HIRSCH INTERNATIONAL CORP.
(a Delaware corporation)
NOTICE OF 2006 ANNUAL
MEETING OF STOCKHOLDERS TO BE
HELD AT 10:00 A.M. ON JANUARY 25, 2006
To the Stockholders of HIRSCH INTERNATIONAL CORP.:
NOTICE IS HEREBY GIVEN that the 2006 Annual Meeting of Stockholders (the
"Meeting") of HIRSCH INTERNATIONAL CORP. (the "Company") will be held on January
25, 2006, at 10:00 A.M. at the offices of Ruskin Moscou Faltischek, P.C., 1425
Reckson Plaza, East Tower, 15th Floor, Uniondale, New York 11556-0190 for the
following purposes:
1. to elect five directors;
2. 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;
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 1,750,000 and;
4. to transact such other business as may properly come before the Meeting and
any adjournment or postponement thereof.
The Board of Directors has fixed December 16, 2005 at the close of
business, as the record date for the determination of stockholders entitled to
notice of and to vote at the Meeting, and only holders of record of shares of
the Company's Common Stock at the close of business on that day will be entitled
to vote. The stock transfer books of the Company will not be closed.
A complete list of stockholders entitled to vote at the Meeting shall be
available at the offices of the Company during ordinary business hours from
December 16, 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.
All stockholders are cordially invited to attend the Meeting in person.
However, whether or not you expect to be present at the Meeting, you are urged
to mark, sign, date and return the enclosed Proxy, which is solicited by the
Board of Directors, as promptly as possible in the postage-prepaid envelope
provided to ensure your representation and the presence of a quorum at the
Meeting. The shares represented by the Proxy will be voted according to your
specified response. The Proxy is revocable and will not affect your right to
vote in person in the event you attend the Meeting.
By Order of the Board of Directors
/s/ Beverly Eichel
Beverly Eichel, Secretary
Hauppauge, New York
December 21, 2005
HIRSCH INTERNATIONAL CORP.
200 Wireless Boulevard
Hauppauge, NY 11788
------------------------------
PROXY STATEMENT
------------------------------
2006 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD AT 10:00 A.M. ON JANUARY 25, 2006
To the Stockholders of Hirsch International Corp.:
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of HIRSCH INTERNATIONAL CORP. (the "Company") of proxies
to be voted at the 2006 Annual Meeting of Stockholders and any adjournment or
postponement thereof (the "Meeting") to be held on the date, at the time and
place, and for the purposes set forth in the foregoing notice. The Board of
Directors has set December 16, 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 7,961,601
shares of Class A Common Stock and 525,018 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 election of the persons listed herein as directors of the Company;
(2) the ratification of the appointment of BDO Seidman, LLP as the
Company's independent registered public accounting firm for the fiscal
year ending January 28, 2006;
(3) the proposed increase in the number of shares of our common stock
available for issuance pursuant to our 2003 Stock Option Plan from
750,000 to 1,750,000 and;
(4) the transaction of such other business as may properly come before the
Meeting and any adjournment or postponement thereof.
In the absence of direction, a signed proxy will be voted in favor of these
proposals.
Your vote is very important. For this reason, our Board of Directors is
soliciting your proxy to vote your shares of common stock at the meeting. The
entire cost of soliciting proxies will be borne by the Company. The cost of
solicitation, estimated at $20,000 which represents an amount believed to be
normally expended for a solicitation relating to an uncontested election of
directors, will include the cost of supplying necessary additional copies of the
solicitation materials and the Company's 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 on all
matters other than the election of directors. With respect to the election of
directors, the holders of the Class B Common Stock will elect three of the
directors ("Class B directors"), and the holders of Class A Common Stock will
elect two of the directors ("Class A directors"). Holders of a majority of the
outstanding shares of Common Stock must be represented in person or by proxy in
order to achieve a quorum to vote on all matters other than the election of
directors. To vote for the Class A directors, holders of a majority of the
outstanding shares of Class A Common Stock must be represented in person or by
proxy in order to achieve a quorum. To vote for the Class B directors, holders
of a majority of the outstanding shares of Class B Common Stock must be
represented in person or by proxy in order to achieve a quorum. The Proxy
Statement, the attached Notice of Meeting, the enclosed proxy card and the
Annual Report to Stockholders are being mailed to stockholders on or about
December 23, 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.
