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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. 2)

 

Filed by the Registrant   x
Filed by a Party other than the Registrant    o
Check the appropriate box:
x	Preliminary Proxy Statement
o	Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
o	Definitive Proxy Statement
o	Definitive Additional Materials
o	Soliciting Material Pursuant to §240.14a-12
HIRSCH INTERNATIONAL CORP.
(Name of Registrant as Specified In Its Charter)
N/A
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
o	No fee required.

 

o	Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

	(1)	Title of each class of securities to which transaction applies:
		Class A Common Stock, par value $0.01 per share, and Class B Common Stock, par value $0.01 per share (together “Common Stock”).
	(2)	Aggregate number of securities to which transaction applies:
		8,785,184 shares of Common Stock outstanding.
	(3)	Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
		Calculated solely for the purpose of determining the filing fee.   The maximum aggregate value was determined based upon the product of (A) 8,785,184 shares of Common Stock that may be exchanged for cash in the transaction and (B) the merger consideration of $0.31 per share. In accordance with Exchange Act Rule 0-11(c), the filing fee was determined by multiplying 0.00005580 by the product of the preceding sentence.
	(4)	Proposed maximum aggregate value of transaction:
		$2,723,407
	(5)	Total fee paid:
		$151.97

 

x	Fee paid previously with preliminary materials.

 

o	Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
	(1)	Amount Previously Paid:
	(2)	Form, Schedule or Registration Statement No.:
	(3)	Filing Party:
	(4)	Date Filed:

 

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Preliminary Copy

 

Hirsch International Corp.

50 Engineers Road
Suite 100
Hauppauge, New York 11788

 

                 , 2009

 

Dear Stockholders:

 

You are cordially invited to attend a special meeting of stockholders of Hirsch International, Corp. (the “Company”), a Delaware corporation, to be held on           , 2009 at          A.M., New York time at the offices of Bryan Cave LLP, 1290 Avenue of the Americas, New York, New York.  The accompanying proxy statement provides information regarding the matters to be acted on at the special meeting, including at any adjournment or postponement thereof.

 

At the special meeting, you will be asked to consider and vote upon a proposal to approve an Agreement and Plan of Merger, dated as of July 2, 2009, that we entered into with Hirsch Holdings, Inc., a Delaware corporation (“Parent”) and HIC Acquisition Company, a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”). Pursuant to the terms of the merger agreement, if the merger is approved and all of the other conditions of the merger are satisfied, you will receive $0.31 for each share of our Class A Common Stock and Class B Common Stock (together, our “common stock”) that you own, and Merger Sub will be merged with and into us and, as a result, we will continue as the surviving corporation. Following the consummation of the merger, Parent will own all of our common stock.  Paul Gallagher, our President, Chief Executive Officer and Chief Operating Officer, presently owns all of Parent’s common stock.

 

If the merger agreement and the merger are approved and the merger is consummated, each share of our common stock (other than shares of our common stock owned by Parent, Merger Sub, Mr. Gallagher or shares owned by stockholders who properly exercise dissenters’ rights of appraisal under Delaware law or shares of our common stock held in treasury by us), will be cancelled and converted into the right to receive $0.31 in cash, without interest. Following the consummation of the merger, we will be privately owned by Parent and its stockholders. A copy of the merger agreement is included as Annex A to the accompanying proxy statement.

 

After careful consideration, the Company’s board of directors by a unanimous vote of the directors (other than Mr. Gallagher, who abstained from the vote) has determined that the merger agreement and the merger are advisable, fair to and in the best interests of us and our stockholders, other than Mr. Gallagher, Parent and Merger Sub, and approved the merger agreement and the merger. This determination was based upon the unanimous recommendation of a special committee of the Company’s board of directors consisting of three independent and disinterested directors. Our board of directors unanimously recommends (with Mr. 

 

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Gallagher taking no part in such recommendation) that you vote FOR the approval of the merger agreement and the merger.

 

When you consider the recommendation of our board of directors to approve the merger agreement and the merger, you should be aware that some of our directors and an executive officer have interests in the merger that may be different from, or in addition to, the interests of our stockholders generally.

 

The accompanying proxy statement provides you with detailed information about the special meeting, the merger agreement and the merger. You are urged to read the entire document carefully. You may also obtain more information about us from documents we have filed with the Securities and Exchange Commission.

 

Regardless of the number of shares you own, your vote is very important. The affirmative vote of the holders of at least a majority of all of the outstanding shares of our common stock entitled to vote at the special meeting is required to approve the merger agreement and the merger.

 

If you fail to vote on the merger agreement and the merger, the effect will be the same as a vote against the approval of the merger agreement and the merger. Once you have read the accompanying proxy statement, please vote on the proposals submitted to stockholders at the special meeting, whether or not you plan to attend the meeting, by signing, dating and mailing the enclosed proxy card. If you receive more than one proxy card because you own shares that are registered differently, please vote all of your shares shown on all of your proxy cards. If your shares are held in “street name” by your broker, your broker will be unable to vote your shares without instructions from you. You should instruct your broker to vote your shares, following the procedures provided by your broker. Failure to instruct your broker to vote your shares will have exactly the same effect as voting against the approval of the merger agreement and the merger.

 

Voting by proxy will not prevent you from voting your shares in person in the manner described in the accompanying proxy statement if you subsequently choose to attend the special meeting.

 

Our board of directors, appreciates your continuing support of the Company and urge you to support the merger.

 

Sincerely,

 

Christopher J. Davino
Director and Chairman of the Special Committee

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES REGULATORY AGENCY HAS APPROVED OR DISAPPROVED THE MERGER, PASSED UPON THE MERITS OR FAIRNESS OF THE MERGER OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE DISCLOSURE IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

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The proxy statement is dated         , 2009, and is first being mailed to stockholders on or about           , 2009.

 

IMPORTANT

 

YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN. PLEASE SIGN, DATE AND PROMPTLY MAIL YOUR PROXY CARD AT YOUR EARLIEST CONVENIENCE.

 

If you have any questions or need assistance voting your shares, please call Georgeson Inc., which is assisting us in the solicitation of proxies, toll-free at 1-888-264-6999.  Banks and brokers should contact Georgeson Inc. at 212-440-9800.

 

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HIRSCH INTERNATIONAL CORP.

 

NOTICE OF SPECIAL MEETING

TO BE HELD ON                , 2009

 

On               , 2009, Hirsch International Corp. will hold a special meeting of stockholders at the offices of Bryan Cave LLP, 1290 Avenue of the Americas, New York, NY. The special meeting will begin at            A.M. New York time.

 

Only holders of shares of our Class A Common Stock, par value $0.01 per share and our Class B Common Stock, par value $0.01 per share (together, our “common stock”), of record at the close of business on                , 2009, may vote at this special meeting or at any adjournments or postponements thereof that may take place. At the special meeting, stockholders will be asked to:

 

(1)                                 consider and vote upon a proposal to approve the Agreement and Plan of Merger, dated as of July 2, 2009, that we entered into with Hirsch Holdings, Inc., a Delaware corporation (“Parent”), HIC Acquisition Company, a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), which we refer to as the merger agreement, and approve the merger of Merger Sub with and into us, as a result of which (a) we will be the surviving corporation in the merger and will be owned by Parent and (b) each share of our common stock (other than shares of our common stock owned by Parent, Merger Sub, Mr. Gallagher, shares owned by stockholders who properly exercise dissenters’ rights of appraisal under Delaware law or shares of our common stock held in treasury by us) will be cancelled and converted into the right to receive $0.31 in cash, without interest; and

 

(2)                                 approve any motion to adjourn the special meeting to a later date, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the foregoing proposal.   

 

Our board of directors (with Mr. Gallagher taking no part in the vote or recommendation) has unanimously approved and recommends that you vote FOR the approval of the merger agreement and the merger and FOR the adjournment proposal, which are discussed in more detail in the accompanying proxy statement.

 

When you consider the recommendation of our board of directors to approve the merger agreement and the merger, you should be aware that some of our directors and executive officers have interests in the merger that may be different from, or in addition to, the interests of our stockholders generally.

