UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ________________.
Commission File No.: 0-23434
HIRSCH INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)
Delaware 11-2230715
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Wireless Boulevard, Hauppauge, New York 11788
(Address of principal executive offices)
Registrant's telephone number, including area code: (516) 436-7100
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of September 10, 1997:
Class of Number of
Common Equity Shares
Class A Common Stock, 6,794,467
Par value $.01
Class B Common Stock, 2,668,139
Par value $.01
<PAGE>
HIRSCH INTERNATIONAL CORP. and SUBSIDIARIES
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Consolidated Balance Sheets - July 31, 1997 and January 31, 1997 3-4
Consolidated Statements of Income for the Six and Three Months Ended July
31, 1997 and 1996 5
Consolidated Statements of Cash Flows for the Six Months Ended July 31,
1997 and 1996 6-8
Notes to Consolidated Financial Statements 9-12
Item 2. Management's Discussion and Analysis of Financial Condition and
Part II. Other Information 16
Signatures 17
</TABLE>
2
Part I - Financial Information
Item 1. Consolidated Financial Statements
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, January 31,
1997 1997
(Unaudited)
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $4,903,000 $7,865,000
SHORT-TERM INVESTMENTS AVAILABLE-FOR-SALE - 2,596,000
ACCOUNTS RECEIVABLE, NET
OF ALLOWANCE FOR DOUBTFUL
ACCOUNTS OF $2,578,000 34,432,000 21,761,000
NET INVESTMENT IN SALES-TYPE
LEASES-CURRENT PORTION (Note 7) 2,612,000 1,715,000
INVENTORIES, NET (Note 6) 22,872,000 15,769,000
OTHER CURRENT ASSETS 2,441,000 2,073,000
TOTAL CURRENT ASSETS 67,260,000 51,779,000
NET INVESTMENT IN SALES-TYPE
LEASES-NON-CURRENT PORTION (Note 7) 14,494,000 9,180,000
EXCESS OF COST OVER NET ASSETS ACQUIRED,
NET OF ACCUMULATED AMORTIZATION OF
$914,000 AND $383,000, RESPECTIVELY
(Note 5) 14,824,000 14,043,000
PURCHASED TECHNOLOGIES, NET OF ACCUMULATED
AMORTIZATION OF $654,000 AND $558,000,
RESPECTIVELY 686,000 781,000
PROPERTY, PLANT AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION AND AMORTIZATION 6,436,000 6,242,000
OTHER ASSETS, NET 1,946,000 1,671,000
TOTAL ASSETS $105,646,000 $83,696,000
See notes to consolidated financial statements.
3
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, January 31,
1997 1997
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
TRADE ACCEPTANCES PAYABLE $16,174,000 $13,332,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 11,890,000 10,160,000
CURRENT MATURITIES OF LONG-TERM DEBT
(Note 8) 230,000 2,430,000
INCOME TAXES PAYABLE 1,639,000 1,541,000
CUSTOMER DEPOSITS PAYABLE 1,386,000 1,357,000
TOTAL CURRENT LIABILITIES 31,319,000 28,820,000
LONG-TERM DEBT, LESS CURRENT
MATURITIES (Note 8) 1,513,000 13,194,000
TOTAL LIABILITIES 32,832,000 42,014,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (Notes 3 and 4)
PREFERRED STOCK, $.01 PAR VALUE; AUTHORIZED:
1,000,000 SHARES; ISSUED: NONE -
CLASS A COMMON STOCK, $.01
PAR VALUE; AUTHORIZED:
20,000,000 SHARES, OUTSTANDING:
6,764,546 AND 5,312,666 SHARES,
RESPECTIVELY 67,000 53,000
CLASS B COMMON STOCK, $.01 PAR VALUE;
AUTHORIZED: 3,000,000 SHARES, OUTSTANDING
2,691,055 AND 2,732,249 SHARES,
RESPECTIVELY 27,000 27,000
ADDITIONAL PAID-IN CAPITAL 41,150,000 15,626,000
UNREALIZED HOLDING GAIN ON SHORT TERM
INVESTMENTS AVAILABLE-FOR-SALE 21,000
RETAINED EARNINGS 31,570,000 25,955,000
TOTAL STOCKHOLDERS' EQUITY 72,814,000 41,682,000
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $105,646,000 $83,696,000
See notes to consolidated financial statements.