1. ELECTION OF DIRECTORS
Five 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 five nominees for the five Board of Director positions as fixed
by the Board of Directors. Of the persons named below, who currently constitute
the entire Board of Directors, Mr. Broitman and Ms. Domuracki have been
nominated for election as Class A directors and Messrs. Arnberg, Davino and
Gallagher have been nominated for election as Class B directors. The persons
named in the accompanying Proxy have advised management that it is their
intention to vote for the election of Mr. Broitman and Ms. Domuracki as Class A
directors and for the election of Messrs. Arnberg, Davino and Gallagher as Class
B directors unless authority is withheld.
o Henry Arnberg - Class B Director
o Marvin Broitman - Class A Director
o Mary Ann Domuracki - Class A Director
o Christopher Davino - Class B Director
o Paul Gallagher - Class B Director
Management believes that each nominee will be able to serve as a director
of the Company. All of the nominees have consented to serve as directors if
elected. If any nominee becomes unable or unwilling to serve, proxies may be
voted for the election of such person or persons as the Board of Directors
determines.
Recommendation and Vote Required
The Board of Directors recommends a vote "for" each of the nominees listed
above. Each of the nominees for Class A Directors and Class B Directors shall be
elected by a plurality of votes cast at the meeting by the holders of the
Company's Class A Common Stock and Class B Common Stock, respectively.
Information Regarding Executive Officers and Directors
The following table sets forth the names and ages of the Company's
directors and executive officers and the positions they hold with the Company:
Name Age Position
---- --- --------
Henry Arnberg.................. 62 Chairman of the Board of Directors
Paul Gallagher................. 55 Chief Executive Officer, President and Director
Marvin Broitman................ 66 Director
Mary Ann Domuracki ............ 50 Director
Christopher J. Davino ......... 39 Director
Beverly Eichel................. 47 Executive Vice President - Finance and Administration, Chief
Financial Officer and Secretary
Kristof Janowski............... 52 Executive Vice President - Sales and Marketing
Nicholas Paccione.............. 50 Vice President - Operations
Henry Arnberg, held the position of Chairman of the Board of the Board of
Directors since 1980 and also served as President of the Company until December
1998 and our Chief Executive Officer until 2004. Mr. Arnberg received a Bachelor
of Science in Accounting from the University of Bridgeport in 1965 and an MBA in
Finance and Management from the Adelphi University in 1971.
Paul Gallagher, joined the Company as its Chief Operating Officer in
September 2001. In early 2003, Mr. Gallagher was appointed the Company's
President as well as a director, and as our Chief Executive Officer in late
2004. Prior thereto, Mr. Gallagher was employed by Cornerstone Group Inc., a
consulting firm focused on corporate turnarounds and restructurings, as well as
mergers and acquisitions. Mr. Gallagher received a Bachelor of Science from the
University of Cincinnati in 1976 and an MBA from Xavier University in 1978.
Marvin Broitman, director of the Company since April 1994, is currently
Vice President of Uniwave, Inc., a company engaged in the engineering and
manufacturing of automation accessory equipment for textile machinery since
1968. Mr. Broitman received a Bachelor of Electrical Engineering degree from
City College in 1961 and an MBA from the Harvard Business School in 1968. Mr.
Broitman serves on the Audit, Stock Option and Compensation Committees of the
Board of Directors.
Mary Ann Domuracki, director of the Company since September 2001, currently
has been managing Director of Restructuring at Financo, Inc. since September
2001. Ms. Domuracki has more than 25 years experience of accounting, advisory
and operating management services. Her industry experience includes, senior
management positions as President of Danskin, Inc., Executive Vice President of
Administration and Finance of Kasper A.S.L., and most recently, Executive Vice
President and Chief Financial Officer of Pegasus Apparel Group, Inc. Ms.