 

Regardless of the number of shares you own, your vote is very important. The affirmative vote of the holders of at least a majority of all of the outstanding shares of our common stock entitled to vote at the special meeting is required to approve the merger agreement and the merger.

 

If you fail to vote on the merger agreement and the merger, the effect will be the same as a vote against the approval of the merger agreement and the merger.

 

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We hope you will be able to attend the meeting, but whether or not you plan to attend, please vote your shares by signing and returning the enclosed proxy card as soon as possible.

 

Voting by proxy will not prevent you from voting your shares in person in the manner described in the accompanying proxy statement if you subsequently choose to attend the special meeting. If you hold your shares in “street name” through a bank, broker or custodian, you must obtain a legal proxy from such custodian in order to vote in person at the special meeting. You should not send in your certificates representing shares of our common stock until you receive written instructions to do so.

 

	By Order of the Board of Directors,
	Dan L. Vasquez
	Secretary

 

 

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SUMMARY TERM SHEET		1
The Parties to the Merger		1
The Proposal		1
Merger Consideration		1
Treatment of Outstanding Options		2
Expected Completion Date of the Merger		2
Votes Required for Adoption of the Merger Agreement		2
Recommendation of Our Board of Directors		2
Opinion of Burnham Securities Inc.		3
Interests of Certain Persons in the Merger		3
Financing of the Merger		4
Material United States Federal Income Tax Consequences		4
Restrictions on Solicitations of Other Offers and Change in Recommendation		4
Conditions to the Completion of the Merger		6
Termination of the Merger Agreement		6
Termination Fees and Expense Reimbursement		8
Appraisal Rights		8
Market Price of the Company’s Common Stock and Dividend Information		8
QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING		10
SPECIAL FACTORS		15
Background of the Merger		15
Recommendation of the Special Committee and of our Board of Directors; Reasons for Recommending Approval of the Merger Agreement		28
Opinion of Burnham Securities Inc.		33
Purpose and Reasons for the Merger of Parent Group		45
Position of Parent Group as to the Fairness of the Merger		45
Purposes and Reasons for the Merger of the Company		48
Alternatives to the Merger for the Company		48
Plans for Hirsch after the Merger		49
Effects of the Merger		49
Effects on the Company if the Merger is Not Completed		52
Financing of the Merger		53
Material United States Federal Income Tax Consequences		54
Interests of Certain Persons in the Merger		57
Projected Financial Information		59
Provisions for Unaffiliated Stockholders		63
Estimated Fees and Expenses of the Merger		63
Regulatory Approvals and Requirements		63
Litigation Related to the Merger		63
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION		64
THE SPECIAL MEETING		66
Date, Time and Place		66
Purpose		66
Board Recommendation		66
Record Date		66

 

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Vote Required		67
Voting of Proxies		67
Revocation of Proxies		68
Adjournment of the Special Meeting		68
Appraisal Rights of Stockholders		68
Solicitation of Proxies		69
Questions and Additional Information		69
THE PARTIES TO THE MERGER		70
Hirsch International Corp.		70
Hirsch Holdings Inc.		70
HIC Acquisition Company		71
THE MERGER AGREEMENT		72
The Merger		72
Effective Time		72
Merger Consideration		73
Payment Procedures		73
Treatment of Stock Options		74
Representations and Warranties		75
Company Material Adverse Effect		77
Conduct of Business Prior to Closing		78
Restrictions on Solicitations of Other Offers		80
Agreement to Use Reasonable Best Efforts		84
Financing		85
Indemnification and Insurance		86
Other Covenants		87
Actions at Direction of Chief Executive Officer		88
Conditions to the Completion of the Merger		88
Termination of the Merger Agreement		89
Termination Fee		91
Amendment		93
Extension of Time; Waiver		93
APPRAISAL RIGHTS		94
OTHER IMPORTANT INFORMATION REGARDING HIRSCH		99
Directors and Executive Officers of Hirsch		99
Historical Selected Financial Data		101
Book Value Per Share		102
Ratio of Earnings to Fixed Charges		103
Ownership of Common Stock by Certain Beneficial Owners and Directors and Executive Officers		103
Ownership of Common Stock by Parent and Merger Sub		105
Market Price of the Company Common Stock and Dividend Information		105
OTHER MATTERS		107
Future Stockholder Proposals		107
Householding of Special Meeting Materials		107
Other Information		107
WHERE YOU CAN FIND MORE INFORMATION		109

 

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ANNEXES

Annex A – Agreement and Plan of Merger

Annex B – Opinion of Burnham Securities Inc.

Annex C – Section 262 of the Delaware General Corporation Law

Annex D – Annual Report on Form 10-K for the year ended December 31, 2008

Annex E – Quarterly Report on Form 10-Q for the Quarter ended June 30, 2009

 

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SUMMARY TERM SHEET

 

This Summary Term Sheet, together with the “Questions and Answers About the Merger and the Special Meeting,” summarizes the material information in this proxy statement. We encourage you to read carefully this entire proxy statement, its annexes and the documents referred to or incorporated by reference in this proxy statement before voting.  In this proxy statement, the terms “Hirsch,” “Company,” “we,” “our” and “us” refer to Hirsch International Corp. and its subsidiaries.  Where appropriate, we have set forth a section and page reference directing you to a more complete description of the topics described in this summary.

 

The Parties to the Merger (page 70)

 

Hirsch International Corp., a Delaware corporation, is a leading provider of equipment and education and support services to the graphic and decorated apparel industry.  The Company represents the decorated apparel industry’s leading brands including Tajima embroidery equipment, MHM screen printing equipment, SEIT textile bridge laser, Pulse Microsystems digitizing and design software and Kornit and Mimaki digital garment printers.

 

Hirsch Holdings, Inc., which we sometimes refer to in this proxy statement as “Parent,” is a Delaware Corporation, that following the consummation of the merger, will own all of the shares of common stock of the surviving corporation.  Currently, Parent is wholly-owned by Paul Gallagher, our President, Chief Executive Officer and Chief Operating Officer.  Mr. Gallagher intends to contribute all of his outstanding shares of our Class A Common Stock that he beneficially owns to Parent immediately prior to the effective time of the merger.

 

HIC Acquisition Company, which we sometimes refer to in this proxy statement as “Merger Sub,” is a Delaware corporation and, prior to the effective time of the merger, is a wholly-owned subsidiary of Parent.

 

In this proxy statement we sometimes refer to Mr. Gallagher, Parent and Merger Sub as the “Parent Group.”

 

The Proposal (page 66)

 

You are being asked to consider and vote to approve the Agreement and Plan of Merger, dated as of July 2, 2009 (as it may be amended from time to time), by and among Hirsch, Parent and Merger Sub, which agreement we sometimes refer to in this proxy statement as the “merger agreement.” Pursuant to the merger agreement, Merger Sub will merge with and into Hirsch International Corp. (which we refer to as the “merger”) and Hirsch will continue as the surviving corporation and a wholly-owned subsidiary of Parent.  Upon completion of the merger, Hirsch will cease to be a publicly traded company, and you will cease to have any rights in Hirsch as a stockholder.

 

Merger Consideration (page 73)

 

If the merger is consummated, holders of shares of our outstanding Class A Common Stock and Class B Common Stock (together, our “common stock”) (other than shares owned by the Parent Group (stockholders other than Parent Group are referred to as “unaffiliated

 

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stockholders”), shares owned by stockholders who properly exercise dissenters’ rights of appraisal under Delaware law, and shares of our common stock held in treasury by us) will be entitled to receive $0.31 in cash, without interest (which we refer to as the “merger consideration”), for each share of our common stock owned at the effective time of the merger. Mr. Gallagher intends to contribute, immediately prior to the effective time of the merger, all of the outstanding shares of our common stock that he owns to Parent. As of the date of this proxy statement, Mr. Gallagher owned 697,899 shares of our common stock.  We will be entitled to deduct and withhold from the merger consideration any amounts required to be deducted and withheld under any applicable tax law, and any amounts so withheld shall be treated as having been paid to the holder from whose merger consideration the amounts were so deducted and withheld.