4
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
July 31, July 31,
<S> <C> <C> <C> <C>
NET SALES $78,126,000 $54,003,000 $40,981,000 $30,135,000
INTEREST INCOME RELATED
TO SALES-TYPE LEASES 2,135,000 1,604,000 1,207,000 783,000
TOTAL REVENUE 80,261,000 55,607,000 42,188,000 30,918,000
COST OF GOODS SOLD 50,932,000 35,274,000 26,615,000 19,630,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 18,974,000 13,122,000 10,063,000 7,393,000
INTEREST EXPENSE 594,000 262,000 256,000 193,000
OTHER INCOME, NET (3,000) (131,000) 36,000 (56,000)
TOTAL EXPENSES 70,497,000 48,527,000 36,970,000 27,160,000
INCOME BEFORE INCOME TAXES 9,764,000 7,080,000 5,218,000 3,758,000
PROVISION FOR INCOME TAXES 4,149,000 2,911,000 2,217,000 1,560,000
NET INCOME $5,615,000 $4,169,000 $3,001,000 $2,198,000
NET INCOME PER SHARE (Note 2)
PRIMARY $0.65 $0.53 $0.33 $0.28
FULLY DILUTED $0.64 $0.53 $0.33 $0.28
WEIGHTED AVERAGE NUMBER OF
SHARES USED IN THE CALCULATION
OF NET INCOME PER
SHARE (Note 2)
PRIMARY 8,680,000 7,902,000 9,105,000 7,920,000
FULLY DILUTED 8,726,000 7,931,000 9,145,000 7,931,000
</TABLE>
See notes to consolidated financial statements.
5
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
July 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $5,615,000 $4,169,000
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 1,362,000 676,000
PROVISION FOR BAD DEBTS - 121,000
PROVISION FOR SLOW-MOVING INVENTORIES - 35,000
DEFERRED INCOME TAXES - (102,000)
LOSS ON DISPOSAL OF ASSETS 3,000 -
GAIN ON SALE OF SHORT-TERM INVESTMENTS (13,000) -
CHANGES IN ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE (12,653,000) 702,000
NET INVESTMENT IN SALES-TYPE LEASES (6,212,000) (984,000)
INVENTORIES (7,203,000) (2,305,000)
OTHER ASSETS (796,000) (197,000)
TRADE ACCEPTANCES PAYABLE 2,842,000 695,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1,369,000 (1,119,000)
INCOME TAXES PAYABLE 97,000 115,000
CUSTOMER DEPOSITS PAYABLE 29,000 160,000
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (15,560,000) 1,966,000
See notes to consolidated financial statements.
6
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
July 31,
1997 1996
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES (731,000) (611,000)
ACQUISITION OF SEWING MACHINE EXCHANGE,
INC. (Note 5) - (4,585,000)
ACQUISITION OF EQUIPMENT CONNECTION, INC.
(Note 5) (553,000) -
SALES (PURCHASES) OF SHORT-TERM INVESTMENTS 2,583,000 484,000
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 1,299,000 (4,712,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS OF BANK FINANCING 3,761,000 7,500,000
REPAYMENTS OF LONG-TERM DEBT (17,800,000) (2,892,000)
PROCEEDS FROM PUBLIC OFFERING 24,315,000 -
ISSUANCE OF STOCK & EXERCISE OF STOCK
OPTIONS AND WARRANTS 1,023,000 1,000
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,299,000 4,609,000
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (2,962,000) 1,863,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,865,000 6,565,000
CASH AND CASH EQUIVALENTS, END OF PERIOD $4,903,000 $8,428,000
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
INTEREST PAID $604,000 $232,000
INCOME TAXES PAID $4,066,000 $2,694,000
See notes to consolidated financial statements.
7
HIRSCH INTERNATIONAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
In March of 1997, the Company purchased all of the assets of Equipment
Connection, Inc. (see Note 5) for $805,000. In the prior year, the Company
purchased all of the capital stock of SMX and Sedeco (see Note 5) for $8,690,000
and $6,565,000, respectively. In connection with the acquisitions the following
activity was recorded:
<TABLE>
<CAPTION>
SMX Sedeco ECI
<S> <C> <C> <C>
FAIR VALUE OF ASSETS ACQUIRED $6,360,000 $3,965,000 $406,000
FAIR VALUE OF LIABILITIES ASSUMED (7,711,000) (1,378,000) (255,000)
NET ASSETS ACQUIRED ($1,351,000) $2,587,000 $151,000
CASH PAID (GROSS) FOR NET ASSETS $5,000,000 $4,165,000 $605,000
PROMISSORY NOTES ISSUED FOR NET ASSETS 3,500,000 - -
CLASS A COMMON STOCK ISSUED FOR NET ASSE 238,000 2,400,000 200,000
ACQUISITION COSTS & RESTRUCTURING RESERV 755,000 754,000 58,000
TOTAL CONSIDERATION 9,493,000 7,319,000 863,000
LESS NET ASSETS ACQUIRED 1,351,000 (2,587,000) (151,000)
LESS ACCUMULATED AMORTIZATION (713,000) (178,000) (23,000)
LESS OFFSET OF PROMISSORY NOTES (550,000) - -
EXCESS OF COST OVER NET ASSETS ACQUIRED $9,581,000 $4,554,000 $689,000
</TABLE>
See notes to consolidated financial statements.