Domuracki is a CPA and a member of the AICPA, and has a Bachelor of Business
Administration from the Pennsylvania State University with a concentration in
Accounting. Ms. Domuracki serves on the Audit, Stock Option and Compensation
Committees of the Board of Directors.
Christopher Davino has served as a director of the Company since October
2004. Mr. Davino is currently Chief Operating Officer of E-Rail Logistics Inc.,
a waste management transportation company. Prior to his current position, Mr.
Davino worked as a restructuring professional at Financo Inc. Mr. Davino is a
seasoned restructuring professional having provided strategic and financial
advice to Fortune 500 companies, financial sponsors and strategic buyers,
commercial banks and bondholders with respect to corporate restructurings and
mergers and acquisitions over the last 14 years. Prior to joining Financo, Mr.
Davino was Managing Director at Miller Buckfire Lewis Ying, LLC, the former
restructuring group of Wasserstein Perella and subsequently Dresdner Kleinwort
Wasserstein. In that capacity, Mr. Davino advised companies as well as their
various creditor constituencies in a wide range of industries including
construction, consumer products, electronics, energy, financial services,
gaming, healthcare, insurance, manufacturing, metals, minerals, steel, real
estate and technology telecommunications. Prior to Wasserstein Perella, Mr.
Davino was a consultant with Zolfo Cooper & Co., an internationally recognized
turnaround consulting and crisis management firm. Mr. Davino received his
Bachelor of Science in Finance from Lehigh University.
Beverly Eichel, has been Executive Vice President of Finance and
Administration and Chief Financial Officer of the Company since February 1,
2002. Ms. Eichel has also served as the Company's Secretary since October 2002.
Prior thereto, she was Executive Vice President and Chief Financial Officer of
Donnkenny, Inc. from October 1998 to June 2001. From June 1992 to September
1998, Ms. Eichel served as Executive Vice President and Chief Financial Officer
of Danskin, Inc. and had been its Corporate Controller from October 1987 to June
1992. Ms. Eichel is a Certified Public Accountant in the State of New York. Ms.
Eichel received a Bachelor of Science in Accounting from the University of
Maryland in 1980.
Kristof Janowski has worked for the Company since 1987. From 1987 through
1994 he was sales manager for the Midwest Region. In October 1994, he was
promoted to Vice President of Midwest sales. In 1999, he was promoted to Vice
President of National Sales and most recently Mr. Janowski was promoted to
Executive Vice President - Sales and Marketing effective March 1, 2005.
Nicholas Paccione joined the Company in June of 2003 as Director of
Information Technology and was promoted to Vice President of Operations in
February of 2005. Prior to joining the Company, Mr. Paccione owned his own
independent consultancy specializing in computer network design. Prior to
starting his consulting firm, Mr. Paccione was Chief Operating Officer at
Heathology, an online health education company, Senior Vice President of
Operations for Primedia Workplace learning, and Vice President of Systems and
Technology for the Primedia Information Group.
All Directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified. The Company's
executive officers are elected annually by the Board of Directors and serve at
the discretion of the Board.
The Company's By-Laws provide that the Company shall indemnify each
Director and such of the Company's officers, employees and agents as the Board
of Directors shall determine from time to time to the fullest extent provided by
the laws of the State of Delaware. The Company carries insurance providing
indemnification, under certain circumstances, to all of its directors and
officers for claims against them by reason of, among other things, any act or
failure to act in their capacities as directors or officers. The current annual
premium for such insurance is approximately $148,000, all of which is paid by
the Company. To date, no sums have been paid to any past or present director or
officer of the Company under this or any prior indemnification insurance policy.
The Company has also entered into Indemnity Agreements with all of its
directors and executive officers. The Indemnity Agreements provide for
indemnification of the Company's directors and officers to the fullest extent
permitted by the provisions of the General Corporation Law of the State of
Delaware.
