Acquisition of music catalogs (5,896,713) (340,000)
----------------- ------------------
Net cash used by investing activities (6,264,888) (10,013,142)
----------------- ------------------
SHERIDAN SQUARE ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Period From
July 29, 2003
For The Year Ended (Inception) to
December 31, 2004 December 31, 2003
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under revolving bank loan 2,988,705 3,521,530
Proceeds from notes payable 7,021,388 4,500,000
Principal payments on notes payable (1,829,500) (304,300)
Financing transaction costs (1,735,517) (864,444)
Capital contributions 4,095,413 11,834,407
----------------- -----------------
Net cash provided by financing activities 10,540,489 18,687,193
----------------- -----------------
NET (DECREASE) INCREASE IN CASH (4,409,307) 5,288,192
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 5,288,192 -
----------------- -----------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 878,885 $5,288,192
================ =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 536,587 $ 120,708
================ =================
Taxes $ 61,390 $ 101,017
================ =================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common and preferred stock issued for music
catalog purchases $ - $1,451,347
Common and preferred stock issued for contribution
of music catalog $ 330,033
Common stock issued in connection with sale of
preferred stock $ 770
Acquisition of subsidiary for debt $ - $1,000,000
Holdback reserve on catalog acquisition $ 3,000,000 $ -
See Notes to Consolidated Financial Statements
SHERIDAN SQUARE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
Note 1: Organization and Nature of Business
Sheridan Square Entertainment, Inc. ("Sheridan"), formerly known
as Sheridan Square Acquisition, Inc. was incorporated on July 29,
2003 in Delaware and currently has its corporate offices located
in New York. During 2003, Music Distribution Holdings, LLC, a
wholly owned subsidiary of Sheridan purchased Musicrama, Inc.
("Musicrama"), a distributor of prerecorded music and Sheridan
Square Entertainment, LLC d/b/a Artemis Records ("Artemis"), a
record label that produces original music recordings and licenses
its music catalog. On June 30, 2004, Sheridan Square
Entertainment, LLC was merged into Sheridan. In 2004, Sheridan
purchased (i) Tone Cool Records Corporation ("Tone Cool"), a
record label incorporated in Massachusetts, (ii) substantially
all of the music recordings catalog of Ropeadope Music
Entertainment, LLC ("Ropeadope"), (iii) the assets of Compendia
Music Group ("Compendia"), a major record label, and (iv) formed
Musicrama Distribution and Marketing Inc.("MDM") to develop,
enhance and expand Musicrama's retail resources. The above
entities are collectively referred to as Sheridan Square
Entertainment, Inc. and Subsidiaries (collectively "the Company")
Note 2: Summary of Significant Accounting Policies
This summary of significant accounting policies of the Company is
presented to assist in understanding the Company's consolidated
financial statements. The consolidated financial statements and
notes are representations of the Company's management who are
responsible for their integrity and objectivity. These accounting
policies are in conformity with accounting principles generally
accepted in the United States of America and have been
consistently applied in the preparation of the financial
statements.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Sheridan Square Entertainment, Inc. and its
subsidiaries, all of which are wholly-owned except for a joint
venture disclosed in Note 3. All significant intercompany
accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all short-term investments, with an
original maturity of three months or less, to be cash
equivalents. Accounts at banking institutions may at times exceed
federally insured limits. As of December 31, 2004 and 2003 the
Company had $613,647 and $4,744,851, respectively over such
limits.
SHERIDAN SQUARE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
Note 2: Summary of Significant Accounting Policies (continued)
Revenue Recognition
The Company derives its revenue substantially from sales arising
from the distribution of prerecorded music, the sale of music
recordings (predominantly compact discs) produced by the Company,
and from the licensing of Company-owned master recordings.
Revenue from music sales is recognized at the time of shipment to
the customer, while licensing revenue is recognized as income is
earned over the term of the agreement. Most sales of prerecorded
music are made with a right of return of unsold goods. Estimated
reserves for returns are established by management based upon
historical experience and product mix and are subject to ongoing
review and adjustment by the Company. These reserves are recorded
at the time of sale and are reflected as a reduction in revenues.
The accompanying consolidated balance sheet includes a provision
for returns which has been netted against the accounts receivable
of Musicrama and a liability for the reserve for returns for
Artemis, Tone Cool and Compendia. Minimum guarantees (advances)
received from licensees are recorded as deferred revenue and are
amortized over the performance period, which is generally the
period covered by the agreement.
Cost of Goods Sold
The Company expenses all product manufacturing, distribution
costs, freight in and royalty costs associated with music sales
as cost of goods sold. Distribution fees, included in cost of
sales, are primarily paid to third party distributors based on a
percentage of sales. The services provided by the third party
distributor include sales, fulfillment and storage of the
Company's product. Also included in distribution fees are fees
paid to a third party service provider for data entry, generation
of invoices, cash processing and logistics services. Distribution
fees were approximately $1,740,305 and $1,402,146 for the year
and period ended December 31, 2004 and 2003, respectively.
Shipping and Handling Costs
Musicrama expenses all shipping and handling costs incurred in
the shipment of goods to customers as part of selling and
administrative expenses.
Accounts Receivable
The Company does not have a provision for doubtful accounts.
Amounts deemed unrecoverable by management, based on specific
analysis, are written off as they are identified. Management
believes that this approach is approximate to the allowance
method. Estimated reserves for returns are established by
management and at December 31, 2004 and December 31, 2003,
Musicrama's reserve was $1,560,581. Musicrama also provides for
an allowance for customer trade discounts which was $113,105 and
$92,674 at December 31, 2004 and December 31, 2003, respectively.
SHERIDAN SQUARE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
Note 2: Summary of Significant Accounting Policies (continued)
Inventory
Inventory consists of musical recordings, such as compact discs,
audiocassettes, digital discs, videotapes, and record albums
stated at lower of cost or market as determined under the average
cost method, or net realizable value.
Property and Equipment
Property and equipment are carried at cost. Depreciation of
property and equipment are calculated using accelerated methods
over the estimated useful lives of the related assets.
Expenditures for repairs and maintenance are charged to expense
as incurred.
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ
from those estimates. Estimates are used in accounting for, among
other things, excess and obsolete inventory, allowance for
doubtful accounts, reserves for returns, useful lives for
depreciation and amortization, future cash flows associated with
impairment testing for goodwill and long-lived assets, deferred
tax assets and contingencies.
Music Catalog
The Company capitalizes the costs to purchase master recordings
at the time of acquisition. These costs are amortized over the
estimated useful life of these master recordings and represents
management's best estimate of the average period of value. Total
amortization expense for music catalogues are $650,173 and
$183,767 for the year and period ended December 31, 2004 and
2003, respectively. The music catalogs are reviewed for
impairment at the end of each year and the amortization period
and carrying value are adjusted when events or changes in
circumstances warrant.
Advances to Artists
Advances to artists, which are recoupable against future
royalties, are capitalized only in the case of "proven" artists,
which are defined as those whose past performance and current
popularity supports capitalization. Unearned balances are
reviewed periodically and if future performance is no longer
assured, the balances are appropriately reserved.
SHERIDAN SQUARE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
Note 2: Summary of Significant Accounting Policies (continued)
Goodwill
Goodwill in the amount of $2,590,000 resulted from an acquisition
in August 2003 (see Note 3). The Company has adopted Financial
Accounting Standards Board No. 142 which eliminated the
amortization of goodwill and substituted an annual review of the
asset for possible impairment requiring the comparison of fair
market value to carrying value. Fair market value is estimated
using the present value of expected future cash flows and other
measures. The Company has completed the required annual testing
of goodwill for impairment and has determined that none of its
goodwill is impaired. Goodwill is being amortized over a
fifteen-year life for income tax purposes.
License Revenues
The Company licenses a portion of its catalog to foreign music
companies under distribution agreements. In most instances the
Company receives a non-refundable, recoupable advance on signing
the agreement. The Company is obligated to deliver its catalog to
the distributor and to pay royalties to the owners of the
copyrighted music. The advances received are recorded as deferred
income and recognized as income as earned over the term of the
agreement. At December 31, 2004 and 2003, the deferred revenue
was $477,651 and $629,044, respectively.
Major Customers
Sales to the ten major customers of Musicrama represented
approximately 88% of total sales for Musicrama for the year ended
December 31, 2004 and sales to eleven major customers represented
89% of total sales for the five months ended December 31, 2003.
The amount due from major customers of Musicrama, included in
trade receivables, net of return reserves, was approximately
$4,926,907 at December 31, 2004 and $4,212,882 at December 31,
2003.
Advertising Costs
Advertising costs are expensed as incurred with the exception of
any expenses paid in connection with a sales event that has not
yet taken place. Advertising expense for the year ended December
31, 2004 and the five months ended December 31, 2003 was
$1,635,758 and $606,614, respectively.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and
cash equivalents, accounts receivable, accounts payable and
accrued expenses approximate fair value because of their short
maturities. The Company's notes payable (or long-term debt)
approximates the fair value of such instruments based upon
management's best estimate of interest rates that would be
available to the Company for similar financial arrangements at
December 31, 2004 and 2003.
SHERIDAN SQUARE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
Note 2: Summary of Significant Accounting Policies (continued)
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the cost
of an asset may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a
write-down to market value is required. At December 31, 2004 and
2003, the Company does not believe that any impairment has
occurred.
Financing Costs
Financing costs are amortized on a straight-line basis over the
respective life of the financing. Amortization expense for the
year ended December 31, 2004 was $284,328 and for the five months
ended December 31, 2003 was $93,095.
Concentration of Credit Risk
Artemis, Compendia and Tone Cool sell substantially their entire
product through one major distributor who accounts to them on a
monthly basis. The Company does an ongoing credit evaluation of
the distributor's financial condition and believes it does not
have a concentration of credit risk.
Income Taxes
The Company files a consolidated federal tax return with its
subsidiaries, and separate state and local corporate tax returns.
The financial statements are prepared on an accrual basis.
Temporary differences occur when income and expenses are
recognized in different periods for financial reporting purposes
and for purposes for computing income taxes currently payable.
Deferred taxes are provided as a result of such temporary
differences.
Royalties
The Company is obligated to pay royalties to the owners of music
copyrights used in master recordings. The Company accrues
royalties using contractual rates and certain estimated rates on
units sold. The contractual royalty liability is computed
quarterly and the accrued royalty balance is adjusted
accordingly. The royalty agreements are subject to audit by
licensors.
Industry Segment Information
The Company has determined that they operate under one segment,
and are not required to report on their operations by segment.
SHERIDAN SQUARE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
Note 2: Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board issued
("the FASB") issued Statement of Financial Accounting Standards
No. 151 ("SFAS No. 151"), "Inventory Costs, an amendment of ARB
No. 43, Chapter 4." SFAS No. 151 clarifies that abnormal
inventory costs such as costs of idle facilities, excess freight
and handling costs, and wasted materials (spoilage) are required
to be recognized as current period costs. The provisions of SFAS
No.151 are effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. Management is currently
evaluating the provisions of SFAS No. 151 and does not expect the
adoption will have a material impact on the Company's financial
position, results of operations or cash flows.
In December 2004, the FASB finalized SFAS No. 123R "Share-Based
Payment" ("SFAS 123R"), amending SFAS No. 123, effective
beginning the Company's first quarter of fiscal 2006. SFAS 123R
will require the Company to expense stock options based on grant
date fair value in its financial statements. Further, adoption of
SFAS No. 123R will require additional accounting related to
income tax effects and additional disclosure regarding cash flow
effects resulting from share-based payments arrangements. The
adoption of SFAS 123R will not effect the Company's cash flows or
financial position, but may have an adverse impact on results of
operations if options are granted in the future.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Non-monetary Assets - an amendment for APB Opinion No. 29". This
statement amends APB Opinion No. 29 to eliminate the exception
for non-monetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of
non-monetary assets that do not have commercial substance. A
non-monetary exchange has commercial substance if future cash
flows of the entity are expected to change significantly as a
result of the exchange. The provisions of SFAS No. 153 are
effective for the Company's year ended December 31, 2006.
Management is currently evaluating the impact of the adoption of
SFAS No. 153 on the Company's consolidated financial position,
liquidity, or results of operations.