 

Treatment of Outstanding Options (page 74)

 

Our board of directors has taken action to terminate all of our existing stock option plans effective immediately prior to the effective time of the merger.  If the merger is consummated, all outstanding options to purchase shares of Hirsch common stock granted under a Hirsch stock option plan and not exercised prior to the merger will vest and be cancelled and converted into the right to receive a cash payment equal to the number of shares of our common stock subject to such options, multiplied by the amount by which $0.31 exceeds the option exercise price, without interest.  Upon cancellation, none of our outstanding options will receive the consideration set forth in the prior sentence, as all of the outstanding options have an exercise price above $0.31.

 

Expected Completion Date of the Merger

 

We currently anticipate that the merger will be completed in October of 2009. However, there can be no assurances that the merger will be completed at all, or if completed, that it will be completed in October of 2009.

 

Votes Required for Adoption of the Merger Agreement (page 67)

 

The presence, in person or by proxy, of stockholders holding at least a majority of our shares of common stock outstanding on the record date will constitute a quorum for the special meeting. The affirmative vote of the holders of a majority of all of the outstanding shares of our common stock entitled to vote is required to approve and adopt the merger agreement and the merger.

 

Approval of a motion to adjourn the meeting to a later date requires the affirmative vote of the holders of a majority of the shares of our common stock present, in person or by proxy, and entitled to vote at the special meeting on that matter, even if less than a quorum. If you fail to vote on the merger agreement and the merger or abstain from voting, the effect will be the same as a vote against the approval of the merger agreement and the merger.

 

Recommendation of Our Board of Directors (page 28)

 

Our board of directors formed a special committee of independent directors on February 12, 2009 to have full authority to consider and pursue all of our strategic alternatives, including any proposal that Mr. Gallagher or any other party might make to acquire all of our outstanding

 

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shares of common stock, and to explore and negotiate any specific proposals that Hirsch might have received.  The special committee has unanimously (i) determined that the merger is advisable and in our best interest and the best interest of our unaffiliated stockholders, and (ii) recommended to our board of directors that the board approve and adopt the merger agreement in order to effect the merger.  The members of the special committee comprise a majority of our board of directors, with the only other members being Mr. Gallagher and Henry Arnberg.  After carefully considering various factors, including the unanimous recommendation of the special committee, our board of directors (with Mr. Gallagher taking no part in the vote) unanimously

 

·                                           determined that the merger and the terms and conditions set forth for the merger in the merger agreement are approved and are advisable, fair to, and in the best interest of, Hirsh and its unaffiliated stockholders;

 

·                                           determined that the merger agreement is approved and adopted; and

 

·                                           directed that the Merger Agreement be submitted to our stockholders for their approval and adoption and recommends that the stockholders approve the merger agreement and the merger.

 

Accordingly, our board of directors (with Mr. Gallagher taking no part in the voting) unanimously recommends that you vote to approve the merger agreement.

 

Opinion of Burnham Securities Inc. (page 33)

 

Burnham Securities Inc., which we refer to as “Burnham,” delivered its oral opinion, which was subsequently confirmed in writing, to the special committee that, as of July 1, 2009 and based upon and subject to the procedures followed, assumptions made, qualifications and limitations on its review undertaken and other matters considered by Burnham, the merger consideration of $0.31 per share in cash to be received by the unaffiliated stockholders was fair from a financial point of view to such stockholders.  The full text of the written opinion of Burnham, dated July 1, 2009, is attached as Annex B to this proxy statement. We encourage you to read this opinion in its entirety.  The opinion of Burnham was provided to the special committee in connection with the special committee’s evaluation of the merger, does not address any other aspect of the merger and is not a recommendation as to how any stockholder should vote with respect to the merger or any other matter.

 

Interests of Certain Persons in the Merger (page 57)

 

In considering the recommendation of our board of directors, you should be aware that our directors and an executive officer have interests in the merger that are different from, or in addition to, your interests as a stockholder and that may present actual or potential conflicts of interest. These interests include, among others:

 

·                                           Mr. Gallagher’s ownership of shares of our common stock prior to the merger and his ownership of Parent (and through Parent, Merger Sub), and, after the completion of the merger, his indirect ownership interest in Hirsch; and

 

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·                                           continued indemnification and directors’ and officers’ liability insurance to be provided by the surviving corporation to our directors and officers for the period following completion of the merger.

 

The special committee and our board of directors were aware of these interests and considered them, among other matters, prior to providing their respective recommendations with respect to the merger agreement and the merger.

 

Financing of the Merger (page 53)

 

Parent estimates that the aggregate amount of financing necessary to complete the merger, and the payment of related fees and expenses will be approximately $3.4 million. This amount is expected to be funded by Parent and Merger Sub with debt financing contemplated by a commitment letter from Keltic Financial Services LLC (which we refer to as “Keltic Financial”) further described below, together with available cash of the Company.

 

Mr. Gallagher has received a debt financing commitment letter that provides for up to $4 million of debt financing to Parent or Merger Sub from Keltic Financial.  The obligation to provide the debt financing to Parent or Merger Sub is subject to the satisfaction of conditions set forth in the commitment letter.  Parent has agreed to use its commercially reasonable efforts to arrange the debt financing on the terms and conditions described in the debt commitment letter.  The closing of the merger is conditioned on the receipt of the debt financing from Keltic Financial.

 

Material United States Federal Income Tax Consequences (page 54)

 

For U.S. federal income tax purposes, your receipt of cash in exchange for your shares of our common stock in the merger generally will result in your recognizing gain or loss measured by the difference, if any, between the cash you receive in the merger and your tax basis in your shares of Company common stock. You should consult your tax advisor for a complete analysis of the effect of the merger on your U.S. federal, state, local and/or foreign taxes.

 

Restrictions on Solicitations of Other Offers and Change in Recommendation (page 80)

 

The merger agreement provides that during the period beginning on the date of the merger agreement and continuing until the close of business on July 22, 2009, which we refer to as the “go-shop period,” we, under the direction of the special committee, are permitted to:

 

·                                           initiate, solicit and encourage “takeover proposals” (as defined below);

 

·                                           participate in any discussions or negotiations regarding a takeover proposal or otherwise cooperate with or take any other action to facilitate any proposal that constitutes, or could reasonably be expected to lead to, a takeover proposal.

 

After the end of the go-shop period and until the earlier of (i) the termination of the merger agreement in accordance with its terms, or (ii) the effective time of the merger, we have agreed that we, our subsidiaries and representatives will not, subject to certain exceptions discussed below, directly or indirectly:

 

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·                                           initiate, solicit or knowingly encourage (including by way of providing information) the submission of any inquiries, proposals or offers or any other efforts or attempts that constitute or may reasonably be expected to lead to a takeover proposal or engage in any discussions or negotiations with respect thereto; or

 

·                                           approve, endorse or recommend, or publicly propose to approve, endorse or recommend, any takeover proposal or enter into any letter of intent, agreement in principal, merger agreement, acquisition agreement or other similar agreement providing for or relating to any takeover proposal, or enter into any agreement or agreement in principle requiring that we abandon, terminate or fail to consummate the transactions contemplated by the merger agreement or breach our obligations thereunder, or publicly propose or agree to do any of the foregoing.

 

Prior to terminating the merger agreement or entering into an agreement with respect to any such takeover proposal, we are required to comply with certain terms of the merger agreement described under “ The Merger Agreement—Restrictions on Solicitations of Other Offers. ”

 

Notwithstanding the foregoing, under certain circumstances, we, acting under the direction of our special committee, from and after the end of the go-shop period, (i) may continue discussions or negotiations with any third party with respect to any takeover proposal if such discussions or negotiations commenced and were ongoing prior to the end of the go-shop period and (ii) may respond to a bona fide unsolicited takeover proposal or terminate the merger agreement and enter into an acquisition agreement with respect to a “superior proposal” (as defined below), in each case so long as we comply with certain terms of the merger agreement described under “ The Merger Agreement—Restrictions on Solicitations of Other Offers .”