The Indemnity Agreements provide that the Company will pay any costs which
an indemnitee actually and reasonably incurs because of any claims made against
him by reason of the fact that he is or was a director or officer of the
Company, except that the Company is not obligated to make any payment which the
Company is prohibited by law from paying as indemnity, or where (a) a final
determination is rendered on a claim based upon the indemnitee's obtaining a
personal profit or advantage to which he was not legally entitled; (b) a final
determination is rendered on a claim for an accounting of profits made in
connection with a violation of Section 16(b) of the Securities Exchange Act of
1934, or similar state or common law provisions; (c) a claim where the
indemnitee was adjudged to be deliberately dishonest; or (d) a final
determination is rendered that indemnification is not lawful.
Meetings and Committees of the Board of Directors
The Board of Directors has an Audit Committee, a Compensation Committee and
a Stock Option Committee. Each member of the Audit Committee as determined by
the Board is an "independent director" as defined in Rule 4200(a)(15) of the
National Association of Securities Dealers listing standards, as applicable and
as may be modified or supplemented. MaryAnn Domuracki, a member of the Audit
Committee, is a financial expert within the meaning of Item 401(h)(2) of
Regulation S-K privileged under the Act.
The 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 Capital Market issuers and director nominees are required to
be approved by a majority of the entire Board and a majority of the independent
directors. The Board generally relies on its network of industry and
professional contacts in connection with identifying potential Board members.
The Board is also open to presentation of nominees recommended by security
holders provided that sufficient information about the proposed nominees
business, industry and financial background is provided to the Board and such
information is received not less than 120 days prior to the release of the proxy
statement to our shareholders. The Board will only consider nominess that have
the requisite industry or financial experience to be able to advise and direct
senior management in the 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.
Messrs. Broitman and Davino and Ms. Domuracki serve on the Compensation
Committee, the Audit Committee, and on the Stock Option Committee. The function
of the Compensation Committee is to determine and to make recommendations to the
Board regarding the compensation of the Company's executives. The report of the
Compensation Committee appears below. The Board of Directors has not adopted a
written charter for the Compensation Committee. The Stock Option Committee
administers the Company's stock option plans and awards stock options.
The Board of Directors met on eleven (11) occasions and acted seven (7)
times by unanimous written consent during the last fiscal year. Each of the
Stock Option Committee and Compensation Committee held numerous informal
telephonic conferences during the fiscal year and did not act by written
unanimous consent.
Audit Committee Report
The current members of the Audit Committee are Marvin Broitman, Christopher
Davino and Mary Ann Domuracki. The Audit Committee held four (4) meetings either
in person or telephonically, had numerous informal telephonic conferences and
did not act by unanimous written consent 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 firm, review compliance with existing
major accounting and financial policies of the Company, review the adequacy of
the financial organization of the Company and review management's procedures and
policies relative to the adequacy of the Company's internal accounting controls.
The Audit Committee meets with the outside independent registered 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. A copy of the Audit Committee Charter was
previously filed as an exhibit to our definitive proxy statement which was filed
with the commission on August 6, 2004.
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 accountants; as appropriate,
the Audit Committee reviews, evaluates and discusses with the
Company's management, internal financial and accounting personnel and
the independent accountants, the following:
o The plan for, and the independent 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, ISB and NASDAQ, among other things, the following:
o Methods to account for significant unusual transactions;
o The effect of significant accounting policies in controversial or
emerging areas for which there is a lack of authoritative
guidance or consensus;
o The process used by management in formulating particularly
sensitive accounting estimates and basis for the independent
registered public accounting firm's conclusions regarding the
reasonableness of those estimates; and
o Disagreements, of which there were none, with management over the
application of accounting principles, the basis for management's
accounting estimates and the disclosures in the financial
statements.
The Company's independent 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 independent
registered public accounting firms to disclose annually in writing all
relationships that, in the independent registered public accounting firm'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 registered public
accounting firm's provision of the other, non-audit related services to the
Company, which are referred to in "Independent Registered Public Accounting Firm
Fees" below, is compatible with maintaining such independent registered public
accounting firm's independence.