SHERIDAN SQUARE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
Note 3: Acquisitions
On July 31, 2003, Music Distribution Holdings, LLC, ("Music LLC")
a wholly owned subsidiary of the Company and a Delaware limited
liability company, purchased 100% of the outstanding common stock
of Musicrama for $10,000,000. Simultaneously, Music LLC merged
into Musicrama. The purchase method was used to account for the
acquisition and an election under Internal Revenue Code Section
338 was filed with the Internal Revenue Service. The $9,908,842
excess of the purchase price over the fair market value of
acquired assets was allocated to goodwill. Payment of the
purchase price consisted of a cash payment of $9,000,000 and the
issuance of $1,000,000 in subordinated promissory notes as
discussed in Note 4.
The following table gives a summary of the acquisitions in
financial terms:
Purchase Price $ 10,000,000
Acquisition Costs 442,831
Fair Value of Assets Acquired (7,871,821)
Fair Value of Liabilities Assumed 7,337,832
----------------
Non-contractual customer obligations $ 9,908,842
================
The detailed components consist of the following:
Purchase Price
Cash to Sellers $ 9,000,000
Notes payables issued to Sellers 1,000,000
-----------------
$ 10,000,000
=================
Fair Value of Assets Acquired:
Accounts receivable $ 4,573,951
Inventory 2,681,667
Property, plant and equipment 61,555
Other 554,648
-----------------
$ 7,871,821
=================
Liabilities Assumed:
Accounts payable and accrued expenses $ 7,337,832
-----------------
$ 7,337,832
=================
SHERIDAN SQUARE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
Note 3: Acquisitions (Continued)
On August 5, 2003, the Company entered into a Shareholders and
Stock Purchase Agreement, with Music Holdings LLC (a
shareholder), Goldberg Records, LLC and Artemis, pursuant to
which (i) Goldberg Records, LLC contributed its entire interest
in Artemis in exchange for capital stock in the Company; (ii) the
holders of all of the outstanding Class B non-voting membership
interests of Artemis were contributed in exchange for capital
stock in the Company; and (iii) Trans World Entertainment Corp.
and Wherehouse Entertainment, Inc. were each granted capital
stock in exchange for their non-voting membership interests in
Artemis. The purchase method of accounting was used for this
transaction and the $6,479,600 excess of the purchase price over
the fair market value of the other assets acquired was allocated
to music catalog.
The following table gives a summary of the acquisitions in
financial terms:
Purchase Price $ 1,451,347
Acquisition Costs 133,591
Fair Value of Assets Acquired (2,078,693)
Fair Value of Liabilities Assumed 6,973,355
---------------
Music Catalog $ 6,479,600
===============
The detailed components consist of the following:
Purchase Price
Stock issued to Sellers $ 1,451,344
---------------
$ 1,451,344
===============
Fair Value of Assets Acquired:
Accounts Receivable $ 562,339
Inventory 31,988
Property, Plant and Equipment 148,399
Intangible Assets 412,123
Other 923,844
---------------
$ 2,078,693
===============
Liabilities Assumed:
Accounts payable and accrued expenses $ 3,736,363
Reserve for returns 1,579,390
Notes payable 119,117
Other 1,538,485
---------------
$ 6,973,355
===============
SHERIDAN SQUARE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
Note 3: Acquisitions (Continued)
The above acquisition was a non-taxable business combination,
resulting in a lower assigned value for the music catalog for
income tax purposes, thereby reducing the potential tax benefit
for future amortization of the music catalog. Accordingly, the
Company has recorded Goodwill and a deferred tax liability of
$2,590,000. This is based on an expected 40% tax rate for the
entire value of the music catalog that management has determined
will not be amortizable for income tax purposes.
On October 15, 2003 the Company purchased the assets of Triloka
for $300,000 that included master recordings, artist agreements,
music publishing rights, copyrights, trademarks, inventory, and
receivables. The purchase price, including acquisition costs of
$40,000, was capitalized as a music catalog asset.
On January 27, 2004, the Company entered into a joint venture
with Ultimatum LLC by purchasing a 50% interest in the recording
contract for the group, Sugarcult. The Company made a
non-refundable, non-recoupable payment for these rights and
capitalized the cost as a catalog cost. This joint venture
interest is included in the consolidation because the Company
exercises control over the operations of the joint venture and
has all the risks of loss. The amount due the minority interest
holder at December 31, 2004 was $20,045.
On May 25, 2004, the Company purchased 100% of the outstanding
common stock of Tone Cool Records Corp. for $750,000, plus
acquisition costs of $128,811. The purchase method was used to
account for the acquisition and an election under Internal
Revenue Code Section 338 was filed with the Internal Revenue
Service. The $ 713,994 excess of the purchase price over the fair
market value of acquired assets was allocated to music catalogs .
On September 8, 2004, the Company purchased substantially all of
the assets of Ropeadope Music Entertainment, LLC for $250,000
including master recordings, artist agreements, music publishing
rights, copyrights, trademarks, inventory and receivables. The
purchase price of $262,500 (including acquisition costs) was
capitalized as inventory.
On December 12, 2004, the Company purchased certain assets and
assumed certain liabilities of Compendia Music Group for
$7,396,713, net of closing adjustments. The purchase method of
accounting was used for this transaction and the $7,338,887
excess of the purchase price over the fair market value of the
non-music catalog assets acquired was allocated to the music
catalog. This agreement provided for a $3,000,000 reserve against
potential claims (see Note 6).
The following table gives a summary of the acquisitions in
financial terms:
Purchase Price $ 7,396,713
Fair Value of Assets Acquired (2,460,377)
Fair Value of Liabilities Assumed 2,402,551
-------------
Music Catalog $ 7,338,887
=============
SHERIDAN SQUARE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
Note 3: Acquisitions (Continued)
The detailed components consist of the following:
Purchase Price
Cash to Sellers $ 4,396,713
Reserve against potential claims 3,000,000
-------------
$ 7,396,713
=============
Fair Value of Assets Acquired:
Accounts receivable $ 1,481,520
Inventory 404,388
Property, plant and equipment 73,664
Other 500,805
-------------
$ 2,460,377
=============
Liabilities Assumed:
Accounts payable $ 1,143,536
Customer deposits 837,527
Notes payable 421,488
------------
$ 2,402,551
============
The following is the unaudited pro forma statement of operations
for the acquisition of Compendia as if it occurred on July 29,
2003.
For the Period
Year Ended July 29, 2003 (Inception)
December 31, 2004 Through December 31, 2003
(Unaudited) (Unaudited)
------------- ------------
Net Sales $44,013,683 $20,450,509
Cost of Goods 28,037,517 15,571,233
------------- ------------
Gross Profit 15,976,166 $ 4,879,276
Operating Expenses 25,360,751 9,420,623
------------- ------------
Operating (Loss) Income (9,384,585) (4,541,347)
Other Expense (3,369,863) (1,933,750)
------------- ------------
Net Loss $(12,754,448) $(6,475,097)
============ ============
Note 4: Property and Equipment
Property and equipment consists of the following at December 31:
2004 2003
---- ----
Equipment and furnishings $1,392,175 $1,065,642
Leasehold improvements 132,145 165,829
---------- ----------
1,524,320 1,231,471
Less: Accumulated depreciation 1,095,784 1,002,463
---------- ----------
Property and equipment at net book value $428,536 $229,008
========== ==========
Depreciation expense was $120,700 during the year ended
December 31, 2004 and $77,666 for the five months ended
December 31, 2003
SHERIDAN SQUARE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
Note 5: Notes Payable
Notes payable as of December 31, 2004 and 2003
consists of the following: 2004 2003
---- ----
In connection with the Musicrama acquisition,
Musicrama entered into a subordinated promissory
note to former shareholders of Musicrama,
guaranteed by the Company, with interest at market
rate, which at December 31, 2004 and 2003 was 5.25%
and 4.00% respectively. These notes are due on
January 15, 2005 with accrued interest. $75,000 $162,500
In connection with the Musicrama acquisition,
Musicrama entered into a subordinated convertible
promissory note to former shareholders of
Musicrama, with interest at 5% per annum, originally
payable August 1, 2004 and extended to June 30, 2005
subject to prepayments if additional equity
financing is obtained by the Company. This note is
convertible into 3.25% of outstanding common stock of
Musicrama, Inc. or 1.5% Class A2 voting unit ownership
interest in Music Holdings, LLC, a shareholder of
the Company. 750,000 750,000
In connection with the Musicrama acquisition,
Musicrama entered into a Revolving credit note
facility with a financial institution. Under this
facility, Musicrama may draw up to $12,500,000.
The amount that can be drawn down under the note is
limited to a percentage of receivables and
inventories, as defined in the loan agreement.
Interest is based on the higher of bank's base
rate or the Federal Funds rate in effect on that
date, plus 0.75%. At December 31, 2004 and 2003
the effective interest rate was 5.50% and 4.25%
per annum, respectively. Interest is payable monthly
and the note matures on July 30, 2008. This
note and the term loan as discussed below is secured
by all of Musicrama's property including cash,
receivables, inventory and fixed assets, and is
guaranteed by the Company. During 2004, this
agreement was amended to allow the Company to
borrow additional funds through Musicrama's
purchase of accounts receivables from Artemis
under a factoring agreement. The receivables
purchased from Artemis are guaranteed by a
shareholder of Music Holdings, LLC, the majority
shareholder of the Company. 8,510,234 5,521,530
In connection with the Musicrama acquisition,
Musicrama entered into a Term loan with a financial
institution payable in monthly installments of
$54,167 until August 2004 and $77,083 thereafter.
In December 2004, the Company made a $1,000,000
principal payment on this loan. Interest is based
on the higher of bank's base rate or the Federal
Funds rate on that date, plus 3.5% per annum. At
December 31, 2004 and 2003, the effective interest
rate was 8.25% and 7.00% per annum, respectively. 541,200 2,283,20
SHERIDAN SQUARE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
Note 5: Notes Payable (continued)
2004 2003
On December 10, 2004 the Company entered
into a Term loan for $10,000,000, payable
December 10, 2009, subject to prepayments if
there are excess cash flows as defined in the
agreement. Interest per annum is 11% plus the
greater of 2% or LIBOR. At December 31, 2004,
the interest rate was 13.37%. This loan
provides that instead of a cash payment, 5% of
the interest payable can be added to principal.
This note is secured by all of the Company's assets
with the exclusion of Musicrama's property,
including cash, receivables, inventory and
fixed assets.
$7,021,389 -
---------- --------
16,897,823 8,717,230
Less Current Portion 1,366,200 1,579,167
---------- ---------
Long Term Portion $15,531,623 $7,138,063
----------- ----------
Notes payable matures as follows for the five years ending December 31:
2005 $ 1,366,200
2006 -
2007 -
2008 8,510,234
2009 7,021,389
-----------
Total $16,897,823
===========
Note 6: Due on Catalog Acquisition
Due on catalog acquisition consists of a $3,000,000 reserve against
potential claims on the Compendia acquisition completed on December
12, 2004. Of this amount, $1,000,000 is a reserve for all claims made
pertaining to returns during the six months following the acquisition.
An independent expert will review the claims as defined in the
contract and determine the amount of the claims, if any, and the
amount due the seller. The $2,000,000 reserve is for all allowable
claims as defined in the contract made by the Company during the two
years ending December 12, 2006.
SHERIDAN SQUARE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
Note 7: Stockholders' Equity
On July 29, 2003, the Company issued 4,951,250 of Series A1 Preferred
stock and 49,512 shares of Class A common stock for net proceeds of
$4,951,250. These shares were purchased by Music Holding, the majority
shareholder of the Company.
On August 5, 2003, the Company issued 2,750,000 shares of Series A1
Preferred stock and 27,500 shares of Class A common stock for net
proceeds of $2,750,000. These shares were purchased by Music Holdings.
On August 5, 2003, the Company issued 330,000 shares of Series A1
Preferred stock and 3,300 shares of Class A common stock for the
contribution of 100% of Music Holdings' interest in Artemis Classics,
LLC, representing 51% of the total ownership of Artemis Classics.
On August 5, 2003, the Company issued 1,422,368 shares of Series A3
Preferred stock, 28,834 shares of Series A4 Preferred stock, 14,224
shares of Class A common stock, and 288 shares of Class B common stock
to acquire Artemis.
During 2003, the Company sold 4,133,157 shares of Series A2 Preferred
stock for net proceeds of $4,133,157. These shares were purchased by
Music Holdings, a majority shareholder of the Company.
During 2004, the Company sold 2,835,593 shares of Series A2 Preferred
stock for net proceeds of $2,835,593. These shares were purchased by
Music Holdings, a majority shareholder of the Company.