 

A “takeover proposal” as defined in the merger agreement, means any inquiry, proposal or offer other than from Parent or its affiliates relating to, or that is reasonably likely to lead to, any direct or indirect acquisition or purchase, in one transaction or a series of related transactions, of assets (including equity securities of any subsidiary of the Company) or businesses that constitute 25% or more of the revenues, net income or assets of the Company and its subsidiaries (taken as a whole), or 25% or more of any class of equity securities of the Company or any our subsidiaries, any tender offer or exchange offer that if consummated would result in any person or group beneficially owning 25% or more of any class of equity securities of the Company or any of our subsidiaries, or any merger, consolidation, business combination, recapitalization, liquidation, dissolution, joint venture, binding share exchange or similar transaction involving the Company or any our subsidiaries pursuant to which any person or group would own 25% or more of any class of equity securities of the Company or any of our subsidiaries, in each case other than the transactions contemplated by this Agreement.

 

A “superior proposal” as defined in the merger agreement, means any written takeover proposal that, if consummated, would result in such person or group (or their equityholders) owning, directly or indirectly, more than 50% of the shares of the Company’s common stock then outstanding (or of the shares of the surviving entity in a merger or the direct or indirect parent company of the surviving entity in a merger) or a majority of the assets of the Company and its subsidiaries (taken as a whole), which the special committee determines in good faith

 

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(after consultation with its outside counsel and financial advisor) would, if consummated, be more favorable to our stockholders from a financial point of view than the transactions contemplated by the merger agreement (taking into account all the terms and conditions of such takeover proposal and the merger agreement, including (x) the likelihood and timing of consummation of such transaction on the terms set forth therein (as compared to the terms in the merger agreement), (y) all appropriate legal, financial (including the financing terms of such takeover proposal), regulatory and other aspects of such takeover proposal, and (z) any changes to the financial and other terms of the merger agreement proposed by Parent in response to such takeover proposal or otherwise).

 

Conditions to the Completion of the Merger (page 88)

 

The completion of the merger is subject to, among other things, the following conditions:

 

·                                           the adoption of the merger agreement by the majority of the outstanding shares of our Class A Common Stock and Class B Common Stock, voting together as class;

 

·                                           the absence of any governmental orders or statutes or rules that have the effect of making the merger illegal or otherwise prevents the consummation of the merger;

 

·                                           each party’s respective representations and warranties in the merger agreement being true and correct as of the closing date in the manner described in “ The Merger Agreement—Conditions to the Completion of the Merger ”;

 

·                                           each party’s performance in all material respects of its obligations required to be performed under the merger agreement prior to the closing date of the merger;

 

·                                           the aggregate number of shares of our common stock at the effective time of the merger for which appraisal rights shall have been perfected under Section 262 of the Delaware General Corporate Law (the “DGCL”) not having exceeded 10% or more of the number of our outstanding shares of common stock as of the record date for the special meeting;

 

·                                           Parent shall have obtained the debt financing on the terms and conditions set forth in the debt financing commitment letter;

 

·                                           the Company shall have obtained the consent to the merger from Tajima Industries, Ltd.; and

 

·                                           Burnham shall not have withdrawn, amended or modified its opinion dated July 1, 2009 to the effect that, as of such date, the per share merger consideration is fair, from a financial point of view, to our unaffiliated stockholders.

 

Stockholders should note that the Company recently obtained the consent to the merger from Tajima Industries, Ltd.

 

Termination of the Merger Agreement (page 89)

 

The merger agreement may be terminated and the merger abandoned at any time before the effective time of the merger, whether before or after our stockholders approve and adopt the merger agreement:

 

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·                                           by mutual written consent of Parent and the Company;

 

·                                           by either Parent or the Company:

 

·                       if the merger has not been consummated on or before the “outside date” (which is October 30, 2009) unless the failure to consummate the merger on or before the outside date is due (in whole or material part) to the terminating party’s breach of a representation warranty, covenant or agreement contained in the merger agreement;

 

·                       if our stockholders fail to approve the merger and to approve and adopt the merger agreement and the transactions contemplated thereby at the special meeting or any adjournment or postponement of that meeting;

 

·                       if a final, non-appealable legal restraint or order permanently restraining or prohibiting the consummation of the merger is issued, provided that the party seeking to terminate the merger agreement shall have used its reasonable best efforts to remove the restraint or order;

 

·                       if the non-terminating party has breached or failed to perform any of its representations, warranties, covenants or agreements contained in the merger agreement such that the closing conditions to the merger agreement would not be satisfied, and which breach cannot be cured by the outside date or, if capable of being cured, has not been cured within thirty days after receipt by the breaching party of written notice from the terminating party stating its intention to terminate, so long as the terminating party is not then in breach of any of its representations, warranties, covenants or agreements such that the closing conditions to the merger agreement would not be satisfied;

 

·                                           by the Company if:

 

·                       prior to obtaining the affirmative vote of a majority of our outstanding shares of common stock, (i) the special committee or our board of directors approves, endorses or recommends another takeover proposal or the entering into another agreement with respect to another takeover proposal , or (ii) our board of directors, acting under the direction of the special committee, modifies its recommendation to our stockholders to adopt the merger agreement and approve the merger, in a manner adverse to Parent, or withdraws such recommendation, in order to enter into a definitive agreement providing for the implementation of a transaction that is a superior proposal (each such event in (i) or (ii) a “change in recommendation”), provided that we complied with the notice and other requirements described below in “ The Merger Agreement—Restrictions on Solicitations of Other Offers ” and we pay to Merger Sub the termination fee described in “ —Termination Fee ”;

 

·                       any portion of the Parent or Merger Sub’s debt financing becomes unavailable in the manner or from the source contemplated by the commitment letter delivered to the Company (or in certain instances, an alternative source), provided that this right may not be exercised by the

 

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Company if it has not provided Parent with at least five business days notice and Parent has not obtained a new debt financing arrangement within such period;

 

·                       by Parent if (i) we shall have made a change in recommendation, (ii) we fail to comply in any material respect with the merger agreement’s requirements regarding solicitation of other offers or termination in connection with a superior proposal described above in “- Restrictions on Solicitations of Other Offers and Change in Recommendation ” and below in “The Merger Agreement — Restrictions on Solicitations of Other Offers ,” or (iii) we fail to include in our proxy statement relating to the approval and adoption of the merger agreement by our stockholders our board of directors’ recommendation to our stockholders to adopt the merger agreement and approve the merger.

 

Termination Fees and Expense Reimbursement (page 91)

 

If the merger agreement is terminated under certain circumstances we will be obligated to reimburse Parent for reasonable actual out of pocket expenses incurred by Parent and Merger Sub in connection with the proposed merger and the other transactions contemplated by the merger agreement in an amount not to exceed either $250,000 or $300,000, depending upon the circumstances of the termination.

 

Appraisal Rights (page 94)

 

Under Delaware law, holders of our common stock who do not vote in favor of adopting the merger agreement will have the right to seek appraisal of the fair value of their shares of our common stock as determined by the Court of Chancery of the State of Delaware if the merger is completed, but only if they comply with all requirements of Delaware law for exercising appraisal rights set forth in Section 262 of the General Corporation Law of the State of Delaware (which we refer to as the “DGCL” in this proxy statement), the text of which can be found in Annex C to this proxy statement, which are summarized in this proxy statement. This appraisal amount could be more than, the same as or less than the merger consideration. Any holder of shares of our common stock intending to exercise appraisal rights must, among other things, submit a written demand for an appraisal to us prior to the vote on the adoption of the merger agreement at the special meeting and must not vote or otherwise submit a proxy in favor of adoption of the merger agreement. Your failure to follow exactly the procedures specified under Section 262 of the DGCL will result in the loss of your appraisal rights, and your shares of Hirsch common stock will instead entitle you to receive merger consideration with respect to such shares.

 

Market Price of the Company’s Common Stock and Dividend Information (page 105 )

 

The closing trading price of our Class A Common Stock on the Nasdaq Capital Market on June 12, 2009, the last completed trading day prior to the public announcement of Mr. Gallagher’s offer, was $0.21 per share. The merger consideration represents a premium of approximately 47.6% to the closing trading price on June 12, 2009.  On July 1, 2009, the last completed trading day prior to public announcement of our entry into the merger agreement, the

 

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closing trading price of our Class A Common Stock was $0.25 per share.  The merger consideration represents a premium of approximately 24% to the closing trading price on July 1, 2009.  On            , 2009, which is the most recent practicable trading date prior to the date of this proxy statement, the closing trading price of our common stock was $       per share.  You are urged to obtain a current market price quotation for our shares of Class A Common Stock.