During the year, the Audit Committee also considered several other matters
in conjunction with management and with the Company's independent registered
public accounting firms. 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;
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 the Company's Annual Report on Form
10-K for the year ended January 29, 2005 for filing with the Securities and
Exchange Commission.
AUDIT COMMITTEE:
Mary Ann Domuracki (Chairman)
Marvin Broitman
Christopher J. Davino
Security Holder Communications with Board of Directors
Security holders wishing to communicate directly with the Company's Board
of Directors or specific members of the Board may direct their communications
to: Hirsch International Corp., 200 Wireless Boulevard, Hauppauge, NY 11788, to
the attention of the appropriate individual(s).
Director's Compensation
Directors who are employees of the Company or its subsidiaries receive no
compensation, as such, for service as members of the Board other than
reimbursement of expenses incurred in attending meetings. Directors who are not
employees of the Company or its subsidiaries receive an annual directors' fee of
$6,000 plus $1,250 for each board or stockholder's meeting attended and $1,000
for each meeting of an executive committee of the Board attended, and are
reimbursed for expenses incurred in attending such meetings. In addition, all
non-employee directors participate in the Company's 2004 Non-Employee Director
Stock Option Plan. Under the terms of our 2004 Non-Employee Director Stock
Option Plan, each non-employee director receives a grant of 10,000 options upon
their appointment to the Board. In addition, each non-employee director receives
an automatic grant of 10,000 options on the date of our Annual Meeting of
Stockholder's, the exercise price for all of these options is the fair market
value on the date of grant. In fiscal 2002, the Board approved the issuance of
50,000 warrants to one independent director and one retired director for
services rendered to the Company. The warrants had an exercise price of $.50 per
share, which was the fair market value on the date of grant. The director was
also granted certain registration rights associated with the warrants. In fiscal
2005, each of the Company's independent directors received 10,000 options under
the Company's 2004 Non-Employee Stock Option Plan. The options have an exercise
price of $.92 per share, which was the fair market value as of the date of the
grant.
Executive Compensation
The following table sets forth the compensation earned during the three
fiscal years ended January 29, 2005, January 31, 2004 and 2003 by the Company's
Chief Executive Officer and by the four most highly paid Company's Executive
Officers whose total compensation for such periods exceeded $100,000 (the "Named
Executives"):
SUMMARY COMPENSATION TABLE
Long-term compensation
Annual compensation Awards Payouts
Other Securities
Annual Restricted Underly- All
Compen- Stock Ing LTIP Other
Fiscal Salary Bonus Sation Awards(s) Options/ Payouts Compen-
Name and Principal Position Year ($) ($) ($) ($) SARs (#) ($) 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 $21,500 - - 20,000 - -
2003 - - - - - - -
1 Bonuses were earned in fiscal 2003 but paid in fiscal 2004
2 Bonuses were earned in fiscal 2004 but paid in fiscal 2005
Stock Options
The following table sets forth the individual grants of stock options made
during the fiscal year ended January 29, 2005 by the Company's Chairman of the
Board and the Named Executives:
Options/SAR Grants Table
Percent of
Number of total
Securities Options/SARs Exercise
Underlying Granted to or Base
Options/SARs Employees in Price Expiration 5% 10%
Name Granted (#) fiscal year ($/Sh) date ($) ($)
- -------------------------------------------------------------------------------------------------------------------
Henry Arnberg - - - - - -
Paul Gallagher 150,000 79% $1.12 12/1/2009 $214,000 $225,000
Beverly Eichel 40,000 21% $1.12 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 (#)
Shares Value
Acquired on Realized
Name Exercise (#) $ 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
Stock Option Plans
The Company maintains two stock option plans pursuant to which options to
purchase an aggregate of 1,984,375 shares of Class A Common Stock may be
granted.