8
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
Six and Three Months Ended July 31, 1997 and 1996
1. Organization and Basis of Presentation
The accompanying consolidated financial statements as of and for the six
and three month periods ended July 31, 1997 and 1996 include the accounts of
Hirsch International Corp. ("Hirsch"), HAPL Leasing Co., Inc. ("HAPL"), Sewing
Machine Exchange, Inc. ("SMX"), Sedeco, Inc. ("Sedeco"), Hirsch Equipment
Connection, Inc. ("HECI"), and Pulse Microsystems Ltd. ("Pulse" and collectively
with Hirsch, HAPL, SMX, Sedeco, and HECI, the "Company"). The operations of HECI
have been included in consolidated operations since March 26, 1997 (the date of
acquisition).
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all the adjustments, consisting of normal accruals,
necessary to present fairly the results of operations for each of the six and
three month periods ended July 31, 1997 and 1996, the financial position at July
31, 1997 and cash flows for the six and three month periods ended July 31, 1997
and 1996, respectively. Such adjustments consisted only of normal recurring
items. The consolidated financial statements and notes thereto should be read in
conjunction with the Company's Annual Report on Form 10-K for the fiscal year
ending January 31, 1997 as filed with the Securities and Exchange Commission.
The interim financial results are not necessarily indicative of the results
to be expected for the full year.
2. Net Income Per Share
Net income per share is based on the weighted average number of common
shares outstanding during the period after giving retroactive effect to stock
dividends (See Note 3). Stock options and warrants are considered to be common
stock equivalents and have been included in the computation of earnings per
share using the treasury stock method.
3. Stock Dividend
On June 25, 1996, the Company declared a five-for-four stock split effected
in the form of a 25 percent stock dividend which was paid on July 22, 1996. The
par value of the shares remains unchanged at $.01 per share. All numbers of
shares, per share amounts and per share prices in the consolidated financial
statements and notes thereto have been adjusted to reflect this stock split
unless otherwise noted.
4. Secondary Public Offering
On June 6, 1997, the Company consummated a secondary public offering of
Class A Common Stock (the "Secondary Offering"). The Company sold 1,210,526
shares at $20.00 per share. Another 750,022 shares were sold by certain
stockholders of the Company ("Selling Stockholders"). On July 7, 1997, the
underwriters exercised their over-allotment option to purchase an additional
294,082 shares of Class A Common Stock, 122,592 shares of which were sold by the
Company and 171,490 shares sold by the selling stockholders. Net proceeds of
approximately $24.3 million were received by the Company after expenses and
underwriting discount.
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
5. Acquisitions
(A) Acquisition of Equipment Connection On March 26, 1997 the Company
acquired all of the assets of Equipment Connection, Inc. ("ECI"). The
acquisition was accounted for as a purchase in accordance with Accounting
Principles Board Opinion No. 16, "Business Combinations" ("APB 16") and
accordingly, the acquired assets and assumed liabilities have been recorded at
their estimated fair market values (pending final purchase price allocation) at
the date of acquisition. The cost in excess of fair value of ECI is being
amortized over a 10-year period. The purchase price was $805,000, paid in the
form of $605,000 in cash and $200,000 in the Company's Class A Common Stock.
Concurrent with the acquisition, the Company entered into five-year employment
contracts with ECI's two former principals.
(B) Acquisition of Sedeco On December 20, 1996 the Company acquired all of
the outstanding capital stock of Sedeco, Inc.. The acquisition was accounted for
as a purchase in accordance with APB 16 and the acquired assets and assumed
liabilities have been recorded at their estimated fair market value (pending
final purchase price allocation) at the date of acquisition. The cost in excess
of fair value of Sedeco is being amortized over a 15-year period.
The purchase price was $6,565,000, paid in the form of $4,165,000 in cash
and $2,400,000 in the Company's Class A Common Stock. Concurrent with the
acquisition, the Company entered into a five-year employment contract with
Sedeco's former shareholder pursuant to which approximately 60,000 options to
purchase shares of Hirsch Class A Common Stock were issued. The options were
issued at fair market value at the date of acquisition and vest in four annual
installments of 25 percent each on the first, second, third, and fourth
anniversary of the date of grant and expire five years from the date of grant.
(C) Acquisition of Sewing Machine Exchange On June 7, 1996 the Company
acquired all of the outstanding capital stock of Sewing Machine Exchange, Inc..
The acquisition was accounted for as a purchase in accordance with APB 16 and
accordingly, the acquired assets and assumed liabilities have been recorded at
their estimated fair market values at the date of acquisition. The cost in
excess of fair value of SMX is being amortized over a 15-year period.
The purchase price was $8,690,000 paid in the form of a promissory note in
the principal amount of $4,250,000 to each of the two shareholders of SMX and by
delivery of an aggregate of 9,375 shares of the Company's Class A Common Stock.