During 2004, the Company sold 1,259,820 shares of Series B Preferred
stock for net proceeds of $1,259,820. These shares were purchased by
Music Holdings, a majority shareholder of the Company.
Series A1 and Series A
Series A1 and Series A2 are non-voting, preferred stock; holders have
a first priority preference equal to its par value in the event of the
sale of the Company or the Company's liquidation.
Series A3 and Series A4
Series A3 and Series A4 are non-voting, preferred stock; holders have
a second priority preference equal to its par value in the event of
the sale of the Company or the Company's liquidation.
Series B
Series B is non-voting preferred stock. Dividends accrue at the rate
of ten percent (10%) per annum on the Liquidation Amount and are
cumulative. Each share has a Liquidation Amount equal to $100 plus any
dividends that are accumulated but unpaid.
SHERIDAN SQUARE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMEN
DECEMBER 31, 2004 AND 2003
Note 8: Commitments and Contingencies
Leases
The Company leases its offices and warehouse facilities under
operating leases, which expire November 30, 2005 and August 31, 2007,
respectively. Minimum annual lease payments are as follows:
Year
----
2005 $ 640,308
2006 111,271
2007 76,013
----------
Total $ 827,592
==========
The Company pays $7,500 per month for various offices on a
month-to-month basis.
Rent expense for the year ended December 31, 2004 was $759,657 and for
the five months ended December 31, 2003 was $224,295.
Commitments
The Company entered into a management services agreement with a
shareholder of Music Holdings LLC, through July 31, 2008 that provides
for an annual fee based on a percentage of earnings before interest,
taxes, depreciation and amortization with a minimum and maximum stated
in the agreement. At December 31, 2004, the total commitment through
July 31, 2008 had a minimum value of $358,833 and a maximum value of
$1,389,583.
The Company and its subsidiaries have entered into various employment
contracts with its executives. The total unpaid commitment of these
contracts by year is as follows:
Year Amount
---- ------
2005 $1,944,967
2006 1,720,207
2007 423,502
2008 132,708
-------
$4,221,384
==========
Under the terms of certain employment contracts, the Company has
agreed to grant options to purchase a number of shares of Class A
Common Stock equal to two percent of the Company's equity on a
fully-diluted basis as of December 31, 2004. The terms of the option
grants, including the exercise price and vesting provisions, are
subject to approval by the Board of Directors.
SHERIDAN SQUARE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
Note 8: Commitments and Contingencies (continued)
Retirement Plan
The Company has a 401(k) profit sharing plan for certain eligible
employees who work more than 1,000 hours per year. Employees can make
voluntary contributions up to federally designated limits. The Company
has the option to match a percentage of eligible employee's
compensation election. The Company's contribution for the year ended
December 31, 2004 was $17,410, and there was no Company contribution
for the five months ended December 31, 2003. Eligible employees are
always fully vested in their account balances. The Company's profit
sharing plan expenses for the year ended December 31, 2004 was $6,856
and for the five months ended December 31, 2003 was $772.
Litigation
In 1999, Artemis sought a declaratory judgment that it had exclusive
rights to the trademark "Artemis Records." During a trial commenced in
June, 2000 a settlement was reached providing for payment of $125,000
by Artemis, however defendant failed to sign the settlement agreement
and no payment was made. In January, 2005 defendant petitioned the
Court to reopen the case to enforce the court-brokered settlement; the
Court dismissed the case on the grounds that it no longer had
jurisdiction. Defendant has filed a claim with the U.S. Patent and
Trademark Office to cancel the Company's registration of the "Artemis"
trademark. Company's counsel believes that the passage of time has
substantially weakened any potential claim of defendant to the
trademark; therefore no provision has been made for any potential
liability.
In May 2003 an action was commenced against the Company and Sony Music
Entertainment Inc.("Sony") alleging tortious interference with certain
contract rights related to the distribution of plaintiff's recording
by the Company. The Company and Sony were granted a motion for summary
judgment and the case was dismissed in its entirety. Plaintiff has
appealed. Company's counsel believes that the Company has meritorious
defenses and is likely to prevail on appeal; therefore no provision
has been made for any potential liability.
The Company is a party to other litigation which management believes
is in the ordinary course of business. Although liability cannot be
presently determined, it is the opinion of management that the
ultimate outcome of any matter, individually and in the aggregate,
will not have a material adverse effect on the financial position or
overall trends in results of operations.
Distribution Agreement
Artemis and Compendia have exclusive distribution agreements in the
United States with a major distributor. The Artemis agreement
commenced April 21, 2003 and the Compendia agreement commenced
December 1, 2003. Both agreements provide for a three-year term and an
automatic three-year renewal unless either party gives written notice
of non-renewal.
The Artemis distribution agreement allowed Artemis to cancel the
agreement prior to termination; Artemis exercised its right of
termination, effective April 30, 2005.
Note 9: Related Party Transactions
Included in Notes Payable at December 31, 2004 is a subordinated
promissory note of $75,000 ($162,500 at December 31, 2003) and a
subordinated convertible note of $750,000 (See Note 5).
Interest Expense for the year ended December 31, 2004 and the five
months ended December 31, 2003 includes $41,175 and $18,771,
respectively, paid or accrued on notes payable to former shareholders
of Musicrama.
Management Expense for the year ended December 31, 2004 and for the
five months ended December 31, 2003, includes $123,333 and $231,858,
respectively, paid to a shareholder of Music Holdings.
SHERIDAN SQUARE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
Note 10: Income Taxes
At December 31, 2004, the Company had net operating loss carryovers
totaling approximately $6,218,000 available to offset future taxable
income, if any. These losses expire at various dates through 2024. The
Company has a deferred tax asset of approximately $2,539,000 arising
from net operating loss deductions and temporary differences and has
recorded a valuation allowance for the full amount of such deferred
tax asset.
The following is reconciliation between the expected income tax
expense (benefit), assuming a statutory Federal tax rate of 35%, and
the actual income tax expense (benefit):
For the Period
From July 29,
2003
For the Year (Inception) to
Ended December December 31,
31, 2004 2003
---------------- -----------------
Expected income tax (benefit) expense
based on Federal rate $ (2,094,000) $ (68,000)
State tax (benefit) expense net of
Federal effect (299,000) (10,000)
Amortization of music catalog 160,000 66,000
Other permanent differences (145,000) (150,000)
Increase in valuation allowance 2,378,000 161,000
---------------- -----------------
Net deferred tax expense $ -- $ --
================ =================
The following is a schedule of the Company's net deferred tax
assets and liability as of:
December 31,
--------------------------------------
2004 2003
---------------- ------------------
Deferred tax asset:
Net operating loss $ 2,489,000 $ 97,000
Other 52,000 65,000
Valuation allowance (2,541,000) (162,000)
---------------- ------------------
$ - $ -
================ ==================
Deferred tax liability:
Goodwill resulting from the valuation
difference of music catalogs for income tax
purposes $ 2,590,000 $ 2,590,000
================ ==================
SHERIDAN SQUARE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
Note 11: Subsequent Events
On January 25, 2005, the Company amended its certificate of
incorporation, changing its authorized capital stock to 10,051,000
shares of which 10,000,000 is Class A Common Stock, par value $0.01
per share; 1,000 shares of Class B Common Stock, par value $0.01 per
share; 1,300 shares of Series A Convertible Preferred Stock ("Series
A"), par value $1.00 per share; and 48,700 shares of Undesignated
Preferred Stock, par value $1.00 per share. Class A Common shares have
voting rights, and Class B Common shares have none. Series A has
voting rights equal to the number of shares of Class A Common that it
can convert into at $63.20 per Class A Common share. Class A provides
cumulative dividends of 8% for one year, 10% for the next six months,
12% for the next six months, and 14% after two years. Upon
liquidation, Series A has a first priority preference equal to 125% of
stated value per share plus any accrued, but unpaid, dividends
thereon. Pursuant to this Amendment, the Company cancelled all issued
shares of preferred stock, and accrued dividends, and reissued all
previous holders of preferred stock shares a total of 710.62 shares of
Series A. This Amendment is not reflected in the financial statements.
On December 3, 2004, the Company began an offering of a private
placement of capital stock, in anticipation with above capital
restructuring of the Company. This placement provides for the sale of
a minimum of 40 units and a maximum of 100 units, each unit consisting
of four shares of Series A, par value $1 per share, and warrants to
purchase 396 shares of Class A Common Stock, par value $.01 per share,
at an offering price of $100,000 per unit. These warrants are
exercisable at $75.84 per share and expire five years from the date of
issuance. The number of shares underlying the warrants are adjustable
dependent on the Series A achieving certain milestones. Under this
placement, the Company has issued 185.28 shares of Series A, and
realized $4,234,678, net of expenses during the six months ended June
30, 2005. Subsequent to June 30, 3005, the Company has sold
approximately 6 units of this offering and realized $133,000, net of
expenses.
On February 10, 2005, Musicrama amended its revolving credit, term
loan and security agreement with its institutional lender, whereby the
lender consented to Musicrama entering into a factoring agreement with
Compendia to purchase certain receivables, allowing such receivables
to qualify as collateral under the revolving credit agreement as
amended.
SHERIDAN SQUARE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
Note 11: Subsequent Events (continued)
On July 20, 2005, the Company entered into a definitive merger
agreement with Hirsch International Corp. and Subsidiaries ("Hirsch"),
a single source provider of equipment, value added products and
services to the embroidery industry. Under the terms of the agreement
the Company's stockholders will receive approximately 15,000,000
shares of Hirsch's common stock. Following the merger, the Company is
expected to own approximately 62% of the outstanding common stock of
Hirsch.
On July 20, 2005, the Company authorized the designation of 40 shares
of Series B Convertible Participating Preferred Stock ("Series B"), at
a par value of $1.00 per share. Series B is senior to all other equity
securities of the Company, including Series A, in terms of dividends,
distributions and liquidation preference. The stated value of Series B
is $25,000 per share. Dividends on Series B accrue commencing January
1, 2006 whether declared or not. Dividends accrue at annual rate of 8%
until April 1, 2006, whereupon the rate shall increase to 14% annually
until July 1, 2006, hereupon the rate shall increase to 18% annually.
These dates of dividend commencement are contingent upon the Company
having i.) sold substantially all the assets of the Company, ii.)
entered into a transaction whereby the Company is no longer the owner
of more than 50% of the voting power of the successor entity, or iii.)
having entered into a merger agreement with Hirsch International Corp.
(see above) (the "Hirsch Merger"). At any time after issuance the
Series B may be redeemed by the Company. If the Hirsch Merger does not
occur, the Series B may be purchased by a major shareholder for 80% of
its stated value inclusive of accrued and unpaid dividends. If the
Hirsch Merger is terminated prior to consummation, the Series B
holders, at their option, may convert their shares into Class A Common
shares at an initial price of $63.20 per share. The Series B shares
have voting rights to approve matters that adversely impact their
rights, ranking or preference. Such voting is determined to the extent
the Series B is convertible into Class A common shares.
On July 22, 2005, the Company issued 20 shares of Series B Convertible
Preferred Stock and realized $500,000.
ANNEX H
COMPENDIA MEDIA
(a division of Compendia Media Group, Inc.)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWELVE MONTHS ENDING DECEMBER 10, 2003 AND
THE YEAR ENDING DECEMBER 31, 2002
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Management
Compendia Media
We have audited the accompanying consolidated balance sheets of Compendia Media
(a division of Compendia Media Group, Inc.) as of December 10, 2004 and December
31, 2003, and the related statements of operations, divisional equity (deficit)
and cash flows for the period January 1, 2004 through December 10, 2004 and for
the year ended December 31, 2003. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Compendia Media (a
division of Compendia Media Group, Inc.) as of December 10, 2004 and December
31, 2003, and the results of its operations and its cash flows for the period
January 1, 2004 through December 10, 2004 and for the year ended December 31,
2003 in conformity with accounting principles generally accepted in the United
States.
/s/ Sherb & Co., LLP
----------------------------
Certified Public Accountants
New York, New York
June 20 2005
COMPENDIA MEDIA
(a division of Compendia Media Group, Inc.)