2003 Stock Option Plan. The 2003 Plan was adopted by the Board of Directors
in May 2003 and was approved by the stockholders of the Company in July 2003
(the "2003 Plan"). The 2003 Plan currently has 750,000 shares of Common Stock
reserved for issuance upon the exercise of options designated as either (i)
incentive stock options ("ISOs") under the Code or (ii) non-qualified stock
options. ISOs may be granted under the 2003 Plan to employees and officers of
the Company. Non-qualified options may be granted to consultants, directors
(whether or not they are employees), employees or officers of the Company. In
certain circumstances, the exercise of stock options may have an adverse effect
on the market price of the Company's Common Stock.
The purpose of the 2003 Plan is to encourage stock ownership by certain
directors, officers and employees of the Company and certain other persons
instrumental to the success of the Company and give them a greater personal
interest in the success of the Company. The 2003 Plan is administered by the
Stock Option Committee. The Committee, within the limitations of the 2003 Plan,
determines the persons to whom options will be granted, the number of shares to
be covered by each option, whether the options granted are intended to be ISOs,
the duration and rate of exercise of each option, the option purchase price per
share and the manner of exercise, the time, manner and form of payment upon
exercise of an option, and whether restrictions such as repurchase rights in the
Company are to be imposed on the shares subject to options. Options granted
under the 2003 Plan may not be granted at a price less than the fair market
value of the Common Stock on the date of the grant (or 110% of fair market value
in the case of persons holding 10% or more of the voting stock of the Company).
The aggregate fair market value of shares for which ISOs granted to any person
are exercisable for the first time by such person during any calendar year
(under all stock option plans of the Company and any related corporation) may
not exceed $100,000. The 2003 Plan will terminate in December, 2013 which means
no options may be granted after such date. Options granted under the 2003 Plan
will expire not more than five years from the date of grant; however, any
options outstanding on the termination date of the 2003 Plan will continue until
they expire by their terms. Options granted under the 2003 Plan are not
transferable during an optionee's lifetime but are transferable at death by will
or by the laws of descent and distribution.
2004 Non-Employee Director Stock Option Plan. The 2004 Plan was adopted by
the Board of Directors in August 2004 and was approved by the stockholders of
Company in January 2005 (the "2004 Plan"). The 2004 Plan has 148,042 shares of
Class A Common Stock for issuance to the Company's independent and unaffiliated
directors. Pursuant to the terms of the 2004 Plan each independent and
unaffiliated director shall automatically be granted, subject to availability,
without any further action by the Board of Directors or the Stock Option
Committee: (i) a non-qualified option to purchase 10,000 shares of Class A
Common Stock upon their initial election or appointment to the Board of
Directors; and (ii) a non-qualified option to purchase 10,000 shares of Class A
Common Stock on the date of each annual meeting of stockholders following their
election or appointment to the Board of Directors. The exercise price of each
option is the fair market value of the Company's Class A Common Stock on the
date of grant. Each option expires five years from the date of grant and vests
in three annual installments of 33 1/3% each on the first, second and third
anniversary of the date of grant. Options granted under the 2004 Plan would
generally not be transferable during an optionee's lifetime but would be
transferable at death by will or by the laws of descent and distribution. In the
event an optionee ceases to be a member of the Board of Directors (other than by
reason of death or disability), then the non-vested portion of the option would
immediately terminate and become void and any vested but unexercised portion of
the option may be exercised for a period of 180 days from the date the optionee
ceased to be a member of the Board of Directors. In the event of death or
permanent disability of an optionee, all options accelerate and become
immediately exercisable until the scheduled expiration date of the option.
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 29, 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 1/29/05
------- ------- ------- ------- -------
Hirsch International Corp. $100 $49 $42 $225 $99
NASDAQ Composite Index 100 70 48 75 74
Peer Group 100 75 79 106 90
Employment Agreements
Paul Gallagher
As of September 11, 2004, Mr. Gallagher entered into a two-year employment
agreement to serve as the Company's President, Chief Operating Officer and a
director. Mr. Gallagher was subsequently appointed to the position of Chief
Executive Officer upon the retirement of Henry Arnberg.
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.
Beverly Eichel
As of February 1, 2004, Ms. Eichel entered into a two-year employment
agreement to serve as the Company's Executive Vice-President-Finance, 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) year 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.