 

We have not paid or declared cash dividends on our common stock within the past five years and we do not intend to pay or declare cash dividends on our common stock in the future.  In addition, the merger agreement prohibits us from declaring or paying dividends on our common stock until the earlier of the termination of the merger agreement in accordance with its terms or the consummation of the merger.

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING

 

The following questions and answers address briefly some questions you may have regarding the proposed merger and the special meeting. These questions and answers may not address all questions that may be important to you as a stockholder of Hirsch. Please refer to the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to or incorporated by reference in this proxy statement.

 

Q:               What is the proposed transaction?

 

A:               The proposed transaction is a merger of Merger Sub with and into us pursuant to the merger agreement.  Once the merger agreement has been adopted by the Company’s stockholders and the other closing conditions under the merger agreement have been satisfied or waived, Merger Sub will be merged with and into the Company, with the Company continuing as the surviving corporation. Upon consummation of the merger, the Company will become a wholly-owned subsidiary of Parent.  All of the common stock of Parent is presently owned by Mr. Gallagher.  After the merger, shares of Hirsch will no longer be publicly traded.

 

Q:               What will I receive for my shares of Hirsch’s common stock in the merger?

 

A:               Upon completion of the merger, you will receive $0.31 in cash, without interest, and less any applicable withholding taxes, for each share of our common stock that you own. This does not apply to shares held by the Parent Group, or any of our stockholders who are entitled to and who properly exercise appraisal rights under Delaware law or shares held by us in our treasury. Upon consummation of the merger, you will not own shares of Hirsch or Parent.

 

Q:               What are the material United States federal income tax consequences of the transaction to stockholders?

 

A:               In general, your receipt of cash in exchange for shares of Hirsch common stock pursuant to the merger will be a taxable transaction for United States federal income tax purposes. Since the tax consequences of the merger to you will depend on your particular circumstances, you should consult your own tax advisor for a full understanding of the U.S. federal, state, local, non-U.S. and other tax consequences of the merger to you. See “Special Factors—Material United States Federal Income Tax Consequences“ beginning on page 54.

 

Q:               Where and when is the special meeting?

 

A:               The special meeting will take place at the offices of Bryan Cave LLP, 1290 Avenue of the Americas, New York, New York on                 , 2009 at            A.M. New York time.

 

Q:               What matters will be voted on at the special meeting?

 

A:               You will be asked to consider and vote on the following proposals:

 

·                        to approve the merger agreement and the merger;

 

·                        to approve any motion to adjourn the special meeting, if necessary or appropriate, to a later date to solicit additional proxies if there are insufficient votes at the time of the

 

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special meeting to approve the proposal on the merger agreement.

 

Q:               Does our board of directors recommend that our stockholders vote “FOR” the adoption of the merger agreement?

 

A:               Yes. After careful consideration, our board of directors, by a unanimous vote of the directors (other than Paul Gallagher, who abstained from the vote) recommends that you vote:

 

·                        “FOR” the adoption of the merger agreement and approval of the merger; and

 

·                        “FOR” the adjournment proposal.

 

You should read “ Special Factors—Recommendation of the Special Committee and of our Board of Directors; Reasons for Recommending Approval of the Merger Agreement ” beginning on page 28, for a discussion of the factors that our special committee and board of directors considered in deciding to recommend the adoption of the merger agreement. In addition, in considering the recommendation of our special committee and board of directors with respect to the merger agreement, you should be aware that some of the Company’s directors and executive officers have interests in the merger that are different from, or in addition to, the interests of our stockholders generally. See “ Special Factors—Interests of Certain Persons in the Merger ” beginning on page 57.

 

Q:               Who is entitled to vote at the special meeting?

 

A:               The record date for the special meeting is              , 2009.  Only holders of Hirsch’s common stock at the close of business on the record date are entitled to notice of, and to vote at, the special meeting or any adjournment or postponement thereof.

 

Q:               What constitutes a quorum for the special meeting?

 

A:               The presence, in person or by proxy, of stockholders representing a majority of the shares of Hirsch’s common stock outstanding on the record date will constitute a quorum for the special meeting.

 

Q:               What vote of the Company’s stockholders is required to adopt the merger agreement and to approve the adjournment proposal?

 

A:               The adoption of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock voting as a single class and entitled to vote on the adoption of the merger agreement at the special meeting.  A failure to vote your shares of common stock, abstention from the vote to adopt the merger agreement or a “broker non-vote” will have the same effect as voting “AGAINST” the adoption of the merger agreement. A “broker non-vote” occurs when a broker does not have discretion to vote on the matter and has not received instructions from the beneficial holder as to how such holder’s shares are to be voted on the matter.

 

Approval of an adjournment of the special meeting requires the affirmative vote of the holders of a majority of the shares of Hirsch common stock present, in person or by proxy, and entitled to vote at the special meeting on that matter. A failure to vote your shares of

 

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common stock or a “broker non-vote” will not affect the vote or any proposal to adjourn the special meeting, if necessary.

 

Q:               How do the directors and executive officers of the Company intend to vote?

 

A:               As of                   , 2009, the record date, the directors and executive officers of Hirsch held and were entitled to vote, in the aggregate, 2,036,075 shares of our common stock representing approximately 21.5% of the outstanding shares. We believe our directors and executive officers intend to vote all of their shares of our common stock FOR the adoption of the merger agreement and approval of the merger, and FOR the adjournment proposal.

 

Q:               When do you expect the merger to be completed?

 

A:               We are working toward completing the merger as quickly as possible, and we anticipate that it will be completed in October of 2009. In order to complete the merger, we must obtain the stockholder approval described above and the other closing conditions under the merger agreement must be satisfied or waived. Neither we, nor Parent and Merger Sub, are obligated to complete the merger unless and until the closing conditions in the merger agreement have been satisfied or waived, which conditions are described in “ The Merger Agreement—Conditions to the Completion of the Merger ” beginning on page 88.

 

Q:               What effects will the proposed merger have on the Company?

 

A:               Upon completion of the proposed merger, Hirsch will cease to be a publicly traded company and will be wholly-owned by Parent. As a result, you will no longer have any interest in our future earnings or growth, if any. Following completion of the merger, the registration of our common stock and our reporting obligations with respect to our common stock under the Securities Exchange Act of 1934, as amended, which we refer to as the “Exchange Act,” are expected to be terminated. In addition, upon completion of the proposed merger, shares of Hirsch common stock will no longer be listed on the Nasdaq Capital Market or any other stock exchange or quotation system.

 

Q:               What happens if the merger is not completed?

 

A:               If the merger agreement is not adopted by our stockholders, or if the merger is not completed for any other reason, our stockholders will not receive any payment for their shares of our common stock pursuant to the merger agreement. Instead, Hirsch will remain as a public company and our common stock will continue to be registered under the Exchange Act and listed and traded on the Nasdaq Capital Market, provided that we meet the requirements of the Nasdaq Capital Market listing rules, which we are not currently in compliance with (see “ Other Matters – Other Information ” on page 107). Under specified circumstances, Hirsch may be required to pay Parent a termination fee or reimburse Parent for its actual out-of-pocket expenses not to exceed $300,000, as described in “ The Merger Agreement—Termination Fee ” beginning on page 91.

 

Q:               What do I need to do now?

 

A:               Please vote as soon as possible.  We urge you to read this proxy statement carefully, including its annexes, and to consider how the transaction affects you as a stockholder.  You may also want to review the documents referenced under “Where You Can Find More

 

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Information” on page 109.

 

Q:               How do I vote?

 

A:               You should simply indicate on your proxy card how you want to vote, and sign and mail your proxy card in the enclosed return envelope as soon as possible so that your shares will be represented at the special meeting. If you sign and send in your proxy and do not indicate how you want to vote, your proxy will be counted as a vote for approval of the merger, and the approval and adoption of the merger agreement and the other transactions contemplated thereby, and for the adjournment proposal, if such adjournment is necessary. If you fail to vote your shares or do not instruct your broker how to vote any shares held for you in a brokerage account, the effect will be the same as a vote against the approval of the merger, and the approval and adoption of the merger agreement, but it will not affect the vote on any proposal to adjourn the special meeting, if necessary. If your shares are held by your broker, bank or other nominee, see below.