BALANCE SHEETS
ASSETS
December 10, December 31,
2004 2003
----------- ------------
CURRENT ASSETS
Accounts receivable, net of allowance $ 1,337,503 $ 1,967,064
Inventory 404,388 450,448
Advances to artists 900,425 1,175,319
Distribution advances 49,066 550,026
Other assets 409,369 328,199
----------- ------------
TOTAL CURRENT ASSETS 3,100,751 4,471,056
----------- ------------
PROPERTY AND EQUIPMENT, at cost less
accumulated depreciation of $2,449,106
and $2,353,764 at December 10, 2004 and
December 31,2003, respectively 117,134 306,569
----------- ------------
OTHER ASSETS
Other assets - 21,197
Recorded music costs, less accumulated
amortization of $1,951,596 and
$1,934,867 at December 10, 2004 and
December 31, 2003, respectively 110,696 25,304
Music catalogs, less accumulated
amortization of $3,847,995 and
$1,313,049 at December 10, 2004
and December 31, 2003, respectively 4,905,666 7,440,611
----------- ------------
TOTAL OTHER ASSETS 5,016,362 7,487,112
----------- ------------
TOTAL ASSETS $ 8,234,247 $ 12,264,737
=========== ============
See Notes to the Financial Statements
COMPENDIA MEDIA
(a division of Compendia Media Group, Inc.)
BALANCE SHEETS
LIABILITIES AND DIVISIONAL DEFICIT
December 10, December 31,
2004 2003
----------- ------------
CURRENT LIABILITIES
Bank overdraft $ 271,471 $ 374,355
Accounts payable 285,867 273,392
Accrued expenses 151,608 174,352
Royalties payable 1,359,166 2,385,848
Notes payable - current portion 12,061,076 10,051,808
----------- ------------
TOTAL CURRENT LIABILITIES 14,129,188 13,259,755
----------- ------------
LONG TERM LIABILITIES
Notes payable - less current portion 22,700,997 20,218,212
----------- ------------
TOTAL LIABILITIES 36,830,185 33,477,967
----------- ------------
COMMITMENTS AND CONTINGENCIES
DIVISIONAL DEFICIT
Contributed Capital 19,597,481 19,597,481
Accumulated Deficit (48,193,419) (40,810,711)
----------- -----------
TOTAL DIVISIONAL DEFICIT (28,595,938) (21,213,230)
----------- -----------
TOTAL LIABILITIES AND DIVISIONAL
DEFICIT $ 8,234,247 $12,264,737
=========== ===========
See Notes to the Financial Statements
COMPENDIA MEDIA
(a division of Compendia Media Group, Inc.)
STATEMENTS OF OPERATIONS
For The Period
from January 1, 2004 For The Year
through December 10, Ended December 31,
2004 2003
-------------------- ------------------
NET SALES $ 6,113,926 $ 8,214,769
COST OF SALES 3,990,025 7,538,882
-------------------- ------------------
GROSS PROFIT 2,123,901 675,887
-------------------- ------------------
SELLING AND
ADMINISTRATIVE EXPENSES 4,281,861 7,318,829
DEPRECIATION AND AMORTIZATION 2,720,520 921,743
-------------------- ------------------
TOTAL EXPENSES 7,002,381 8,240,572
-------------------- ------------------
LOSS FROM OPERATIONS (4,878,480) (7,564,685)
-------------------- ------------------
Other Income (Expenses)
Other Financing Costs - 2,149
Other Gain 3,431 5,100
Interest Income - 1,092
Interest Expense (2,507,659) (2,300,047)
-------------------- ------------------
(2,504,228) (2,291,706)
-------------------- ------------------
NET LOSS $ (7,382,708) $ (9,856,391)
=================== =================
See Notes to the Financial Statements
COMPENDIA MEDIA
(a division of Compendia Media Group, Inc.)
STATEMENTS OF DIVISIONAL EQUITY (DEFICIT)
Contributed Accumulated Divisional
Capital Deficit Deficit
------------------ -------------------- ------------------
Balance - January 1, 2003 $ 19,597,481 $ (30,954,320) $ (11,356,839)
Net loss - 2003 - (9,856,391) (9,856,391)
------------------ -------------------- ------------------
Balance - December 31, 2003 19,597,481 (40,810,711) (21,213,230)
Net loss - 2004 - (7,382,708) (7,382,708)
------------------ -------------------- ------------------
Balance - December 10, 2004 $ 19,597,481 $ (48,193,419) $ (28,595,938)
================== ==================== ==================
See Notes to the Financial Statements
COMPENDIA MEDIA
(a division of Compendia Media Group, Inc.)
STATEMENTS OF CASH FLOWS
For The Period from For The Year
January 1, 2004 through Ended
December 10, 2004 December 31, 2003
------------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (7,382,708) $ (9,856,391)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation 168,845 326,673
Amortization 2,551,675 595,070
(Increase) Decrease in:
Accounts receivable 629,561 (303,237)
Inventory 46,060 2,467,340
Advances to artists 274,894 (233,651)
Distribution Advances 500,960 (527,115)
Other assets (59,973) 981,987
Increase (Decrease) in:
Accounts payable 12,474 (27,215)
Accrued expenses (22,744) (122,110)
Royalties payable (1,026,682) 932,936
-------------------------- -------------------
Net cash used in operating activities (4,307,638) (5,765,713)
-------------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition (disposal) of property
and equipment 20,590 (53,555)
Acquisition of music catalogs and
recorded music assets (102,121) (29,326)
-------------------------- --------------------
Net cash (used in) provided by
investing activities (81,531) (82,881)
-------------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank Overdraft (102,884) 236,358
Net proceeds from notes payable 4,492,053 5,612,236
-------------------------- --------------------
Net cash used in financing activities 4,389,169 5,848,594
-------------------------- --------------------
NET INCREASE (DECREASE) IN CASH - -
CASH AND CASH EQUIVALENTS - beginning
of period - -
-------------------------- --------------------
CASH AND CASH EQUIVALENTS - end
of period $ - $ -
========================== ====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 2,507,659 $ 2,300,047
========================== ====================
Taxes $ - $ -
========================== ====================
See Notes to the Financial Statements
COMPENDIA MEDIA
(a division of Compendia Media Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD JANUARY 1, 2004 THROUGH DECEMBER 10, 2004
AND FOR THE YEAR ENDED DECEMBER 31, 2003
Note 1: Summary of Significant Accounting Policies
This summary of significant accounting policies of the Company is
presented to assist in understanding the Company's financial
statements. The financial statements and notes are representations of
the Company's management who are responsible for their integrity and
objectivity. These accounting policies are in conformity with
accounting principles generally accepted in the United States of
America and have been consistently applied in the preparation of the
financial statements.
Basis of Presentation
Compendia Media (the "Company") is a division of Compendia Media
Group, Inc., a subsidiary of Dominion Resources, Inc. ("Dominion
Resources"). The Company is a record label that produces original
music recordings and licenses their music catalogs. The financial
statements include the financial position and results of operation of
the Company.
Cash and Cash Equivalents
The Company considers all short-term investments, with an original
maturity of three months or less, to be cash equivalents. Accounts at
banking institutions may at times exceed federally insured limits. As
of December 10, 2004 and December 31, 2003, the Company did not exceed
their federally insured limits.
Revenue Recognition
The Company derives its revenue substantially from the sale of music
recordings (predominantly compact discs) produced by the Company, and
from the licensing of Company-owned master recordings. Revenue from
music sales is recognized at the time of shipment to the customer,
while licensing revenue is recognized as income is earned over the
term of the agreement. Most sales of prerecorded music are made with a
right of return of unsold goods. Estimated reserves for returns are
established by management based upon historical experience and product
mix and are subject to ongoing review and adjustment by the Company.
These reserves are recorded at the time of sale and are reflected as a
reduction in revenues.
COMPENDIA MEDIA
(a division of Compendia Media Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD JANUARY 1, 2004 THROUGH DECEMBER 10, 2004
AND FOR THE YEAR ENDED DECEMBER 31, 2003
Note 2: Summary of Significant Accounting Policies (continued)
Cost of Goods Sold
Prior to 2004, the Company expensed all product manufacturing,
distribution costs, freight in and royalty costs associated with music
sales as cost of goods sold. The Company expensed as part of selling
and administrative expenses all shipping and handling costs incurred
in the shipment of goods to customers.
During 2004, the Company sold substantially their entire product
through a third party distributor who accounted to it on a monthly
basis. The distribution fees charged by the distributor, included in
cost of sales, are primarily paid based on a percentage of sales. The
services provided by the third party distributor include sales,
fulfillment and storage of the Company's product. Also included in
distribution fees are fees paid to the third party distributor for
data entry, generation of invoices, cash processing and logistics
services. Distribution fees were approximately $970,000 for the eleven
months ended December 10, 2004.
Accounts Receivable
Amounts deemed unrecoverable by management, based on specific
analysis, are reserved as they are identified. Estimated reserves for
returns are established by management based upon historical experience
and are subject to on-going review and adjustment by the Company.
Total reserves as of December 10, 2004 and December 31, 2003 were
approximately $857,000 and $751,000, respectively.
Inventory
Inventory consists of musical recordings, such as compact discs,
audiocassettes, digital discs, videotapes, and record albums stated at
lower of cost or market as determined under the average cost method,
or net realizable value.
Property and Equipment
Property and equipment are carried at cost. Depreciation of property
and equipment are calculated using accelerated methods over the
estimated useful lives of the related assets, five to seven years.
Expenditures for repairs and maintenance are charged to expense as
incurred.
COMPENDIA MEDIA
(a division of Compendia Media Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD JANUARY 1, 2004 THROUGH DECEMBER 10, 2004
AND FOR THE YEAR ENDED DECEMBER 31, 2003
Note 2: Summary of Significant Accounting Policies (continued)
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates. Estimates are used in
accounting for, among other things, excess and obsolete inventory,
allowance for doubtful accounts, reserves for returns, useful lives
for depreciation and amortization, deferred tax assets and
contingencies.
Music Catalog and Recorded Music Costs
The Company capitalizes the costs to purchase master recordings at the
time of acquisition, and capitalizes the production costs of master
recordings, net of any recoupable amounts. These costs are amortized
over the estimated useful life of these master recordings and
represents management's best estimate of the average period of value.
The music catalogs are reviewed for impairment at the end of each
year, the amortization period, and carrying values are adjusted when
events or changes in circumstances warrant.
Advances to Artists
Advances to artists, which are recoupable against future royalties,
are capitalized. Unearned balances are reviewed periodically and if
future performance is no longer assured, the balances are
appropriately reserved.
License Revenues
The Company licenses a portion of its catalog to foreign music
companies under distribution agreements. In most instances the Company
receives a non-refundable but recoupable advance on signing the
agreement. The Company is obligated to deliver its catalog to the
distributor and to pay royalties to the owners of the copyrighted
music. The advances received are recorded as income at the time of
receipt.
Advertising Costs
Advertising costs are expensed as incurred with the exception of any
expenses paid in connection with a sales event that has not yet taken
place. Advertising expense for the eleven months ended December 10,
2004 and the year ended December 31, 2003 was $1,172,184 and
$1,521,103, respectively.
COMPENDIA MEDIA
(a division of Compendia Media Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD JANUARY 1, 2004 THROUGH DECEMBER 10, 2004
AND FOR THE YEAR ENDED DECEMBER 31, 2003
Note 2: Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk
During 2004, the Company sold substantially their entire product
through one major distributor who accounted to it on a monthly basis.
The Company does an ongoing credit evaluation of the distributor's
financial condition and believes it does not have a concentration of
credit risk.
Prior to 2004, the Company self-distributed its product. Sales to the
ten major customers of the Company represented approximately 68% of
total sales for the Company for the years ended December 31, 2003. The
amount due from these 10 major customers of the Company, included in
trade receivables, net of return reserves, was approximately
$1,538,566 on December 31, 2003.
Income Taxes
For Federal tax purposes, had the Company been a stand-alone entity,
the Company would have had no tax expense for the eleven months ended
December 10, 2004 and the year ended December 31, 2003 due to its
losses. Additionally, the Company would have generated deferred tax
assets based upon its net operating losses, which the Company would
have recorded a full valuation allowance.
Royalties
The Company is obligated to pay royalties to the owners of music
copyrights used in master recordings. The Company accrues royalties
using contractual rates and certain estimated rates on units sold. The
contractual royalty liability is computed quarterly and the accrued
royalty balance is adjusted accordingly. The royalty agreements are
subject to audit by licensors.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and accrued
expenses approximate fair value because of their short maturities. The
Company's notes payable (or long-term debt) approximates the fair
value of such instruments based upon management's best estimate of
interest rates that would be available to the Company for similar
financial arrangements at December 10, 2004 and December 31, 2003.