Pursuant to the terms of the promissory notes, the Company was required to make
a principal payment on each note in the amount of $2,500,000 on June 13, 1996
with the balance of each note ($1,750,000) payable in 60 equal monthly
installments of principal and interest beginning July 7, 1996 (see Note 8B).
Concurrent with the acquisition, the Company entered into five-year employment
contracts with SMX's former shareholders pursuant to which they received
approximately 331,000 options to purchase shares of Hirsch Class A common stock.
The options were issued at fair market value at the date of acquisition and vest
in four annual installments of 25 percent each on the first, second, third, and
fourth anniversary of the date of grant and expire five years from the date
thereof.
6. Inventories, Net
July 31, 1997 January 31, 1997
Machines............................... $18,735,000 $12,245,000
Parts.................................. 6,140,000 5,527,000
24,875,000 17,772,000
Less: Reserve.......................... (2,003,000) (2,003,000)
Inventories, net....................... $22,872,000 $15,769,000
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
7. Net Investment in Sales-Type Leases
July 31, 1997 January 31, 1997
Total Minimum Lease Payments Receivable $18,190,000 $11,142,000
Estimated Residual Value of Leased
Property (Unguaranteed)................ 4,204,000 3,059,000
Allowance for Estimated Uncollectible
Lease Payments ........................ (338,000) (338,000)
Less: Unearned Income.................. (4,950,000) (2,968,000)
Net Investment......................... 17,106,000 10,895,000
Less: Current Portion.................. (2,612,000) (1,715,000)
Long-Term Portion...................... $14,494,000 $9,180,000
8. Long-Term Debt
July 31, 1997 January 31, 1997
Term Note (A).......................... $ - $6,750,000
Promissory Notes (B)................... - 2,542,000
Acquisitions (C) - 4,446,000
Mortgage (D)........................... 1,664,000 1,779,000
Other........ 79,000 107,000
Total (E)......................... ...... 1,743,000 15,624,000
Less: Current maturities............... (230,000) (2,430,000)
Long-Term Maturities................... $1,513,000 $13,194,000
(A) On June 10, 1996, the Company entered into a term loan agreement with a
bank (the "Term Loan Agreement") pursuant to which the bank lent $7,500,000 to
the Company to fund the acquisition of SMX and to repay SMX's credit facilities.
The loan was repayable in 20 equal quarterly installments of principal and
interest (as defined in the Term Loan Agreement) beginning September 30, 1996.
The loan was guaranteed by Hirsch, Pulse and SMX, and required the Company to
maintain, among others, certain minimum tangible net worth, quick asset ratio
and fixed charge coverage ratio levels, as defined. In June of 1997 the Company
paid the total outstanding balance of the loan with proceeds from the Secondary
Offering (see Note 4).
Hirsch International Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(B) In connection with the acquisition of SMX (see Note 5C), the Company
issued promissory notes in the principal amount of $4,250,000 to each of the two
former shareholders of SMX. Pursuant to the terms of the promissory notes, the
Company was required to make a principal payment on June 13, 1996 with the
balance of each note ($1,750,000) payable in 60 equal monthly installments of
principal and interest beginning July 7, 1996. The notes bore interest at the
rate (the "Hirsch Rate") defined in the Hirsch Term Agreement plus 2% through
June 1999 and from July 1999 through maturity at the Hirsch Rate. Pursuant to
the terms of the Stock Purchase Agreement, the former shareholders of SMX made
certain guarantees with respect to collectibility of accounts receivable and
salability of inventory among other things. In the fourth quarter of fiscal
1997, these notes were reduced by approximately $550,000. In June of 1997 the
Company paid the total outstanding balance of the notes with proceeds from the
Secondary Offering (see Note 4).
(C) In connection with the acquisitions of ECI and Sedeco, the Company
borrowed approximately $761,000 and $4,446,000, respectively, to fund the
acquisitions and repay existing credit facilities. The amounts were borrowed
under the provisions of the Revolving Credit Facility (see E) and bore interest
as defined therein. The Revolver matures three years from the closing date at
which point, any amounts used to fund acquisitions thereunder will convert to a
term loan facility and be paid in 12 equal quarterly installments over a three
year period. At April 30, 1997, all amounts outstanding thereunder were
classified in Long-Term Debt on the Balance Sheets. In June of 1997 the Company
paid the total outstanding balance of the Revolver with proceeds from the
Secondary Offering (see Note 4).
(D) On October 27, 1994, Hirsch entered into a ten year, $2,295,000
mortgage agreement with a bank (the "Mortgage") for its new corporate
headquarters. The mortgage bears interest at a fixed rate of 8.8 percent and is
payable in equal monthly principal installments of approximately $19,000. The
terms of the Mortgage, among other things, restrict additional borrowings by the
Company, and require the Company to maintain certain debt service coverage ratio
levels, as defined in the Mortgage. The obligation under the Mortgage is secured
by a lien on the premises and the related improvements thereon.