401(k) Plan
The Company sponsors a voluntary contribution plan qualified under Section
401(k) of the Code (the "401(k) Plan"). Employees of the Company who have
attained the age of 21 and who complete one year of continuous service are
eligible to participate in the 401(k) Plan. Under the 401(k) Plan, an employee
may elect to contribute annually on a pre-tax basis to a retirement account a
specified percentage of his or her compensation. Each employee is fully vested
at all times with respect to his or her contributions. Within certain limits
prescribed by the 401(k) Plan and applicable law, the Board of Directors may
authorize discretionary matching contributions by the Company up to a maximum of
two percent of an eligible employee's annual compensation. The Company elected
not to make a matching contribution for the fiscal years ended January 29, 2005,
January 31, 2004 and 2003, respectively.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
The Company's Compensation Committee of the Board of Directors consists of
Marvin Broitman (Chairman), Mary Ann Domuracki, and Christopher Davino, all of
which are independent outside directors of the Company. The Compensation
Committee's primary responsibility is for reviewing the Company's compensation
practices for executive officers and key employees.
The Compensation Committee has furnished the following report on executive
compensation.
Compensation Committee Report
The Compensation Committee of the Board of Directors (the "Committee") is
currently composed of three independent outside directors of the Company.
The Committee focuses on compensating Company executives on a competitive
basis with other comparably sized and managed companies in a manner consistent
and supportive of overall Company objectives and through a compensation plan
which balances the long-term and short-term strategic initiatives of the
Company. The Committee intends that the Company's executive compensation program
will:
(1) reward executives for strategic management, the achievement of key
business objectives and enhancement of stockholder value;
(2) reflect each executive's success at resolving key operational issues;
(3) facilitate both the short-term and long-term planning process; and
(4) attract and retain key executives believed to be critical to the
long-term success of the Company.
The Company's compensation program for executive officers generally
consists of (i) a fixed base salary, (ii) performance-related annual bonus
awards and (iii) long-term incentive compensation in the form of stock options.
In addition, Company executives are able to participate in various benefit plans
generally available to other full-time employees of the Company. Each executive
officer's compensation package is designed to provide an appropriately weighted
mix of these elements, which in the aggregate provide a level of compensation
the committee believes is approximately equal to those provided by comparatively
sized and managed companies.
In reviewing the Company and executives' performance, the Committee takes
into consideration, among other things, the following performance factors in
making its compensation recommendations: revenues, net income and cash flow. The
Committee has received outside guidance from independent 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 Company'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 29, 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 formulating the terms of Mr. Gallagher's employment
agreement, the Committee engaged and received guidance from an independent
compensation consultant who advised them on the comparability and fairness to
the stockholders of the terms of the employment agreement.
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.
COMPENSATION COMMITTEE:
Marvin Broitman (Chairperson)
Mary Ann Domuracki
Christopher J. Davino
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of shares of Class
A Common Stock and Class B Common Stock as of December 1, 2005, by (i) each
person who owns more than 5% of the outstanding shares of Class A and Class B
Common Stock; (ii) each executive officer and director of the Company; and (iii)
all officers and directors of the Company as a group:
Amount and Nature of Percent of
Name and Address of Beneficial Owner (1) Title of Class (2) Beneficial Ownership Class
- ---------------------------------------------------------------------------------------------------------------
Henry Arnberg................. Class A 981,658 12.4%
Class B 400,018 (3,4) 91%
Paul Levine................... Class A 1,074,621 (5) 13.6%
Class B -
Marvin Broitman............... Class A 81,498 (6) 1.0%
Class B - -
Mary Ann Domuracki............ Class A 23,333 (7) *
Class B - -
Christopher Davino............ Class A 3,333 (10) *
Class B - -
Paul Gallagher................ Class A 653,332 (8) 8.3%
Class B - -
Beverly Eichel................ Class A 202,166 (9) 2.6%
Class B - -
All Officers and Directors as a group Class A 3,019,941 38.2%
(six persons) Class B 400,018 91%
* Less than one percent
(1) All addresses are c/o Hirsch International Corp., 200 Wireless Boulevard,
Hauppauge, New York 11788.