COMPENDIA MEDIA
(a division of Compendia Media Group, Inc.)
NOTES TO
FINANCIAL STATEMENTS
FOR THE PERIOD JANUARY 1, 2004 THROUGH DECEMBER 10, 2004
AND FOR THE YEAR ENDED DECEMBER 31, 2003
Note 2: Summary of Significant Accounting Policies (continued)
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the cost of an
asset may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset would be compared to
the asset's carrying amount to determine if a write-down to market
value is required. At December 10, 2004 and December 31, 2003, the
Company does not believe that any impairment has occurred.
Note 3: Property and Equipment
Property and equipment consists of the following at:
December 10, December 31,
2004 2003
--------------- -------------
Equipment and furnishings $2,328,618 $2,372,984
Leasehold improvements 237,622 287,349
----------- ----------
2,566,230 2,660,333
Less: Accumulated depreciation 2,449,106 2,353,764
----------- ---------
Property and equipment at
net book value $ 117,134 $ 306,569
========= ==========
Depreciation expense was $168,845 and $326,673 during the period
ending December 10, 2004 and the year ended December 31, 2003,
respectively.
Note 4: Notes Payable
The Company had a term loan with a bank, which was owned by Dominion
Resources, in the amount of $16,000,000, which provided for accrued
interest to be added to the principal balance. The amount of interest
added to the principal as of December 10, 2004 and December 31, 2003
was $4,517,655 and $3,007,970, respectively. In addition, the Company
had a revolving credit facility with a bank, which was owned by
Dominion Resources, of $12,500,000 and $11,750,000 at December 10,
2004 and December 31, 2003 respectively, which provided for accrued
interest to be added to the principal balance. The amounts
outstanding, including interest, under the facility were $14,244,418
and $11,262,050 at December 10, 2004 and December 31, 2003,
respectively. The expiration date of these loans is September 30,
2006.
COMPENDIA MEDIA
(a division of Compendia Media Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD JANUARY 1, 2004 THROUGH DECEMBER 10, 2004
AND FOR THE YEAR ENDED DECEMBER 31, 2003
Note 4: Notes Payable (continued)
The rates of interest on the term loan was 9.25% and 8.0% at December
10, 2004 and December 31, 2003, respectively, and on the revolving
credit facility was 9.25% and 8.0% at December 10, 2004 and December
31, 2003, respectively. The amounts outstanding under the Term Loan
and the revolving credit facility were not among the liabilities
assumed at the time of acquisition by Sheridan. (See Note 6)
Note 5: Commitments and Contingencies
Leases
The Company leases its offices under an operating lease, which expires
October 31, 2005. Minimum annual lease payments are as follows:
Year
----
2004 one month ended December 31, 2004 $ 10,210
2005 102,100
-------
Total $ 112,310
=========
Rent expense was $393,654 and $385,604 for the eleven and one half
months period ended December 10, 2004 and for the year ended December
31, 2003, respectively. The Company had leased a warehouse facility
and certain offices, and these leases were terminated prior to
December 2004.
Commitments
As of December 10, 2004, the Company had an obligation under an
employment contract. This agreement expires on December 31, 2004. The
total unpaid commitment on this contract is $25,000 as of December 10,
2004.
Litigation
The Company is a party to litigation which management believes is in
the ordinary course of business. Although liability cannot be
presently determined, it is the opinion of management that the
ultimate outcome of any matter, individually and in the aggregate,
will not have a material adverse effect on the financial position or
overall trends in results of operations.
COMPENDIA MEDIA
(a division of Compendia Media Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD JANUARY 1, 2004 THROUGH DECEMBER 10, 2004
AND FOR THE YEAR ENDED DECEMBER 31, 2003
Note 5: Commitments and Contingencies (continued)
Distribution Agreement
The Company has an exclusive distribution agreement in the United
States with a major distributor beginning December 1, 2003. The
agreement provides for a three-year term. The distributor can request
renewal of the contract upon notice to the Company no later than 150
days prior to the expiration of the original term. This renewal can be
rejected by the Company upon written notice within 30 days of receipt
of such notice.
Note 6: Subsequent Events
Effective December 10, 2004, certain assets and liabilities of the
Company were acquired by Compendia Acquisition, LLC and CM, LLC, both
of these companies being owned by Sheridan Square Entertainment, Inc.
The purchase price was $7,396,713.
ANNEX I
MUSICRAMA, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SEVEN MONTHS ENDING JULY 31, 2003 AND
THE YEAR ENDING DECEMBER 31, 2002
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Directors
Musicrama, Inc.
We have audited the accompanying consolidated balance sheets of Musicrama, Inc.
as of July 31, 2003 and December 31, 2002, and the related statements of
operations, stockholder's equity and cash flows for the seven months ended July
31, 2003 and for the year ended December 31, 2002. These financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Musicrama, Inc. as
of July 31, 2003 and December 31, 2002, and the results of its operations and
its cash flows for the seven months ended July 31, 2003 and for the year ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States.
/s/ Sherb & Co., LLP
----------------------------
Certified Public Accountants
New York, New York
June 20 2005
MUSICRAMA, INC.
BALANCE SHEETS
July 31, 2003 December 31, 2002
------------- -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 410,913 $ 2,019,851
Trade receivables, net of allowances 4,573,951 4,307,106
Inventory 2,681,667 2,159,790
Prepaid expenses 136,263 70,292
------------ ----------
TOTAL CURRENT ASSETS 7,802,794 8,557,039
------------ ----------
PROPERTY AND EQUIPMENT, at cost
less accumulated depreciation of
$385,871 and $354,448, respectively 61,555 57,391
------------ ----------
OTHER ASSETS
Security deposit and other assets 7,472 14,708
------------ ----------
$ 7,871,821 $ 8,629,138
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 7,337,832 $ 5,654,142
Loans Payable to Stockholders - 727,548
Income tax payable - 123,000
------------ ----------
TOTAL CURRENT LIABILITIES 7,337,832 6,504,690
------------ ----------
LONG TERM LIABILITIES
Loans Payable to Stockholders - 1,000,000
------------ ----------
TOTAL LIABILITIES 7,337,832 7,504,690
------------ ----------
STOCKHOLDERS' EQUITY
Common stock, $10 par value; 200 authorized; 1,000 1,000
100 shares issued and outstanding
Retained earnings 532,989 1,123,448
------------ ----------
TOTAL STOCKHOLDERS' EQUITY 533,989 1,124,448
------------ ----------
$ 7,871,821 $ 8,629,138
============ ===========
See Notes to Financial Statements.
MUSICRAMA, INC.
STATEMENTS OF OPERATIONS
For the Seven
Months Ended For the Year Ended
July 31, 2003 December 31, 2002
------------- -----------------
NET SALES $ 13,198,757 $ 26,024,156
COST OF SALES 8,704,942 18,140,729
------------ --------------
GROSS PROFIT 4,493,815 7,883,427
------------ --------------
SELLING AND ADMINISTRATIVE EXPENSES 2,834,572 5,457,473
DEPRECIATION AND AMORTIZATION 31,423 57,530
------------ --------------
TOTAL EXPENSES 2,865,995 5,515,003
------------ --------------
INCOME FROM OPERATIONS 1,627,820 2,368,424
------------ --------------
OTHER EXPENSES (INCOME)
Other Expense 13,956 -
Interest Income - (15,906)
Interest Expense 67,451 119,747
------------ --------------
TOTAL OTHER EXPENSES 81,407 103,841
------------ --------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,546,413 2,264,583
PROVISION FOR INCOME TAXES 33,500 141,135
------------ --------------
NET INCOME $ 1,512,913 $ 2,123,448
============ ==============
MUSICRAMA, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2002
AND FOR THE SEVEN MONTHS ENDED JULY 31, 2003
Common Stock Total
----------------------- Retrained Stockholders'
Shares Amount Earnings Equity
--------- -------- ----------- -------------
Balances - December 31, 2001 100 $ 1,000 $ 166,663 $ 167,663
-
Dividends Paid - - (1,166,663) (1,166,663)
Net Income - - 2,123,448 2,123,448
--------- --------- ------------ ------------
Balances - December 31, 2002 100 1,000 1,123,448 1,124,448
Dividends Paid - - (2,103,372) (2,103,372)
Net Income - - 1,512,913 1,512,913
--------- --------- ------------ ------------
Balances - July 31, 2003 100 $ 1,000 $ 532,989 $ 533,989
========= ========= ============ =============
See Notes to Financial Statements
MUSICRAMA, INC.
STATEMENT OF CASH FLOWS
For the Seven
Months Ended For the Year Ended
July 31, 2003 December 31, 2002
--------------- -----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,512,913 $ 2,123,448
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation 31,423 57,530
Increase) decrease in:
Accounts receivable (266,845) (3,712,315)
Inventory (521,877) 177,691
Prepaid expenses (65,971) 4,752
Security deposits 7,236 (828)
Increase (decrease) in:
Accounts payable and accrued expenses 1,683,690 1,043,907
Income taxes payable (123,000) 123,000
--------------- ----------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,257,569 (182,815)
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (35,587) (72,727)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (2,103,372) (1,166,663)
Borrowings (Repayments) under revolving loan, net - (3,889)
Loans payable - affiliates - (8,000)
Loans payable - officers (1,727,548) (531,363)
--------------- ---------------
NET CASH USED IN FINANCING ACTIVITIES (3,830,920) (1,709,915)
--------------- ---------------
NET DECREASE IN CASH (1,608,938) (1,965,457)
CASH AND CASH EQUIVALENTS - BEGINNING 2,019,851 3,985,308
--------------- ---------------
CASH AND CASH EQUIVALENTS - END $ 410,913 $ 2,019,851
=============== ================
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $ 67,451 $ 119,747
=============== ===============
Tax $ 178,110 $ -
=============== ===============
See Notes to Financial Statements.
MUSICRAMA, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1: Organization and Nature of Business
Musicrama, Inc. (the "Company") was incorporated in New York on
December 31, 1992 to conduct business as a music recordings
distributor.
Note 2: Summary of Significant Accounting Policies
This summary of significant accounting policies of the Company is
presented to assist in understanding the Company's financial
statements. The financial statements and notes are representations of
the Company's management who are responsible for their integrity and
objectivity. These accounting policies are in conformity with
accounting principles generally accepted in the United States of
America and have been consistently applied in the preparation of the
financial statements.
Cash and Cash Equivalents
The Company considers all short-term investments, with an original
maturity of three months or less, to be cash equivalents. Accounts at
banking institutions may at times exceed federally insured limits.
Accounts Receivable
The Company does not have a provision for doubtful accounts. Amounts
deemed unrecoverable by management, base on specific analysis, are
written off as they are identified. Management believes that this
approach is approximate to the allowance method. Estimated reserves
for returns are established by management based upon historical
experience and are subject to ongoing review and adjustment by the
Company. The Company also provides for an allowance for customer trade
discounts.
Inventory
Inventory consists of musical recordings, such as compact discs,
audiocassettes, digital discs, videotapes, and record albums stated at
lower of cost or market as determined under the average cost method,
or net realizable value.
Property and Equipment
Property and equipment are carried at cost. Depreciation of property
and equipment are calculated using accelerated methods over the
estimated useful lives of the related assets. Expenditures for repairs
and maintenance are charged to expense as incurred.
MUSICRAMA, INC.
NOTES TO FINANCIAL STATEMENTS
Note 2: Summary of Significant Accounting Policies (continued)
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could
differ from those estimates.
Revenue Recognition
The Company derives its revenue substantially from sales arising from
the distribution of prerecorded music. Most sales of prerecorded music
are made with a right of return of unsold goods. Estimated reserves
for returns are established by management based upon historical
experience and product mix and are subject to ongoing review and
adjustment by the Company. These reserves are recorded at the time of
sale and are reflected as a reduction in revenues. The accompanying
balance sheet includes a provision for returns which has been netted
against the accounts receivable in the amount of $2,110,388 and
$2,346,476 at July 31, 2003 and December 31, 2002, respectively.
Cost of Goods Sold
The Company includes the cost of product and freight in associated
with music sales as cost of goods sold.
Shipping and Handling Costs
The Company expenses as part of selling and administrative expenses
all shipping and handling costs incurred in the shipment of goods to
customers.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and accrued
expenses approximate fair value because of their short maturities. The
Company's notes payable (or long-term debt) approximates the fair
value of such instruments based upon management's best estimate of
interest rates that would be available to the Company for similar
financial arrangements at July 31, 2003 and December 31, 2002,
respectively.