(E) The Company has a $30,000,000 Revolving Credit Facility (the
"Facility"). The Facility is for working capital loans, letters of credit, and
deferred payment letters of credit and bear interest as defined in the Facility.
The terms of the Facility, among other things, restrict additional borrowings by
the Company and require the Company to maintain certain minimum tangible net
worth, quick asset ratio and fixed charge coverage levels, as defined. The
Facility also provides a $15,000,000 sub-limit to finance acquisitions (as
defined therein). This Facility has also been used for letters of credit and
deferred payment letters of credit aggregating approximately $16,174,000 at July
31, 1997.
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 the
Company or its management are intended to identify such forward-looking
statements. These forward-looking statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
Company's actual results, performance or achievements could differ materially
from the results expressed in or implied by these forward-looking statements.
Factors that could cause or contribute to such differences are detailed from
time to time in the Company's Securities and Exchange Commission reports,
including this Form 10-Q for the fiscal quarter ended July 31, 1997, and the
Company's Prospectus filed with the Commission on June 6, 1997. Historical
results are not necessarily indicative of trends in operating results for any
future period.
Six and Three Months Ended July 31, 1997 as Compared to the Six and Three
Months Ended July 31, 1996
Net Sales. Net sales for the six and three months ended July 31, 1997 were
$78,126,000 and $40,981,00, an increase of $24,123,000 and $10,846,000, or 44.7%
and 36.0%, respectively, compared to $54,003,000 and $30,135,000 for the six and
three months ended July 31, 1996. Approximately $18,478,000 and $7,718,000 of
such increase was due to the sale of embroidery machinery for the six and three
months ended July 31, 1997. The Company believes that this increase is the
result of the continued strong demand for embroidered products, the expansion
into new territories acquired through recent acquisitions (see Note 5), the
creation of new embroidery applications and markets and the continued strength
of "embroidery entrepreneurs" as a growing segment of the marketplace.
Additionally, technological advances and innovations in embroidery equipment
have opened up new marketing opportunities.
The Company's revenues have also grown in large part as a result in the
growth in unit sales of the singlehead embroidery machine. Singlehead embroidery
machines and multihead embroidery machines represented 44.9% and 55.1% and 43.5%
and 56.5%, respectively, of the number of embroidery machines sold during the
six and three months ended July 31, 1997 as compared to 43.9% and 56.1% and
44.3% and 55.7% for the six and three months ended July 31, 1996, respectively.
Revenue from the sale of the Company's computer hardware and software,
parts, service, used machines, application software and embroidery supplies for
the six and three months ended July 31, 1997 aggregated approximately
$14,678,000 and $8,747,000, an increase of approximately 62.5% and 55.7% as
compared to $9,034,000 and $5,619,000 for the six and three months ended July
31, 1996. This increase is primarily attributable to the increase in machine
revenues.
Interest income related to sales-type leases. HAPL's interest income
increased 33.1% and 54.2% to $2,135,000 and $1,207,000 for the six and three
months ended July 31, 1997 from $1,604,000 and $783,000 for the comparable
periods of the prior year. This increase is a result of the continued expansion
of HAPL's operations and staff.
Cost of Goods Sold. For the six and three months ended July 31, 1997, cost
of goods sold increased $15,658,000 and $6,985,000, or 44.4% and 35.6%, to
$50,932,000 and $26,615,000 from $35,274,000 and $19,630,000 for the six and
three months ended July 31, 1996. The increase was in direct proportion to the
Company's increased sales volume. The fluctuation of the dollar against the yen
has a minimal effect on Tajima equipment gross margins since all currency
fluctuations have been reflected in pricing adjustments in order to maintain
consistent gross margins on machine revenues. Gross margins for the Company's
value-added products are generally higher than gross margins on the sale of
embroidery machinery.
Selling, General and Administrative ("SG&A") Expenses. For the six and
three months ended July 31, 1997. SG&A expenses increased $5,852,000 and
$2,670,000, or 44.6% and 36.1%, to $18,974,000 and $10,063,000 from $13,122,000
and $7,393,000 for the six and three months ended July 31, 1996. SG&A expenses
increased as a percentage of revenues to 23.6% and 23.9% for the six and three
months ended July 31, 1997, respectively, from 23.6% and 23.9% for the same
periods of the prior year. This increase in SG&A expenses as a percentage of
revenues is primarily attributable to the following factors:
In order to implement its growth strategy the Company has hired additional
sales and marketing personnel for small machines and supplies, opened several
new sales offices and hired additional software programmers and technicians. The
Company also increased expenditures for advertising and for participation in
trade shows and seminars.
The Company made a significant investment in its infrastructure as it
relates to the West Coast Expansion. Additional sales, marketing, training,
administrative and technical support personnel were hired to commence operations
on the West Coast. The Company also entered into leases for several new sales
offices and incurred start up costs related to these offices.