(2) The Company's outstanding Common Stock consists of two classes. Class A
Common Stock and Class B Common Stock. The Class A Common Stock and the
Class B Common Stock are substantially identical except that two-thirds of
the directors of the Company will be elected by Mr. Arnberg, the holder of
all of the Class B Common Stock, as long as the number of outstanding
Shares of Class B Common Stock equals or exceeds 400,000 shares.
(3) 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 December 1, 2005 are deemed to be outstanding for the purpose of
calculating the percentage of outstanding shares owned by that person only.
(4) 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.
(5) 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.
(6) 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.
(7) 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
(8) 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 with Sheridan Square
Entertainment, Inc. 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.
(9) 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 with Sheridan Square
Entertainment, Inc. 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.
(10) Includes options to purchase 3,333 shares of Class A Common Stock at an
exercise price of $1.01 per share. Does not include options to purchase
6,667 shares of Class A Common Stock at an exercise price of $1.01 per
share.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive, officers and directors, and persons who own more than ten percent of
a registered class of the Company's equity securities (collectively, the
"Reporting Persons") to file reports of ownership and changes in ownership with
the Securities and Exchange Commission and to furnish the Company with copies of
these reports. Based solely on the Company's review of the copies of such forms
received by it during its fiscal year ended January 29, 2005, the Company
believes that the Reporting Persons complied with all filing requirements
applicable to them.
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.
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 Threads subsidiary, pursuant to
the terms of the agreement. 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, the son of Henry
Arnberg and the 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 consulting 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.
2. SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The policy of the Audit Committee is to review and pre-approve both audit
and non-audit services to be provided by our independent registered public
accounting firm (other than certain exceptions permitted by the Sarbanes Oxley
Act of 2002). The Audit Committee negotiates the annual audit fee directly with
our independent registered public accounting firm. Any work in addition to these
pre-approved services in a quarter requires the advance approval of the Audit
Committee. The Audit Committee considered and discussed with BDO Seidman, LLP
and management as to whether the provision of permitted 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.
Fees paid to our independent registered public accounting firm
The following table sets forth the fees paid to our independent registered
public accounting firm 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.
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 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 and
eligible to vote is required for the adoption of the foregoing 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 1,750,000. 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.
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 1,750,000 shares of
Class A 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 vote "for" the
proposed amendment to the 2003 Stock Option Plan. 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 and eligible to vote is
required for the adoption of the foregoing proposals.
4. OTHER BUSINESS
The Board of Directors has no knowledge of any other business that may come
before the Meeting and does not intend to present any other business. However,
if any other business shall properly come before the Meeting or any adjournment
thereof, the persons named as proxies will have discretionary authority to vote
the shares of Common Stock represented by the accompanying proxy in accordance
with their best judgment on such matters.
Stockholder's Proposals
Any stockholder of the Company who wishes to present a proposal to be
considered at the next annual meeting of stockholders of the Company and who
wishes to have such proposal presented in the Company's proxy statement for such
Meeting must deliver such proposal in writing to the Company at 200 Wireless
Boulevard, Hauppauge, New York 11788, on or before August 1, 2006. In order to
curtail controversy as to the date on which the proposal was received by the
Company, it is suggested that proponents submit their proposals by certified
mail, return receipt requested.
By Order of the Board of Directors
/s/ Beverly Eichel
-----------------------------------
Beverly Eichel, Secretary
The Company will furnish without charge to each person whose proxy is being
solicited by this proxy statement, on the written request of such person, a copy
of the Company's Annual Report on Form 10-K, for its fiscal year ended January
29, 2005. Such request should be addressed to Stockholder Relations, Hirsch
International Corp., 200 Wireless Boulevard, Hauppauge, New York 11788.
Dated: December 21, 2005
EXHIBIT A:
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 Class A 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 Class A 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 1,750,000 Shares
of Class A 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 Class A Common Stock shall be deemed to
be:
(i) the closing price of the Company's Class A 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.