MUSICRAMA, INC.
NOTES TO FINANCIAL STATEMENTS
Note 2: Summary of Significant Accounting Policies (continued)
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the cost of an
asset may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset would be compared to
the asset's carrying amount to determine if a write-down to market
value is required. At December 31, 2002 and July 31, 2003, the Company
does not believe that any impairment has occurred.
Income Taxes
The Company has elected to be treated as a small business corporation
under Subchapter S of the Internal Revenue Code and, accordingly, was
not responsible for federal income taxes and state corporation
franchise tax. The Company files New York City corporate tax returns
and such taxes have been reflected in the financial statements.
The Company was taxed as an S corporation until July 31, 2003, when
100% of the Company's outstanding common stock was purchased, thereby
effecting a change in ownership and a disqualifying event regarding
the Company's tax status. Subsequent to acquisition, the Company began
taxation as a C corporation. The change in the Company's tax status
will not have a material effect on the financial statements.
Advertising Costs
Advertising costs are expensed as incurred with the exception of any
expenses paid in connection with a sales event that has not yet taken
place. Advertising expense for the seven months ended July 31, 2003
was $28,689 and for the year ended December 31, 2002 was $239,940.
Major Customers
Sales to eleven major customers represented approximately 88% of total
sales for the seven months ended July 31, 2003. The amount due from
major customers, included in trade receivables, was approximately
$6,376,875 at July 31, 2003
Sales to eleven major customers represented approximately 89% of total
sales for the year ended December 31, 2002. The amount due from major
customers, included in trade receivables, was approximately $6,203,294
at December 31, 2002.
MUSICRAMA, INC.
NOTES TO FINANCIAL STATEMENTS
Note 3: Loans Payable to Stockholders
The Company has obtained short term loans from their stockholders,
which accrue interest at 13.5% per annum. The balance of these loans
at December 31, 2002 was $1,727,548, of which $727,548 is classified
as short term and is due upon demand, and $1,000,000 is long term.
There were no amounts outstanding at July 31, 2003.
Interest expense on these loans was $119,747 and $65,818 for the year
ended December 31, 2002 and the seven months ended July 31, 2003,
respectively.
The Company has availability to $1,000,000 line of credit from a bank,
which accrues interest at the prime rate. There were no borrowings
under this line of credit at December 31, 2002 and July 31, 2003. This
line was cancelled in conjunction with the acquisition of the Company
on July 31, 2003.
Note 4: Property and Equipment
Property and equipment consists of the following:
July 31, 2003 December 31, 2002
------------- -----------------
Equipment and furnishings $ 420,423 $ 384,836
Leasehold improvements 27,003 27,003
----------- -----------
447,426 411,839
Less: Accumulated depreciation 385,871 354,448
---------- ----------
Property and equipment at
net book value $ 61,555 $ 57,391
=========== ===========
Depreciation expense was $57,530 for the year ended December 31, 2002
and $31,423 during the seven months ended July 31, 2003.
MUSICRAMA, INC.
NOTES TO FINANCIAL STATEMENT
Note 5: Commitments and Contingencies
Leases
The Company leases its office and warehouse facilities under an
operating lease, which expires August 31, 2007. Minimum annual lease
payments are as follows:
Year
Five Months Ended December 31, 2003 $ 34,787
2004 103,373
2005 107,250
2006 111,271
2007 76,013
-----------
$ 432,694
===========
Rent expense for the year ended December 31, 2002 was $81,465 and for
the seven months ended July 31, 2003 was $36,948.
Note 6: Related Party Transactions
Included in Notes Payable at December 31, 2002 are notes payable to
shareholders of $1,727,548 (See Note 4).
Interest Expense for the year ended December 31, 2002 and for the
seven months ended July 31, 2003 included $119,747 and $67,471,
respectively, paid on notes payable to shareholders.
At December 31, 2002, the Company had a non-interest bearing loan of
$4,933 to a related party. The Company also paid commissions of
$75,000 to this related party during the year ended December 31, 2002.
Note 7: Subsequent Events
On July 31, 2003, Music Distribution Holdings, LLC, a Delaware limited
liability company, purchased 100% of the outstanding common stock of
Musicrama, Inc. for $10,000,000. Simultaneously, Music Distribution
Holdings, LLC merged into Musicrama, Inc. The purchase method was used
to account for the acquisition and an election under Section 338 was
filed with the Internal Revenue Service. The excess of the purchase
price over assets allocated to goodwill was $9,908,842. The purchase
payment consisted of a cash payment of $9,000,000 and the issuance of
$1,000,000 in subordinated promissory notes to the former
stockholders.
ANNEX J
SHERIDAN SQUARE ENTERTAINMENT, LLC (d/b/a/ ARTEMIS RECORDS)
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SEVEN MONTHS ENDING JULY 31, 2003 AND
THE YEAR ENDING DECEMBER 31, 2002
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Members
Sheridan Square Entertainment, LLC d/b/a Artemis Records
We have audited the accompanying consolidated balance sheets of Sheridan Square
Entertainment, LLC d/b/a Artemis Records as of July 31, 2003 and December 31,
2002, and the related consolidated statements of operations, members' deficit
and cash flows for the seven months ended July 31, 2003 and for the year ended
December 31, 2002. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sheridan Square
Entertainment, LLC d/b/a Artemis Records as of July 31, 2003 and December 31,
2002, and the results of its operations and its cash flows for the seven months
ended July 31, 2003 and for the year ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States.
/s/ Sherb & Co., LLP
----------------------------
Certified Public Accountants
New York, New York
June 20, 2005
SHERIDAN SQUARE ENTERTAINMENT, LLC (d/b/a/ ARTEMIS RECORDS)
CONSOLIDATED BALANCE SHEETS
JULY 31, 2003 AND DECEMBER 31, 2002
ASSETS
July 31 December 31
2003 2002
--------- -----------
CURRENT ASSETS
Cash and cash equivalents $ 224,991 $ 3,255,891
Accounts receivable 443,222 2,857,487
Inventory 31,988 40,114
Prepaid expenses 174,693 -
Advances to artists 368,422 342,725
------------- -----------
TOTAL CURRENT ASSETS 1,243,316 6,496,217
------------- -----------
PROPERTY AND EQUIPMENT, at cost
less accumulated depreciation of
$538,926 and $575,681, respectively 148,399 63,916
OTHER ASSETS
Security deposits 155,738 83,809
Intangibles, less accumulated amortization
of $2,625,686 and $2,527,584, respectively 412,123 506,979
------------ -----------
TOTAL OTHER ASSETS 567,861 590,788
------------ -----------
TOTAL ASSETS $ 1,959,576 $ 7,150,921
============ ============
See Notes to the Consolidated Financial Statements
SHERIDAN SQUARE ENTERTAINMENT, LLC (d/b/a/ ARTEMIS RECORDS)
CONSOLIDATED BALANCE SHEETS
JULY 31, 2003 AND DECEMBER 31, 2002
LIABILITIES
July 31 December 31
2003 2002
------------- ---------------
CURRENT LIABILITIES
Accounts payable $ 327,155 393,871
Accrued expenses 1,792,716 2,139,741
Royalties payable 1,616,492 2,536,305
Reserve for returns 1,579,390 3,819,638
Deferrred Revenue - current portion 136,431 271,929
Other liabilities 758,615 827,692
------------- ------------
TOTAL CURRENT LIABILITIES 6,210,799 9,989,176
------------- ------------
LONG TERM LIABILITIES
Deferred revenue less current portion 643,439 78,071
Loans payable 3,000,000 -
Notes payable - 34,098,716
------------- ------------
TOTAL LONG TERM LIABILITIES 3,643,439 34,176,787
------------- ------------
TOTAL LIABILITIES 9,854,238 44,165,963
------------- ------------
COMMITMENTS AND CONTINGENCIES
MEMBERS' DEFICIT
Members' Equity 45,802,885 14,741,752
Accumulated Deficit (53,697,547) (51,756,794)
------------- ------------
TOTAL MEMBERS' DEFICIT (7,894,662) (37,015,042)
------------- ------------
TOTAL LIABILITIES AND MEMBERS' DEFICIT $ 1,959,576 7,150,921
============ =========
See Notes to the Consolidated Financial Statements
SHERIDAN SQUARE ENTERTAINMENT, LLC (d/b/a/ ARTEMIS RECORDS)
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Seven For The Year
Months Ended Ended December
July 31, 2003 31, 2002
--------------- ----------------
NET SALES (RETURNS) $ (637,845 $ 15,107,419
COST OF SALES (2,019,480) 9,138,057
---------------- ---------------
GROSS PROFIT 1,381,635 5,969,362
---------------- ---------------
SELLING AND ADMINISTRATIVE EXPENSES 3,307,487 13,762,886
DEPRECIATION AND AMORTIZATION 13,984 373,262
---------------- ---------------
TOTAL EXPENSES 3,321,471 14,136,148
---------------- ---------------
LOSS FROM OPERATIONS (1,939,836) (8,166,786)
Interest Expense 917 872,132
---------------- ---------------
NET LOSS $ (1,940,753) $ (9,038,918)
================ ===============
See Notes to the Consolidated Financial Statements
SHERIDAN SQUARE ENTERTAINMENT, LLC (d/b/a/ ARTEMIS RECORDS)
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
FOE THE SEVEN MONTHS ENDED JULY 31, 2003 AND THE YEAR ENDED DECEMBER 31, 2002
Members' Accumulated
Equity Deficit Total
-------------- --------------- ------------
Balance - December 31, 2001 $ 18,195,834 $ (42,717,876) $ (24,522,042)
Members' draw (3,454,082) - (3,454,082)
Net loss - (9,038,918) (9,038,918)
--------------- ---------------- -------------
Balance - December 31, 2002 14,741,752 (51,756,794) (37,015,042)
Members' contribution 31,061,133 - 31,061,133
Net loss - (1,940,753) (1,940,753)
--------------- ---------------- -------------
Balance - July 31, 2003 $ 45,802,885 $ (53,697,547) $ (7,894,662)
=============== ================ =============
See Notes to the Consolidated Financial Statements
SHERIDAN SQUARE ENTERTAINMENT, LLC (d/b/a/ ARTEMIS RECORDS)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Seven For The Year
Months Ended Ended December
July 31, 2003 31, 2002
------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,940,753) $ (9,038,918)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 13,984 373,262
(Increase) Decrease in:
Accounts receivable 2,295,148 2,343,867
Inventory 8,126 196,824
Prepaid expenses (346,091) 4,614,684
Security deposit (71,929) -
Advances to artists (25,697) 702,683
Other receivables 215,516 249,521
Increase (Decrease) in:
Accounts payable (66,716) 306,424
Accrued expenses (347,025) 389,736
Royalties payable (919,813) 73,302
Reserve for returns (2,240,248) 1,198,980
Other liabilities (69,077) 472,013
Deferred revenue 429,870 (2,296,331)
------------- -------------
Net cash used by operating activities (3,064,705) (413,953)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (47,729) (17,305)
------------- -------------
Net cash used by investing activities (47,729) (17,305)
------------- -------------
See Notes to the Consolidated Financial Statements
SHERIDAN SQUARE ENTERTAINMENT, LLC (d/b/a/ ARTEMIS RECORDS)
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - 6,454,116
Proceeds from loans payable 3,000,000 -
Principal payments on notes payable (33,979,599) -
Capital contributions 31,061,133 (3,454,082)
------------- -------------
Net cash provided by financing activities 81,534 3,000,034
------------- -------------
NET (DECREASE) INCREASE IN CASH (3,030,900) 2,568,776
CASH AND CASH EQUIVALENTS - BEGINNING 3,255,891 687,115
------------- -------------
CASH AND CASH EQUIVALENTS - END $ 224,991 $ 3,255,891
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 60,779 $ 785,78
============= =============
Taxes $ 7,728 $ 34,869
============= =============
See Notes to the Consolidated Financial Statements
SHERIDAN SQUARE ENTERTAINMENT, LLC (d/b/a/ ARTEMIS RECORDS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Organization and Nature of Business
Sheridan Square Entertainment, LLC d/b/a Artemis Records ("Artemis" or
the "Company"), was organized in Delaware on February 24, 1999.
Artemis is a record label that produces original music recordings and
licenses its music catalog.