The Company incurred certain incremental costs in connection with the
acquisitions of SMX, Sedeco, and ECI.
Interest Expense. Interest expense for the six and three months ended July
31, 1997 increased $332,000 and $63,000 to $594,000 and $256,000 from $262,000
and $193,000 for the six and three months ended July 31, 1996. This increase is
directly attributable to the increased interest costs related to the additional
debt assumed for the SMX, Sedeco, and ECI acquisitions. This debt was repaid
with proceeds from the Secondary Public Offering.
Provision for income taxes. The provision for income taxes reflected an
effective tax rate of approximately 42.5% and 42.5% for the six and three months
ended July 31, 1997 as compared to 41.1% and 41.5% for the six and three months
ended July 31, 1996. Differences from the federal statutory rate consisted
primarily of provisions for state income taxes net of Federal tax benefit. The
increase in the tax rate for the six and three months ended July 31, 1997 is
principally the result of changes in the sales mix which resulted in increased
sales to states and other taxing jurisdictions with higher effective tax rates.
Additionally, the goodwill related to the Sedeco acquisition, which was
accounted for as a stock purchase for tax purposes, resulted in a permanent
difference since it is not deductible for tax purposes. The principal components
of the deferred income tax assets result from allowances and accruals which are
not currently deductible for tax purposes and differences in amortization
periods between book and tax bases. There was no effect on deferred taxes as a
result of the SMX acquisition, which was accounted for as an asset purchase for
tax purposes. The goodwill related to the SMX acquisition is being amortized
over 15 years for both book and tax purposes. The Company has not established
any valuation allowances against these deferred tax assets as management
believes it is more likely than not that the Company will realize these assets
in the future based upon the historical profitable operations of the Company.
Net Income. Net Income for the six and three months ended July 31, 1997
increased $1,446,000 and $803,000, or 34.7% and 36.5%, to $5,615,000 and
$3,001,000 from $4,169,000 and $2,198,000 for the six and three months ended
July 31, 1996. This increase is due to the continued growth in machine sales in
addition to the contribution to net income from the sale of the Company's value
added products.
Liquidity and Capital Resources
Operating Activities and Cash Flows
The Company's working capital was $35,941,000 at July 31, 1997, increasing
$12,982,000 or 56.5%, from $22,959,000 at January 31, 1997. The Company has
financed its operations principally through cash generated from operations,
long-term financing of certain capital expenditures and the proceeds from the
Secondary Offerings completed in June 1997 and January 1996. The acquisition of
SMX was financed through a term loan agreement with a bank. The acquisitions of
Sedeco and ECI were financed through borrowings against the $30 million
Revolving Credit Facility (See Note 8 of Notes to Consolidated Financial
Statements) although these borrowings were repaid at July 31, 1997 with the
proceeds of the offering (See Note 4 of notes to Consolidated Financial
Statements).
During the six months ended July 31, 1997, the Company's cash and cash
equivalents and short-term investments available-for-sale decreased by
$2,962,000 to $4,903,000. Net cash of $15,560,000 was used in the Company's
operating activities. Cash provided by increases in the balance of trade
acceptances payable, accounts payable and accrued expenses, income taxes
payable, and customer deposits payable aggregating approximately $4,337,000 was
offset by cash used to increase inventory, accounts receivable, net investment
in sales-type leases and other assets aggregating $26,864,000. These changes
resulted from expansion of the Company's business and the acquisitions during
fiscal year 1997 and the six months ended July 31, 1997.
The Company purchases foreign currency futures contracts to hedge specific
purchase commitments. Substantially all foreign currency purchases commitments
are matched with specific foreign currency futures contracts. Consequently, the
Company believes that no material foreign currency exchange risk exists relating
to outstanding trade acceptances payable. The cost of such contracts are
included in the cost of inventory.
Revolving Credit Facility and Borrowings
In January 1997, The Company entered into a $30,000,000 Revolving Credit
Facility with two banks (the "Facility"). The Facility is to be used for working
capital loans, letters of credit and deferred payment letters of credit and bear
interest as defined in the Facility. The terms of the Facility restrict
additional borrowings by the Company and require the Company to maintain certain
minimum tangible net worth, quick asset ratio and fixed charge coverage levels
as defined. The Facility also provides a $15,000,000 sub-limit to finance
acquisitions (as defined therein). This Facility has also been used for letters
of credit and deferred payment letters of credit aggregating approximately
$16,174,000 at July 31, 1997. There were no working capital or acquisition loans
outstanding against this Facility at July 31, 1997.
On June 10, 1996, the Company entered into a term loan agreement with a
bank (the "Term Loan Agreement") pursuant to which the bank lent $7,500,000 to
the Company to fund the acquisition of SMX and to repay SMX's credit facilities.
The loan was repayable in twenty equal quarterly installments of principal and
interest (as defined in the Term Loan Agreement) commencing September 30, 1996.