 

Q:               If my shares are held in “street name” by my broker, will my broker vote my shares for me?

 

A:               Your broker will not vote your shares on your behalf unless you provide instructions to your broker on how to vote. You should follow the directions provided by your broker regarding how to instruct it to vote your shares. Without those instructions, your shares will not be voted, which will have the same effect as voting “AGAINST” the adoption of the merger agreement.

 

Q:               What does it mean if I get more than one proxy card or vote instruction form?

 

A:               If your shares are registered differently and are in more than one account, you may receive more than one proxy card or voting instruction form. Please complete, sign, date and return all of the proxy cards and voting instruction forms you receive regarding this special meeting to ensure that all of your shares are voted.

 

Q:               May I change my vote?

 

A:               Yes. You may change your vote at any time before your proxy is voted at the special meeting, subject to the limitations described below. You may do this in a number of ways. First, you may send us a written notice stating that you would like to revoke your proxy. Second, you may complete and submit a new proxy card. If you choose either of these two methods, you must submit your notice of revocation or your new proxy card to the secretary of Hirsch at or before the taking of the vote at the special meeting, at the address under “The Parties to the Merger—Hirsch International Corp.” on page 70.  You may also change your vote by attending the special meeting and voting in person. Simply attending the special meeting, without voting in person, will not revoke your proxy. Notwithstanding the foregoing, if your shares are held in street name and you have instructed a broker to vote your shares, you must follow directions received from your broker to change your vote or to vote at the special meeting.

 

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Q:              What happens if I sell my shares of Hirsch common stock before the special meeting?

 

A:               The record date for the special meeting is earlier than the date of the special meeting and the date that the merger is expected to be completed. If you transfer your shares of Hirsch common stock after the record date but before the special meeting, you will retain your right to vote at the special meeting, but will transfer the right to receive the per share merger consideration of $0.31 in cash, without interest and less any applicable withholding taxes, to the person to whom you transfer your shares, so long as such person owns the shares of Hirsch common stock when the merger is completed. In such case, your vote is still very important and you are encouraged to vote.

 

Q:               Are appraisal rights available?

 

A:               Yes. As a holder of shares of common stock of the Company, you are entitled to appraisal rights under Delaware law if (a) you do not vote in favor of adopting the merger agreement, (b) you continue to hold your shares of Hirsch common stock until the consummation of the merger, (c) you deliver to us a written demand for appraisal prior to the vote at the special meeting and (d) you satisfy certain other conditions. See “ Appraisal Rights ” beginning on page 94.

 

Q:               Should I send in my stock certificates now?

 

A:               No. PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES WITH YOUR PROXY.

 

If you hold your shares in your name as a stockholder of record, then shortly after the merger is completed you will receive a letter of transmittal with instructions informing you how to send in your stock certificates to the paying agent in order to receive the merger consideration in respect of your shares of our common stock. You should use the letter of transmittal to exchange your stock certificates for the merger consideration which you are entitled to receive as a result of the merger. If you hold your shares in “street name” through a broker, bank or other nominee, then you will receive instructions from your broker, bank or other nominee as to how to effect the surrender of your “street name” shares in exchange for the merger consideration.

 

Q:               Will any proxy solicitors be used in connection with the special meeting?

 

A:               Yes. To assist in the solicitation of proxies, we have engaged Georgeson Inc., who may be contacted toll-free at 1-888-264-6999.  Banks and brokers may contact Georgeson Inc. at 212-440-9800.

 

Q:               Who can help answer my other questions?

 

A:               If you have any questions about the merger, need assistance in submitting your proxy or voting your shares, or need additional copies of the proxy statement or the enclosed proxy card, you should contact Georgeson Inc., which is acting as the proxy solicitation agent in connection with the merger.  They may be contacted toll-free at 1-888-264-6999.  Banks and brokers may contact Georgeson Inc. at 212-440-9800.

 

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SPECIAL FACTORS

 

Background of the Merger

 

Our board of directors and management regularly evaluate our business and operations and periodically review and assess strategic alternatives available to enhance value to our stockholders. As part of this process, our board of directors and management have regularly considered opportunities that could complement, enhance or expand our current business or products or that might otherwise offer growth opportunities for the Company. In this regard, over the course of the past two years, we have explored several strategic alternatives. To assist us in identifying opportunities, the Company engaged an investment bank in May 2007 to serve as its financial advisor and to help identify and evaluate potential strategic alternatives.  In May and June of 2007, the investment bank assisted us in our evaluation of an acquisition candidate, which was a screen printing equipment manufacturer, but ultimately the transaction was not consummated and our engagement with the investment bank was terminated in September 2007.

 

During the remainder of 2007 and the first two quarters of 2008, our board of directors and management continued to evaluate potential strategic alternatives for the Company. On August 4, 2008, we acquired 80% of the equity interests of US Graphic Arts, Inc., a company primarily engaged in developing and manufacturing printers for the decorative apparel industry, and viewed as complementary to the Company’s business of providing equipment and education and support services to the decorated apparel industry.

 

Beginning in the fall of 2008, the rapidly deteriorating general economic conditions in the United States and the tightening of the credit markets had a significant impact upon the business of the Company. The reduced demand for capital goods that began during this period hurt the Company’s business. Additionally, the movement of the currency exchange rates between the dollar and the Japanese yen also adversely affected the Company, as the Company purchases its largest amount of embroidery machine equipment from a Japanese vendor.

 

Between January and March 2009, the Company approached approximately 20 financial institutions to obtain a new credit facility to address its working capital needs.  Unfortunately, due to the Company’s continuing losses, which were projected to continue for the foreseeable future, the Company was unsuccessful in its efforts.

 

At a board of directors’ meeting on February 2, 2009, the board of directors acknowledged the difficult business environment facing the Company. At this meeting, the topic of the Company’s strategic alternatives was raised. Mr. Gallagher presented certain information to the board of directors that detailed the Company’s financial situation if it were (i) to continue operating in its present form, or (ii) to identify a potential acquirer for the Company in an effort to eliminate its public stockholders.  Mr. Gallagher also indicated that the Company had approximately $3 to $4 million in cash at such time, but that the costs of remaining a public company were approximately $1 million per year. The board of directors then discussed the possibilities of the Company engaging in a transaction whereby it would cease to be a publicly owned Company or the Company liquidating and distributing the proceeds upon liquidation to its stockholders. There was also initial discussion of forming a special committee comprised of independent members of the board of directors, whose responsibility it would be to further investigate the Company’s strategic alternatives. The board of directors authorized the executive

 

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officers of the Company to retain a firm to conduct an analysis of the Company’s liquidation value.

 

After consultation from the independent members of the board of directors, and after contacting several valuation consultants, the Company retained Clear Thinking Group LLC (“Clear Thinking”) on February 5, 2009 to perform a liquidation analysis of the Company.  Clear Thinking was selected by the Company after consideration of, among other things, the fact that it is a national advisory firm that specializes in corporate restructuring, operations improvements, litigation analytics, liquidation and asset sales, case management services, with expertise in providing financial advisory services to financially distressed entities.  Clear Thinking provided a liquidation analysis for the Company on February 12, 2009, and then issued an updated liquidation analysis for the Company on May 29, 2009.  No material relationship existed between the Company and Clear Thinking during the two years prior to the engagement of Clear Thinking to perform the liquidation analyses, and no such material relationships are contemplated.  No limitations were placed on Clear Thinking regarding the preparation of its two liquidation analyses.  Clear Thinking was paid an aggregate of $25,412 for the preparation of its two analyses.  A summary of each of Clear Thinking’s liquidation analyses are included below.  However, as the descriptions below are only a summary and do not contain all of the information set forth in the liquidation analyses prepared by Clear Thinking, we urge you to read the full text of each of the liquidation analyses in their entirety, which are attached as Exhibits (c)(3) and (c)(4) to the Schedule 13E-3 filed with the SEC in connection with the merger and which analyses are incorporated to this Proxy Statement by reference.