Note 2: Summary of Significant Accounting Policies
This summary of significant accounting policies of the Company is
presented to assist in understanding the Company's consolidated
financial statements. The consolidated financial statements and notes
are representations of the Company's management who are responsible
for their integrity and objectivity. These accounting policies are in
conformity with accounting principles generally accepted in the United
States of America and have been consistently applied in the
preparation of the financial statements.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Artemis Classics, LLC ("Classics"). All significant
intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all short-term investments, with an original
maturity of three months or less, to be cash equivalents. Accounts at
banking institutions may at times exceed federally insured limits. As
of July 31, 2003 and December 31, 2002, the Company had $121,909 and
$3,155,891, respectively over such limits.
Revenue Recognition
The Company derives its revenue substantially from the sale of music
recordings (predominantly compact discs) produced by the Company, and
from the licensing of Company-owned master recordings. Revenue from
music sales is recognized at the time of shipment to the customer,
while licensing revenue is recognized as income is earned over the
term of the agreement. Most sales of prerecorded music are made with a
right of return of unsold goods. Estimated reserves for returns are
established by management based upon historical experience and product
mix and are subject to ongoing review and adjustment by the Company.
These reserves are recorded at the time of sale and are reflected as a
reduction in revenues. During 2003, the Company changed third party
distributors resulting in additional returns and the related
adjustment to the returns reserve. The accompanying consolidated
balance sheet includes a liability for the reserve for returns for
Artemis. Minimum guarantees (advances) received from licensees are
recorded as deferred revenue and are amortized over the performance
period, which is generally the period covered by the agreement.
SHERIDAN SQUARE ENTERTAINMENT, LLC (d/b/a/ ARTEMIS RECORDS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2: Summary of Significant Accounting Policies (continued)
Cost of Goods Sold
The Company expenses all product manufacturing, distribution costs,
freight in and royalty costs associated with music sales as cost of
goods sold.
Distribution fees, included in cost of sales, are primarily paid to
third party distributors based on a percentage of sales. The services
provided by the third party distributor include sales, fulfillment and
storage of the Company's product. Also included in distribution fees
are fees paid to a third party service provider for data entry,
generation of invoices, cash processing and logistics services.
Distribution fees were approximately $157,106 and $2,459,808 for the
seven months ended July 31, 2003 and the year ended December 31, 2002,
respectively.
Accounts Receivable
The Company does not have a provision for doubtful accounts. Amounts
deemed unrecoverable by management, based on specific analysis, are
written off as they are identified. Management believes that this
approach is approximate to the allowance method.
Inventory
Inventory consists of musical recordings, such as compact discs,
audiocassettes, digital discs, videotapes, and record albums stated at
lower of cost or market as determined under the average cost method,
or net realizable value.
Property and Equipment
Property and equipment are carried at cost. Depreciation of property
and equipment are calculated using accelerated methods over the
estimated useful lives of the related assets. Expenditures for repairs
and maintenance are charged to expense as incurred.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates. Estimates are used in
accounting for, among other things, excess and obsolete inventory,
allowance for doubtful accounts, reserves for returns, useful lives
for depreciation and amortization, deferred tax assets and
contingencies.
SHERIDAN SQUARE ENTERTAINMENT, LLC (d/b/a/ ARTEMIS RECORDS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2: Summary of Significant Accounting Policies (continued)
Music Catalog
The Company capitalizes the costs to purchase master recordings at the
time of acquisition. These costs are amortized over the estimated
useful life of these master recordings and represents management's
best estimate of the average period of value. The music catalogs are
reviewed for impairment at the end of each year and the amortization
period and carrying value are adjusted when events or changes in
circumstances warrant.
Advances to Artists
Advances to artists, which are recoupable against future royalties,
are capitalized only in the case of "proven" artists, which are
defined as those whose past performance and current popularity
supports capitalization. Unearned balances are reviewed periodically
and if future performance is no longer assured, the balances are
appropriately reserved.
License Revenues
The Company licenses a portion of its catalog to foreign music
companies under distribution agreements. In most instances the Company
receives a non-refundable, recoupable advance on signing the
agreement. The Company is obligated to deliver its catalog to the
distributor and to pay royalties to the owners of the copyrighted
music. The advances received are recorded as deferred income and
recognized as income as earned over the term of the agreement. At July
31, 2003 and December 31, 2002, the deferred revenue was $779,870 and
$350,000, respectively.
Advertising Costs
Advertising costs are expensed as incurred with the exception of any
expenses paid in connection with a sales event that has not yet taken
place. Advertising expense for the seven months ended July 31, 2003
and the year ended December 31, 2002 was $122,660 and $3,483,670,
respectively.
Intangibles
Intangible assets, consisting of trademarks and other intangibles, are
recorded at cost and amortized on a straight line basis over fifteen
years. At July 31, 2003 and December 31, 2002, the amortization
expense was $100,051 and $214,773, respectively.
2003 2004 2005 2006 2007
---- ---- ---- ---- ----
Amortization
of intangibles $33,919 $81,405 $81,405 $81,405 $81,405
SHERIDAN SQUARE ENTERTAINMENT, LLC (d/b/a/ ARTEMIS RECORDS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2: Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk
Artemis sells substantially their entire product through one major
distributor who accounts to it on a monthly basis. The Company does an
ongoing credit evaluation of the distributor's financial condition and
believes it does not have a concentration of credit risk.
Income Taxes
No provision for income taxes has been reflected in the accompanying
financial statements since, according to the Internal Revenue Code, a
Limited Liability Company is not responsible for payment of income
taxes; all income, gains, losses and credits retain their character
and pass through directly to the individual members.
Royalties
The Company is obligated to pay royalties to the owners of music
copyrights used in master recordings. The Company accrues royalties
using contractual rates and certain estimated rates on units sold. The
contractual royalty liability is computed quarterly and the accrued
royalty balance is adjusted accordingly. The royalty agreements are
subject to audit by licensors.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable and accrued
expenses approximate fair value because of their short maturities. The
Company's notes payable (or long-term debt) approximate the fair value
of such instruments based upon management's best estimate of interest
rates that would be available to the Company for similar financial
arrangements at July 31, 2003 and December 31, 2002.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the cost of an
asset may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset would be compared to
the asset's carrying amount to determine if a write-down to market
value is required. At July 31, 2003 and December 31, 2002, the Company
does not believe that any impairment has occurred.
SHERIDAN SQUARE ENTERTAINMENT, LLC (d/b/a/ ARTEMIS RECORDS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3: Property and Equipment
Property and equipment consists of the following:
July 31 December 31
2003 2002
---- ----
Equipment and furnishings (5 years) $568,225 $507,257
Leasehold improvements (39 years) 119,100 132,339
-------- --------
687,324 639,596
Less: Accumulated depreciation 538,926 575,681
-------- -------
Property and equipment at net book value $148,399 $63,916
======== =======
Depreciation expense was ($86,067) during the seven months ended July
31, 2003 and $158,489 for the year December 31, 2002
Note 4: Notes Payable
Long term borrowings represent draw downs on a $40,000,000 bank line
of credit guaranteed by a member of the company. The balance
outstanding as of December 31, 2002 was $34,098,716. In February 2003,
a member of the Company contributed $31,106,563 to the Company in
exchange for members equity, and the Company repaid the principal
balance and accrued interest with the proceeds.
Note 5: Loans Payable
In July 2003 the Company was loaned $3,000,000 by Sheridan Square
Entertainment, Inc., formerly known as Sheridan Square Acquisition,
Inc, ("Sheridan"). Sheridan was incorporated in Delaware on July 29,
2003. This loan is non-interest bearing. This loan was advanced in
anticipation of Sheridan's acquisition of the Company on July 31, 2003
(see Note 7)
SHERIDAN SQUARE ENTERTAINMENT, LLC (d/b/a/ ARTEMIS RECORDS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6: Commitments and Contingencies
Leases
The Company leases its offices under operating leases, which expire
November 30, 2005. Minimum annual lease payments are as follows:
Year
----
2003 five months ending December 2003 $ 130,971
2004 314,330
2005 314,330
----------
Total $ 759,631
==========
Rent expense for the seven months ended July 31, 2003 was $433,654 and
for the year ended December 31, 2002 was $535,784.
Commitments
The Company and its subsidiary have entered into various employment
contracts with its executives. The total unpaid commitment of these
contracts by year is as follows:
Year Amount
---- ------
2003 five months ending December 2003 $ 660,005
2004 367,000
----------
$1,027,005
Retirement Plan
The Company has a 401(k) profit sharing plan for certain eligible
employees who work more than 1,000 hours per year. Employees can make
voluntary contributions up to federally designated limits. The Company
has the option to match a percentage of eligible employee's
compensation election. Eligible employees are always fully vested in
their account balances. The Company's employer match for the seven
months July 31, 2003 was $19,062 and for the year ended December 31,
2002 was $60,246. The Company's profit sharing plan expenses for the
seven months July 31, 2003 was $3,223 and for the year ended December
31, 2002 was $5,845.
SHERIDAN SQUARE ENTERTAINMENT, LLC (d/b/a/ ARTEMIS RECORDS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6: Commitments and Contingencies (continued)
Litigation
In 1999, Artemis sought a declaratory judgment that it had exclusive
rights to the trademark "Artemis Records." During a trial commenced in
June, 2000 a settlement was reached providing for payment of $125,000
by Artemis, however defendant failed to sign the settlement agreement
and no payment was made. In January, 2005 defendant petitioned the
Court to reopen the case to enforce the court-brokered settlement; the
Court dismissed the case on the grounds that it no longer had
jurisdiction. Defendant has filed a claim with the U.S. Patent and
Trademark Office to cancel the Company's registration of the "Artemis"
trademark. Company's counsel believes that the passage of time has
substantially weakened any potential claim of defendant to the
trademark; therefore no provision has been made for any potential
liability.
The Company is a party to other litigation which management believes
is in the ordinary course of business. Although liability cannot be
presently determined, it is the opinion of management that the
ultimate outcome of any matter, individually and in the aggregate,
will not have a material adverse effect on the financial position or
overall trends in results of operations.
Distribution Agreement
Artemis' product is distributed through third parties. Prior to April
30, 2003, Artemis product was distributed under an agreement which
provided for a three-year term and an automatic three-year renewal
unless either party gives written notice of non-renewal. This
distribution agreement allowed Artemis to cancel the agreement prior
to termination and the Company exercised its right of termination
effective April 30, 2003..
Beginning May 1, 2003, the Company entered into another distribution
agreement which provided for a three-year term and an automatic
three-year renewal unless either party gives written notice of
non-renewal. This distribution agreement allowed Artemis to cancel the
agreement prior to termination. Artemis exercised its right of
termination, effective April 30, 2005.
Note 7: Subsequent Events
On August 3, 2003, Sheridan purchased 100% of the membership interest
of the Company. The terms of the agreements were as follows:
Goldberg Records LLC contributed its entire interest in Artemis in
exchange for 15% of the capital stock of the Sheridan. Artemis owned
49% of Classics. Music Holdings, LLC, a shareholder of Sheridan, owned
the remaining 51% of Classics and contributed this interest valued at
$330,000 to Sheridan in exchange for capital stock of Sheridan.