The loan was guaranteed by Hirsch, Pulse and SMX and required the Company to
maintain, among others, certain minimum tangible net worth, quick asset ratio
and fixed charge coverage ratio levels, as defined. In June of 1997 the Company
paid the total outstanding balance of the loan with proceeds from the Secondary
Offering (see Note 4).
HAPL sells substantially all of its leases to financial institutions on a
non-recourse basis several months after the commencement of the lease term
thereby reducing its financing requirements. HAPL Leasing, which was fully
activated in May 1993, has closed $115,889,000 in lease agreements as of July
31, 1997. To date, approximately $101,892,000, or 87.9%, of the leases have been
sold to third party financial institutions on a non-recourse basis.
On January 27, 1994, Hirsch entered into a ten year, $2,295,000 Mortgage
agreement with a bank (the "Mortgage") for its new corporate headquarters. The
Mortgage bears interest at a fixed rate of 8.8% and is payable in equal monthly
principal installments of $19,125. The obligation under the Mortgage is secured
by a lien on the premises and the related improvements thereon.
Future Capital Requirements
The Company believes that the net proceeds from the Secondary Offering (see
Note 4 of Notes to Consolidated Financial Statements), its existing cash and
funds generated from operations, together with its existing revolving credit
facility, will be sufficient to meet its working capital and capital expenditure
requirements and to finance planned growth.
Backlog and Inventory
The ability of the Company to fill orders quickly is an important part of
its customer service strategy. The embroidery machines held in inventory by the
Company are generally shipped within a week from the date the customer's orders
are received, and as a result, backlog is not meaningful as an indicator of
future sales.
Inventory at July 31, 1997 of new Tajima embroidery machines was
$14,255,000 representing approximately one month's sales which is comparable to
historical inventory levels. Inventory of approximately $4,480,000 consisted of
computer software, used machines and other equipment.
Inflation
The Company does not believe that inflation has had, or will have in the
foreseeable future, a material impact upon the Company's operating results.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) On June 20, 1997, the Company held its Annual Meeting of Stockholders
(the "Meeting").
(b) At the Meeting, the Stockholders of the Company elected Marvin
Broitman, Ronald Krasnitz and Douglas Schenendorf as Class A directors and Henry
Arnberg, Herbert M. Gardner, Paul Levine and Tas Tsonis as Class B directors.
(c) At the Meeting, the Stockholders of the Company approved the amendment
of the Company's Stock Option Plan increasing the number of Class A Common Stock
authorized for issuance thereunder from 750,000 to 1,050,000.
(d) The Stockholders of the Company then ratified the selection of Deloitte
& Touche as the Company's independent auditors for the fiscal year ending
January 31, 1998. The following sets forth the results of voting on each matter
voted upon at the meeting:
1. Election of Directors
For Against
Marvin Broitman 3,202,596 123,330
Ronald Krasnitz 3,202,596 123,330
Douglas Schenendorf 3,202,596 123,330
Henry Arnberg 2,507,249 0
Herbert M. Gardner 2,507,249 0
Paul Levine 2,507,249 0
Tas Tsonis 2,507,249 0
<PAGE>
2. Amendment of the Company's Stock Option Plan.
For Against
3,841,837 310,810
3. Ratification of Deloitte & Touche LLP as the Company's independent
auditors for the fiscal year ending January 31, 1998.
For Against
5,822,740 2,662
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Restated Certificate of Incorporation of the Company
*3.2 Amended and Restated By-Laws of the Company
10.1 Stock Option Plan, As Amended
27 Financial Data Schedule.
*Incorporated by reference from the Company's Registration Statement on
Form S-1 (Registration Statement 33-72618) filed with the Commission on February
14, 1994.
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed by the Company on May 30, 1997, with
respect to a press release announcing its quarterly results for its first
quarter ended April 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HIRSCH INTERNATIONAL CORP.
Registrant
By: \s\ Henry Arnberg
-----------------------------------
Henry Arnberg, President and
Chief Executive Officer
By: \s\ Kenneth Shifrin
-----------------------------------
Kenneth Shifrin,
Chief Financial Officer
Dated: September 12, 1997
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
HIRSCH INTERNATIONAL CORP.
------------------------------------------------
Under Section 245 of the
Delaware General Corporation Law
------------------------------------------------
The undersigned, Henry Arnberg and Paul Levine, being President and
Secretary, respectively, of HIRSCH INTERNATIONAL CORP., a Delaware corporation
(the "Corporation") hereby certify as follows:
FIRST: The name of the Corporation is Hirsch International Corp. The name
under which the Corporation was originally formed was Portman-Curson, Inc.
SECOND: The Certificate of Incorporation was filed by the Department of
State of the State of Delaware on December 7, 1970.