 

Another meeting of the board of directors was held on February 12, 2009. The first topic discussed was the liquidation analysis that had been prepared for the Company by Clear Thinking. The analysis indicated that the Company’s liquidation value was estimated to be in the range of $1.2 million to $3.5 million in the aggregate, resulting in an estimated per share value of $0.13 to $0.36.  A summary of Clear Thinking’s liquidation analysis follows.

 

Clear Thinking’s report dated February 12, 2009 (the “February Analysis”) was based upon meetings with Mr. Gallagher, the Company’s President, Chief Executive Officer and Chief Operating Officer, and the Company’s then Chief Financial Officer, as well as the following financial data: the Company’s balance sheet as of December 31, 2008 and other historical income statements and balance sheets, estimated wind down expenses, consolidated 2009 forecast of net sales, gross profit, gross margin by manufacturer, and salary and other operating expenses last updated by management as of February 9, 2009 (a copy of which is included in “ — Projected Financial Information ”), and additional information on the following items: (i) available cash on hand, (ii) aging accounts receivable, (iii) aging inventory, (iv) equipment purchase order, (v) furniture, fixture and equipment, (vi) real estate lease liabilities, (vii) miscellaneous leases and contracts, (viii) estimated wind down expenses, (ix) accounts payable and accrued expenses payable, and (x) employee severance.  In connection with Clear Thinking’s review, Clear Thinking assumed and relied upon, without independent verification, the accuracy and completeness of the information that was publicly available or supplied or otherwise made available to Clear Thinking by the Company, and formed a substantial basis for its opinion.  Clear Thinking also assumed that the financial projections that were furnished to it had been reasonably prepared on bases reflecting the best current estimates and judgments of the management of the Company of the future financial performance of the Company.

 

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In addition to reviewing the foregoing materials, Clear Thinking assumed that the Company would employ a carefully orchestrated and executed wind down process which would maximize value for the Company’s stockholders.  Clear Thinking assumed that the Company would employ a two stage approach, and that phase I would commence March 1, 2009, and take approximately sixty days to complete, during which period, the Company would aggressively sell most of its less expensive inventory that required a greater amount of customer service, training and sales support.  At the conclusion of such period, it was assumed that a significant reduction in sales staff and support could be implemented, resulting in a reduction of a significant monthly cash expenditure.  Phase II would then focus on selling the remaining inventory to more established customers that need less sales support and training.  It was assumed that this phase would take sixty days, and that most sales offices could be closed with only a limited number of the best sales staff remaining.  Simultaneously with the occurrence of phase I and phase II, the Company would collect its accounts receivable.

 

After the expiration of the initial 120 days during the two stage approach, it was assumed that an additional thirty days would then be necessary for the Company to close down its business.  Based upon the March 1, 2009, start date, it was estimated that the liquidation process could be completed by July 1, 2009.

 

In preparing its liquidation analysis, the recovery rates utilized were based upon Clear Thinking’s experience in connection with other liquidation scenarios. 

 

Based upon the foregoing, and the additional material assumptions in the notes following the table below, Clear Thinking estimated the Company’s liquidation value in its February 12, 2009 report, as follows:

 

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							Liquidation Analysis Scenarios
		Recoverable Assets as of 2/9/09		$ Amount			Low			Mid			High
a		Cash in Bank – Estimate		$	4,461,065		$	4,461,065		$	4,461,065		$	4,461,065
b		Accounts Receivable		$	3,906,466		$	3,068,460		$	3,273,920		$	3,495,088
				Recovery Rate			78.5		%	83.8		%	89.5		%
c		Inventory Equipment & Parts (Recovery on Cost)		$	11,912,256		$	8,739,035		$	9,716,269		$	10,595,347
				Recovery Rate			73.4		%	81.6		%	88.9		%
d,e		Pre-Paid Expenses (Supplies, etc.)		$	164,000		$	16,400		$	24,600		$	32,800
				Recovery Rate			10.0		%	15.0		%	20.0		%
f		Furniture, Fixtures & Equipment (“FF&E”)		$	1,555,698		$	97,605		$	123,312		$	149,018
				Recovery Rate			6.3		%	7.9		%	9.6		%
g		Intellectual Property (Patents, Trademarks, URL’s, etc.)		$	0		$	—		$	—		$	—
h		FF&E Recovery Fee (-20%)					$	(19,521	)	$	(24,662	)	$	(29,804	)
i		Accounts Receivable Collection Fees (-15%)					$	(230,135	)	$	(245,544	)	$	(262,132	)
		Net Recovery before Wind Down Expenses, Professional Fees, and Return to Shareholders					$	16,132,909		$	17,328,960		$	18,441,383
		Operating and Administrative Expenses, Professional Fees and Other Expenses
j		Company Operating Costs During Orderly Wind Down					$	5,146,177		$	5,146,177		$	5,146,177
k		Professional Fees & Expenses					$	750,000		$	750,000		$	750,000
		Gross $ Available to Creditors					$	10,236,732		$	11,432,783		$	12,545,206
l		Property Lease Liabilities		$	730,742		$	730,742		$	730,742		$	730,742
m		Other Leases and Contracts Liabilities		$	13,872		$	13,872		$	13,872		$	13,872
n		Accounts Payable & Accrued Expenses Payable		$	5,135,329		$	5,135,329		$	5,135,329		$	5,135,329
o		Inventory On Order Commitment Payable		$	1,963,143		$	1,963,143		$	1,963,143		$	1,963,143
p		Customer Credits on Accounts Receivable		$	584,696		$	584,696		$	584,696		$	584,696
q		February Cash Usage		$	450,000		$	450,000		$	450,000		$	450,000
r		Check Float		$	200,000		$	200,000		$	200,000		$	200,000
		Net Available for Shareholders					$	1,158,952		$	2,355,002.67		$	3,467,426

 

a.                          Available cash on hand as of February 9, 2009, as per company cash flow summary report, less amounts committed for outstanding letters of credit.

b.                         Accounts receivable (includes customer payments by credit cards where the Company has not yet actually received the underlying payment, as well as credits owed to customers, which are reflected in line p as an expense) as of February 9, 2009, as per the Company’s aging accounts receivable records.  This amount assumes that half of the balance will be collected in the normal fashion, and the other half will be collected utilizing a collection agency.

c.                          Inventory value indicated is at cost as per the Company’s aging inventory summary as of February 9, 2009.  The total includes parts inventory and on order inventory.

d.                         Amount indicated is from the Company’s December 31, 2008 balance sheet and assumes most pre-paid expenses are unrecoverable other than supplies.

e.                          Assumes real estate lease deposits of $35,703 are unrecoverable.

f.                            Amount indicated is from the December 31, 2008 balance sheet and includes furniture, fixtures and equipment, leasehold improvements, computer upgrades and website development costs.

g.                         Assumes the Company’s intellectual property has no value in the marketplace.

h.                         Assumes a liquidator recovery fee of 20% of gross sales of furniture, fixtures and equipment, after sales tax.

i.                             Assumes company uses a collection agency to collect half of the accounts receivable; a collection fee of 15% of recovered receivables is applied on the half recovered by the collection agency.

 

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j.                             Assumes normal use of cash plus payment of additional commissions and advertising for two months, and two months with reduced expenses; also includes severance of $1.2 million.

k.                          Assumes approximately $750,000 for legal and other professional fees for winding down the business, including, without limitation, SEC filings, shareholder communication, possible litigation.

l.                             Estimated real estate liability based on leases as of December 31, 2008.  Assumes all offices and locations vacated by June 30, 2009.

m.                       Estimated other contracts and lease liabilities as of December 31, 2008.

n.                         Accounts payable and accrued expenses as of February 9, 2009.

o.                         Includes payables associated with the current inventory on order as of February 9, 2009.

p.                         Assumes that credits in favor of customers as of February 9, 2009 will be returned to customers.

q.                         Assumes the last three weeks of February 2009 will result in use of cash in the amount of $150,000 per week.

r.                            Outstanding checks as of February 9, 2009, estimated at $200,000.