ANNEX K
SHERIDAN SQUARE ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
SHERIDAN SQUARE ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, June 30,
2005 2004
---------- ---------
CURRENT ASSETS
Cash and cash equivalents $ 323,249 $ 1,240,226
Accounts receivable, net of allowances
of $1,707,059 and $1,661,313, at June
30, 2005 and 2004, respectively 11,725,264 9,452,132
Inventory 7,187,042 5,080,174
Prepaid expenses 996,485 1,236,414
Advances to artists 2,867,636 988,648
----------- ---------
TOTAL CURRENT ASSETS 23,099,677 17,997,594
----------- ---------
PROPERTY AND EQUIPMENT, at cost less
accumulated depreciation of $1,155,104
and $1,060,468, as of June 30, 2005
and 2004, respectively 386,054 287,563
----------- ---------
OTHER ASSETS
Security deposits and other assets 358,276 203,928
Financing costs, less accumulated
amortization of $668,880 and $214,915, at
June 30, 2005 and 2004, respectively 2,348,636 1,029,528
Goodwill 2,590,000 2,590,000
Non-contractual customer obligations,
less accumulated amortization of
$1,130,785 and $484,826 at
June 30, 2005 and 2004 respectively 8,642,711 9,303,301
Music catalogs, less accumulated
amortization of $1,130,785 and
$484,286, at June 30, 2005 and 2004,
respectively 14,460,060 7,920,278
----------- ---------
TOTAL OTHER ASSETS 28,399,683 21,047,035
----------- ---------
TOTAL ASSETS $ 51,885,415 $ 39,332,192
============ ============
SHERIDAN SQUARE ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, June 30,
2005 2004
----------- ----------
CURRENT LIABILITIES
Accounts payable $9,295,539 $7,046,403
Accrued expenses 797,617 2,546,192
Royalties payable 2,385,342 1,976,807
Reserve for returns 1,512,413 640,329
Deferred revenue - current portion 186,935 147,384
Other liabilities 398,865 389,033
Notes payable - current portion 829,000 1,704,377
Due on catalog acquisition - current portion 1,000,000 -
Accrued dividends payable 706,563 -
---------- ---------
TOTAL CURRENT LIABILITIES 17,112,274 14,450,525
---------- ----------
LONG TERM LIABILITIES
Deferred revenue less current portion 180,380 473,837
Due on catalog acquisition - less
current portion 2,000,000 -
Notes payable - less current portion 16,864,790 9,695,864
Deferred tax liability 2,590,000 2,590,000
---------- ----------
TOTAL LONG TERM LIABILITIES 21,635,170 12,759,701
---------- ----------
TOTAL LIABILITIES 38,747,444 27,262,226
---------- ----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 95,800 10,023
--------- ----------
See Notes to Consolidated Financial Statements
SHERIDAN SQUARE ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY -- Continued
June 30, June 30,
2005 2004
----------- ----------
Accounts payable $9,295,539 $7,046,403
STOCKHOLDERS' EQUITY
Voting preferred stock
Series A Convertible Preferred,
$1.00 par value; 1,300 shares
authorized; 896 shares issued and
outstanding 896 581
Series B Convertible Preferred,
$1.00 par value; 40 shares authorized;
-0- shares issued and outstanding - -
Undesignated Preferred Stock
$1.00 par value; 48,660 shares authorized;
-0- shares issued and outstanding - -
Voting common stock
Class A, $0.01 par value; 10,000,000
authorized; 94,536 shares issued and
outstanding 945 945
Non-Voting common stock
Class B, $0.01 par value; 1,000 authorized;
288 shares issued and outstanding 3 3
Additional paid in Capital
21,238,241 14,525,028
Accumulated deficit (8,197,913) (2,466,613)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 13,042,172 12,059,943
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 51,885,415 $ 39,332,192
============ ============
See Notes to Consolidated Financial Statements
SHERIDAN SQUARE ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended
June 30,
-------------------------------
2005 2004
------------- --------------
NET SALES $ 19,012,989 $16,959,361
COST OF SALES 9,846,468 10,943,595
------------- --------------
GROSS PROFIT 9,166,521 6,015,765
------------- --------------
SELLING AND ADMINISTRATIVE EXPENSES 9,064,410 7,231,089
DEPRECIATION AND AMORTIZATION 1,236,298 810,903
------------- --------------
TOTAL EXPENSES 10,300,708 8,041,991
------------- --------------
LOSS FROM OPERATIONS (1,134,187) (2,026,226)
------------- --------------
OTHER EXPENSES
Interest Expense 812,701 237,169
Minority Interest 75,755 10,023
------------- --------------
TOTAL OTHER EXPENSES 888,456 247,191
------------- --------------
LOSS BEFORE INCOME TAXES (2,022,644) (2,273,417)
------------- --------------
NET LOSS (2,022,644) (2,273,417)
Preferred stock dividends 706,563 -
------------- --------------
NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS ($2,729,207) ($2,273,417)
============= ===============
See Notes to Consolidated Financial Statements.
SHERIDAN SQUARE ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
June 30,
------------------------------
2005 2004
--------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,022,644) $ (2,273,417)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 59,320 58,005
Amortization 1,125,178 658,801
Minority interests (20,045) 10,023
Deferred tax expense 132,000 184,000
(Increase) Decrease in:
Accounts receivable (629,372) (1,806,655)
Inventory (1,296,553) 28,492
Prepaid expenses (540,610) (1,150,784)
Security deposits and other assets (183,994) (3,180)
Advances to artists (939,396) (621,562)
Increase (Decrease) in:
Accounts payable 943,106 (396,794)
Accrued expenses (607,942) 916,617
Royalties payable (1,145,905) (248,286)
Reserve for returns (453,916) (968,295)
Other liabilities 157,869 (72,811)
Deferred revenue (110,337) (7,823)
--------------- -----------
Net cash used in operating activities (5,665,242) (5,825,670)
--------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (16,838) (109,360)
Cost of acquiring subsidiaries - (128,811)
Acquisition of music catalogs - (1,500,000)
--------------- -----------
Net cash used by investing activities (16,838) (1,738,171)
--------------- -----------
See Notes to Consolidated Financial Statements
SHERIDAN SQUARE ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
June 30,
------------------------------
2005 2004
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under revolving bank loan 1,016,058 3,095,711
Proceeds from notes payable 317,509 -
Principal payments on notes payable (537,600) (412,700)
Financing transaction costs - (77,136)
Capital contributions 4,234,678 910,000
---------- -----------
Net cash provided by financing activities 5,030,645 3,515,875
---------- -----------
NET (DECREASE) INCREASE IN CASH (651,434) (4,047,966)
CASH AND CASH EQUIVALENTS - BEGINNING
OF PERIOD 878,885 5,288,192
---------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 227,451 $ 1,240,226
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 601,103 $ 221,688
========== ===========
Taxes $ - $ -
========== ===========
See Notes to Consolidated Financial Statements
SHERIDAN SQUARE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 1: Organization and Nature of Business
Sheridan Square Entertainment, Inc. ("Sheridan"), formerly known as
Sheridan Square Acquisition, Inc. was incorporated on July 29, 2003 in
Delaware and currently has its corporate offices located in New York.
During 2003, Music Distribution Holdings, LLC, a wholly owned
subsidiary of Sheridan purchased Musicrama, Inc. ("Musicrama"), a
distributor of prerecorded music and Sheridan Square Entertainment,
LLC d/b/a Artemis Records ("Artemis"), a record label that produces
original music recordings and licenses its music catalog. On June 30,
2004, Sheridan Square Entertainment, LLC was merged into Sheridan. In
2004, Sheridan purchased (i) Tone Cool Records Corporation ("Tone
Cool"), a record label incorporated in Massachusetts, (ii)
substantially all of the music recordings catalog of Ropeadope Music
Entertainment, LLC ("Ropeadope"), (iii) the assets of Compendia Music
Group ("Compendia"), a major record label, and (iv) formed Musicrama
Distribution and Marketing Inc.("MDM") to develop, enhance and expand
Musicrama's retail resources. The above entities are collectively
referred to as Sheridan Square Entertainment, Inc. and Subsidiaries
(collectively "the Company")
Basis of Presentation
In the opinion of management of the Company, the accompanying
unaudited consolidated interim financial statements reflect all
adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position of the Company as
of June 30, 2005 and the consolidated results of its operations and
its cash flows for the six months ended June 30, 2005 and 2004. The
results of operations for such interim periods are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2005. In addition, management is required to make
estimates and assumptions that affect the amounts reported and related
disclosures. Estimates, by their nature, are based on judgment and
available information. Also, during interim periods, certain costs and
expenses are allocated among periods based on an estimate of time
expired, benefit received, or other activity associated with the
periods. Accordingly, actual results could differ from those
estimates. The interim results are not necessarily indicative of
results expected for a full year. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. These unaudited condensed consolidated financial
statements should be read in conjunction with the financial statements
and related notes included in the Company's year end audited financial
statement, included herein in this proxy on Form _________, filed with
the Securities and Exchange Commission.
SHERIDAN SQUARE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 2: Stockholders' Equity
On January 25, 2005, the Company amended its certificate of
incorporation, changing its authorized capital stock to 10,051,000
shares of which 10,000,000 is Class A Common Stock, par value $0.01
per share; 1,000 shares of Class B Common Stock, par value $0.01 per
share; 1,300 shares of Series A Convertible Preferred Stock ("Series
A"), par value $1.00 per share; and 48,700 shares of Undesignated
Preferred Stock, par value $1.00 per share. Class A Common shares have
voting rights, and Class B Common shares have none. Series A has
voting rights equal to the number of shares of Class A Common that it
can convert into at $63.20 per Class A Common share. Class A provides
cumulative dividends of 8% for one year, 10% for the next six months,
12% for the next six months, and 14% after two years. Upon
liquidation, Series A has a first priority preference equal to 125% of
stated value per share plus any accrued, but unpaid, dividends
thereon. Pursuant to this Amendment, the Company cancelled all issued
shares of preferred stock, and accrued dividends, and reissued all
previous holders of preferred stock shares a total of 710.62 shares of
Series A.
On December 3, 2004, the Company began an offering of a private
placement of capital stock, in anticipation with above capital
restructuring of the Company. This placement provides for the sale of
a minimum of 40 units and a maximum of 100 units, each unit consisting
of four shares of Series A, par value $1 per share, and warrants to
purchase 396 shares of Class A Common Stock, par value $.01 per share,
at an offering price of $100,000 per unit. These warrants are
exercisable at $75.84 per share and expire five years from the date of
issuance. The number of shares underlying the warrants are adjustable
dependent on the Series A achieving certain milestones. Under this
placement, the Company has issued 185.28 shares of Series A, and
realized $4,234,678, net of expenses as of June 30, 2005. Subsequent
to June 30, 2005, the Company has sold approximately 6 units of this
offering and realized $133,000, net of expenses.
Note 3: Notes Payable
On February 10, 2005, Musicrama amended its revolving credit, term
loan and security agreement with its institutional lender, whereby the
lender consented to Musicrama entering into a factoring agreement with
Compendia to purchase certain receivables, allowing such receivables
to qualify as collateral under the revolving credit agreement as
amended.
SHERIDAN SQUARE ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 4: Acquisitions
On December 12, 2004, the Company purchased certain assets and assumed
certain liabilities of Compendia Music Group for $7,396,713, net of
closing adjustments. The following is the unaudited pro forma
statement of operations for the acquisition of Compendia as if it
occurred on January 1, 2004.
Six Months Ended
June 30, 2004
(Unaudited)
----------------
Net Sales $20,783,111
Cost of Goods 12,952,748
-----------
Gross Profit 7,830,362
Operating Expenses 10,747,021
-----------
Operating Loss (2,916,659)
Other Expense 978,378
-----------
Net Loss ($ 3,895,037)
=============
Note 5: Subsequent Events
On July 20, 2005, the Company entered into a definitive merger
agreement with Hirsch International Corp. and Subsidiaries ("Hirsch"),
a single source provider of equipment, value added products and
services to the embroidery industry. Under the terms of the agreement
the Company's stockholders will receive approximately 15,000,000
shares of Hirsch's common stock. Following the merger, the Company is
expected to own approximately 62% of the outstanding common stock of
Hirsch.
On July 20, 2005, the Company authorized the designation of 40 shares
of Series B Convertible Participating Preferred Stock ("Series B"), at
a par value of $1.00 per share. Series B is senior to all other equity
securities of the Company, including Series A, in terms of dividends,
distributions and liquidation preference. The stated value of Series B
is $25,000 per share. Dividends on Series B accrue commencing January
1, 2006 whether declared or not. Dividends accrue at annual rate of 8%
until April 1, 2006, whereupon the rate shall increase to 14% annually
until July 1, 2006, hereupon the rate shall increase to 18% annually.
These dates of dividend commencement are contingent upon the Company
having i.) sold substantially all the assets of the Company, ii.)
entered into a transaction whereby the Company is no longer the owner
of more than 50% of the voting power of the successor entity, or iii.)
having entered into a merger agreement with Hirsch International Corp.
(see above) (the "Hirsch Merger"). At any time after issuance the
Series B may be redeemed by the Company. If the Hirsch Merger does not
occur, the Series B may be purchased by a major shareholder for 80% of
its stated value inclusive of accrued and unpaid dividends. If the
Hirsch Merger is terminated prior to consummation, the Series B
holders, at their option, may convert their shares into Class A Common
shares at an initial price of $63.20 per share. The Series B shares
have voting rights to approve matters that adversely impact their
rights, ranking or preference. Such voting is determined to the extent
the Series B is convertible into Class A common shares.
On July 22, 2005, the Company issued 20 shares of Series B Convertible
Preferred Stock and realized $500,000.