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: The Corporation may issue three classes of shares as follows:
a. Class A Common Stock. The aggregate number of shares of Class A Common
Stock which the Corporation may issue is 20,000,000 shares with a par value of
$.01. The shares shall be designated as "Class A Common Stock" and shall have
identical rights and privileges in every respect. The dividend rights
attributable to the holders of Class A Common Stock shall be identical to those
of the holders of Class B Common Stock and all stock dividends shall be paid in
Class A Common Stock. Each shareholder of record shall be entitled to one vote
per share on all matters submitted to a vote of the shareholders, except that as
long as the number of outstanding shares of Class B Common Stock equals or
exceeds 400,000 shares, the holders of the Class A Common Stock, voting as a
class, shall be entitled to elect one-third of the Board of Directors and the
holders of the Class B Common Stock, voting as a class, shall be entitled to
elect two-thirds of the Board of Directors.
b. Class B Common Stock. The aggregate number of shares of Class B Common
Stock which the Corporation may issue is 3,000,000 shares with a par value of
$.01. The shares shall be designated as "Class B Common Stock" and shall have
identical rights and privileges in every respect. The dividend rights
attributable to the holders of Class B Common Stock shall be identical to those
of the holders of Class A Common Stock and all stock dividends shall be paid in
Class A Common Stock. Each shareholder of record shall be entitled to one vote
per share on all matters submitted to a vote of the shareholders, except that as
long as the number of outstanding shares of Class B Common Stock equals or
exceeds 400,000 shares, the holders of the Class A Common Stock, voting as a
Class, shall be entitled to elect one-third of the Board of Directors and the
holders of the Class B Common Stock, voting as a class, shall be entitled to
elect two-thirds of the Corporation's Board of Directors. A holder of Class B
Common Stock may at any time convert any portion or all of such Stock into Class
A Common Stock on a one-for-one basis. In the event of any disposition of shares
of Class B Common Stock, other than to a holder of Class B Common Stock or to a
spouse or child of a holder of Class B Common Stock or to a trust created for
the benefit of a holder of Class B Common Stock or a spouse or child of a holder
of Class B Common Stock, such shares shall be deemed to be automatically
converted into an equal number of fully paid and non-assessable shares of Class
A Common Stock. At such time as the number of outstanding shares of Class B
Common Stock is less than 400,000, all remaining shares of the Class B Common
Stock shall be deemed automatically converted into an equal number of shares of
Class A Common Stock. This article FOURTH may not be amended to increase the
authorized number of shares of Class B Common Stock.
c. 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 4.c, 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.
FIFTH: The Corporation is to have perpetual existence.
SIXTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
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 this
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 this corporation, as the case may be,
to be summoned in such manner as the said court directs. If a majority in number
representing three fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
this corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this corporation, as the case may be, and also on this
corporation.
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 Restated Certificate of Incorporation restates and
integrates and does not further amend the provisions of the Corporation's
Certificate of Incorporation as theretofore amended or supplemented, and there
is no discrepancy between those provisions and the provisions of this restated
certificate.
TWELFTH: This Restated Certificate of Incorporation has been duly adopted
in accordance with the provisions of the General Corporation Law of the State of
Delaware by the unanimous written consent of the board of directors of the
Corporation, all in accordance with ss.245 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF, the undersigned have executed this Restated Certificate
of Incorporation and hereby affirm that the statements made herein are true
under the penalties of perjury, this _____ day of September, 1997.
-----------------------------
Henry Arnberg, President
-----------------------------
Paul Levine, Secretary
HIRSCH INTERNATIONAL CORP.
STOCK OPTION PLAN, AS AMENDED
1. Plan; Purpose; General. The purpose of this 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 within
12 months after the Company has a class of equity securities registered under
the Securities Act of 1933, as amended (the "Act").
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
<PAGE>
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 "disinterested person" 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 "disinterested persons" within the meaning of Exchange Act
Rule 16b-3.
-2-
<PAGE>
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 3, 2003 but options
previously granted may extend beyond that date.
6. Terms and Conditions of Options
(a) Exercise Price. Except as provided in Section 5(b) of this Plan, the
purchase price per Share for Shares issuable upon exercise of options shall be a
minimum of 100% of fair market value on the date of grant and shall be
determined by the Board. 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
-3-
<PAGE>
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 Class A 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 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. Except for options granted pursuant to Section 5(b) of this
Plan, the Board may impose such vesting restrictions 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).
-4-
<PAGE>
(f) Forfeiture of Options upon Termination of Relationship. Except as
otherwise provided in an option agreement between the Company and a Participant,
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 on 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
-5-
<PAGE>
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 Class A 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 Class A 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 1,050,000 Shares
of Class A Common Stock of the Company.
-6-
<PAGE>
(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.
-7-
<PAGE>
(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 his 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
-8-
<PAGE>
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 of 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.
-9-
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<NAME> Hirsch International Corp.
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<PERIOD-START> May-1-1997
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