Miscellaneous Assumption: Assumes no recovery or additional liability with respect to the Company’s U.S. Graphic Arts, Inc. subsidiary.

 

Also discussed at the meeting on February 12, 2009 was the fact that, although the Company was cutting expenses wherever possible, the condition of the embroidery marketplace together with the rate that the Company was using its available cash was placing the Company in a precarious financial position. The Company’s strategic alternatives were again discussed, with the following options being mentioned:

 

·                                           the Company pursuing a “going private” transaction;

 

·                                           the Company’s sale to a third party;

 

·                                           the liquidation of the Company;

 

·                                           the Company electing to “go dark”(i.e. ceasing to be a Securities and Exchange Commission (the “SEC”) reporting company as permitted under the rules promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)); and

 

·                                           maintaining the status quo while trying to further minimize the Company’s expenses, and waiting for improvement in the embroidery market.

 

During discussion of the various alternatives, it was determined that it was appropriate at such time to form a special committee comprised of independent members of the board of directors, who would not be participants in any going private transaction if one were proposed, to have full authority to consider and pursue the Company’s strategic alternatives.  The directors appointed to the special committee , each of whom met the criteria referenced in the preceding sentence, were Marvin Broitman, Christopher J. Davino and Mary Ann Domuracki and the special committee was empowered to retain legal, financial and other advisors to assist the special committee in the fulfillment of its duties.

 

During the remainder of February and during March the special committee met several times to consider candidates to serve as independent legal advisor to the special committee. During this period, the special committee also interviewed and considered five different firms to serve as independent financial advisor to the special committee. On March 31, 2009, the special committee retained Thompson Hine LLP (“Thompson Hine”) as its independent legal advisor.

 

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Also during the remainder of February 2009, and through the beginning of April, the board of directors met several times, at which meetings the board of directors discussed, among other things, the Company’s business and financial condition and the Company’s strategic alternatives. Additionally, the special committee reported to the board of directors on the status of retaining its independent financial and legal advisors during several of these meetings.

 

On April 7, 2009, the special committee met to discuss the Company’s strategic alternatives with representatives of Thompson Hine in attendance.  The special committee discussed the initial issues that should be considered in connection with the pursuit of any strategic alternatives, including the interests of the Company’s stockholders, the interests of the Company’s creditors, and the interests of the Company’s employees. The special committee also discussed the likely process that would need to be completed with respect to considering any strategic alternatives for the Company. Additionally, the special committee discussed the status of its search for an investment banking advisor to solicit and evaluate various strategic alternatives that might be considered by the special committee.

 

Also during April, Mr. Gallagher met with representatives of the special committee to confirm his interest in possibly undertaking a going private transaction involving all of the outstanding shares of the Company, and discuss with the special committee the status of potential financing.

 

On April 21, 2009, the special committee met to discuss retaining Burnham as its investment banking advisor. Representatives of Thompson Hine attended the meeting and representatives of Burnham attended a portion of the meeting. The special committee also discussed the potential terms of retaining Burnham.  The special committee discussed the Company’s strategic alternatives in light of its financial condition. Between April 21, 2009 and April 28, 2009, the special committee met several more times to discuss the Company’s strategic alternatives and the terms and scope of retaining Burnham.

 

The special committee elected to retain Burnham after interviewing several other financial advisory firms.  In selecting Burnham, the special committee considered, among other things, that Burnham is a nationally recognized investment banking firm with substantial experience in similar transactions to the merger, and that Burnham is familiar with the Company and its business.  A further description of Burnham’s experience is set forth in “— Opinion of Burnham Securities Inc.”

 

On April 29, 2009, the board of directors met to receive an update on the Company’s business and financial position. During the meeting, the special committee disclosed it was retaining Burnham as its investment banking advisor and generally discussed the services that Burnham would provide. A discussion ensued regarding the potential strategic alternatives that might be available to the Company. During such discussion, the members of the special committee requested that the officers of the Company obtain an updated liquidation analysis from Clear Thinking Group LLC, which had previously provided a liquidation analysis to the Company as noted above.

 

From April 28, 2009, through the first week of June 2009, Burnham began the process described in “— Opinion of Burnham Securities Inc. ” below, including reviewing publicly available financial statements and other business and financial information of the Company;

 

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reviewing financial projections prepared by management of the Company (a copy of which is included in “— Projected Financial Information ”); meeting with senior executives of the Company and discussing with them the past and current operations and financial condition and the prospects of the Company; and conducting other financial analyses on the Company that Burnham deemed appropriate.  Included in the financial information reviewed by Burnham, was an analysis prepared by our management of our accounts receivable reserve as of March 31, 2009.  We have included a copy of this analysis below for our stockholders’ review.  This analysis was one of many items considered by Burnham in arriving at its opinion.  For additional information regarding the materials reviewed by Burnham and the process followed by Burnham in arriving at its opinion, please see “— Opinion of Burnham Securities, Inc. ”  For more complete financial information regarding the Company, please see “ Other Important Information Regarding Hirsch—Historical Selected Financial Data ” and the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, which are attached as Annexes D and E respectively.

Hirsch International Corp.
Accounts Receivable Reserve Analysis
As of March 31, 2009

 

		Current		31 - 60 days		61 - 90 days		91 - 120 days		Above 121 days		Account		Total
Total accounts receivable as of March 31, 2009		1,367,566		867,702		409,366		582,517		1,441,626		(885,757	)	3,783,021
Percentage of total receivable per aging		36	%	23	%	11	%	15	%	38	%	-23	%	100	%
In order to compare the percentages for the current year to the prior year, the following adjustments must be made:
Accounts not applied @ 03/31/09 (open credits)
120201								(151,477	)	(174,233	)	325,710		0
103285										(34,975	)	34,975		0
124347								(84,558	)			84,558		0
100564				(23,500	)							23,500		0
Accounts not aged correctly @ 03/31/09
117117		204,711		(204,711	)
124932		159,510		(159,510	)
102520 - trade in pick up								(37,500	)
102036 - trade in purchase		37,500
123989 (offset to Accounts Payable)						(148,200	)
For comparison purposes, the following invoices should have been paid by quarter end (pymt recd subsequent to Mar 09):
														0
124660										(46,739	)			(46,739	)
114229										(18,000	)			(18,000	)
103285 - balance										(30,657	)			(30,657	)
114386								(32,850	)
100419										(18,100	)
														0
For comparison purposes, the following invoices have been turned over to collections/reposessed:
112634 - machine picked up										(36,614	)			(36,614	)
121969 - turned over to collections										(31,859	)			(31,859	)
118713										(24,636	)			(24,636	)
Subtotal		401,720		(387,720	)	(148,200	)	(306,385	)	(415,813	)	468,743		(387,655	)
Revised Total		1,769,287		479,982		261,166		276,131		1,025,813		(417,014	)	3,395,366
		52	%	14	%	8	%	8	%	30	%	-12	%	100	%
December 31, 2008 aging percentages		46	%	34	%	12	%	8	%	17	%	-17	%	100	%

 

Analysis of Reserve						Reserve
HIC Reserve by Aged Category per above
Add Specific Reserve (c):						15,930
Accounts Receivable - Legal 100% reserved						55,140
Reserve for all a/r prior to 1/1/08						15,720
Reserve for all a/r at 75% from 1/1/08 - 6/30/08				220,686 at 75%		165,515
Reserve for all a/r at 50% from 7/1/08 - 11/30/08				362,952 at 50%		181,476		(685,556 less credits applied of 322,604 above)
Reseve for all a/r 91 -120 (as revised) @ 25%				276,131 at 25%		69,033
General Accounts Receivable Reserve						49,411
Total
Reserve necessary at March 31, 2009						552,224
General Ledger Balance at March 31, 2009						552,224
Specific Reserve (c):		Amt Due		% Reserve Needed		Reserve
118713		24,636		100.00% >120		0		(subsequently received machine back)
121969		31,859		50.00%		15,930
						0
		56,495				15,930
Reserve for Sales Returns and Adjustments
General Ledger Balance at March 31, 2009						50,000

 

a/r = Accounts Receivable

 

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