<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 27, 1997
REGISTRATION NO. 333-23961
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
DSI TOYS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 5092 74-1673513
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
---------------
M. D. DAVIS
CHAIRMAN AND CEO
DSI TOYS, INC.
1100 WEST SAM HOUSTON PARKWAY (NORTH) 1100 WEST SAM HOUSTON PARKWAY (NORTH)
SUITE A SUITE A
HOUSTON, TEXAS 77043 HOUSTON, TEXAS 77043
(713) 365-9900 (713) 365-9900
(ADDRESS, INCLUDING ZIP CODE AND (NAME, ADDRESS, INCLUDING ZIP CODE AND
TELEPHONE NUMBER, INCLUDING AREA TELEPHONE NUMBER, INCLUDING AREA CODE,
CODE, OF REGISTRANT'S PRINCIPAL OF REGISTRANT'S AGENT FOR SERVICE)
EXECUTIVE OFFICES)
---------------
COPIES OF COMMUNICATION TO:
MICHAEL L. BENGTSON, ESQ. GLENN D. SMITH, ESQ.
THOMPSON & KNIGHT, P.C. STROOCK & STROOCK & LAVAN LLP
1700 PACIFIC AVENUE, SUITE 3300 2029 CENTURY PARK EAST, SUITE 1800
DALLAS, TEXAS 75201 LOS ANGELES, CALIFORNIA 90067
(214) 969-1700 (310) 556-5800
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 27, 1997
PROSPECTUS
3,000,000 Shares
LOGO
[LOGO OF DSI TOYS, INC. APPEARS HERE]
Common Stock
Of the 3,000,000 shares of common stock (the "Common Stock") offered hereby,
2,500,000 shares are being sold by DSI Toys, Inc. (the "Company") and 500,000
shares are being sold by a certain shareholder of the Company (the "Selling
Shareholder"). See "Principal and Selling Shareholders." The Company will not
receive any of the proceeds from the sale of the shares by the Selling
Shareholder. The Common Stock has been approved for listing in The Nasdaq Stock
Market's National Market (the "Nasdaq National Market") under the symbol
"DSIT," subject to official notice of issuance. Prior to this offering, there
has been no public market for the Common Stock. It is currently anticipated
that the initial public offering price will be between $9.00 and $11.00 per
share. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price.
-----------
The Common Stock offered hereby involves a high degree of risk.
See "Risk Factors" commencing on page 6.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proceeds
Underwriting Proceeds to to Selling
Price to Public Discount(1) Company(2) Shareholder
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share ................ $ $ $ $
- --------------------------------------------------------------------------------
Total(3) ................. $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Excludes warrants to purchase 250,000 shares of Common Stock for an
exercise price equal to 120% of the initial public offering price, to be
issued to the Representatives of the Underwriters. The Company and the
Selling Shareholder have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deduction of expenses estimated to be $620,000, payable by the
Company.
(3) The Company, the Selling Shareholder and an additional shareholder of the
Company have granted to the Underwriters a 45-day option to purchase up to
a maximum of 450,000 additional shares of Common Stock to cover over-
allotments, if any. If such option is exercised in full, the total "Price
to Public," "Underwriting Discount," "Proceeds to Company" and "Proceeds to
Selling Shareholder" will be $ , $ , $ and $ , respectively.
In addition, such additional shareholder will receive proceeds of $ if
such option is exercised in full. See "Underwriting."
-----------
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to their right to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in Boston, Massachusetts,
on or about , 1997.
Tucker Anthony Sutro & Co. Incorporated
Incorporated
The date of this Prospectus is , 1997
<PAGE>
[PHOTOS OF REPRESENTATIVE PRODUCTS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
Except as otherwise indicated, the information contained in this Prospectus (i)
assumes the Underwriters' over-allotment option will not be exercised and (ii)
assumes an initial public offering price of $10.00 per share. Except as
otherwise indicated, references to the "Company" refer to DSI Toys, Inc. and
its wholly owned subsidiary, DSI (HK) Ltd. ("DSI(HK)"). Investors should
carefully consider the information set forth under the heading "Risk Factors."
The terms "fiscal year" and "fiscal" refer to the Company's fiscal year which
is the year ending January 31 of the following calendar year mentioned (e.g., a
reference to fiscal 1996 is a reference to the fiscal year ended January 31,
1997).
THE COMPANY
The Company designs, develops, markets and distributes high quality, value-
priced toys and children's consumer electronics. The Company's core product
categories are (i) juvenile audio products, including walkie-talkies, pre-
school audio products, pre-teen audio products and musical toys; (ii) girls'
toys, including dolls, play sets and accessories; and (iii) boys' toys,
including radio control vehicles, action figures and western and military
action toys. Founded in 1970, the Company historically was principally a
supplier of non-proprietary toys to deep discount stores and regional drug
store chains. With the addition of new senior management personnel in 1990, the
Company began to market its expanding product line to major toy retailers by
emphasizing innovative packaging and developing in-house brands. Further, in
fiscal 1993, the Company began to emphasize the development and marketing of
proprietary products, consisting of toys developed by the Company incorporating
concepts licensed from outside inventors, products designed in-house, products
for which the Company owns the mold and products incorporating well-known
trademarks licensed to the Company. The Company introduced its first
television-promoted proprietary product, the Rosie(R) doll, in fiscal 1995.
Rosie(R) ranked as the number two selling doll, by dollar amount (and number
three by unit), in the large doll category during calendar 1995, as measured by
the Toy Retail Sales Tracking Service.
Traditionally a supplier of juvenile audio products and boys' toys, the
Company has diversified its product offerings over the last two fiscal years,
primarily through its expansion into the girls' toys category with the
introduction of the Rosie(R) doll in fiscal 1995 and the Pattie(TM) doll in
fiscal 1996. For fiscal 1997, the Company has introduced new products in its
three core categories, as well as a new children's action game, Hoppin' Poppin'
Spaceballs(TM). The Company seeks to enhance its position as a leading supplier
of high quality, value-priced toys and intends to continue developing
proprietary products, primarily through pursuing opportunities to license toy
concepts from outside inventors and to license recognized trademarks. The
Company believes that it offers its customers many value-priced products, which
the Company believes are lower-priced alternatives to comparable products sold
by other toy companies. The Company believes that this strategy of offering
lower priced products to its customers provides them with opportunities to
realize higher margins on sales of the Company's products as compared to sales
of products offered by other toy companies.
Since fiscal 1993, the Company's net sales have grown from $36.7 million to
$63.2 million (or 72%) for fiscal 1996, and net income has grown from $362,000
to $2.2 million (or 494%) during the same period. The Company believes that
this growth is attributable to several factors, including its ability to
identify new products with broad appeal and to rapidly develop and market these
products. The Company believes that its use of innovative packaging and
increased utilization of brand names have also contributed to its growth. The
Company offers several licensed products under the Kawasaki(R) brand name,
including a radio-controlled motorcycle, guitars, keyboards and a percussion
instrument. The Company also has developed and currently is marketing products
incorporating several in-house brand names, including Digi-Tech(TM) (walkie-
talkies), LA Rock(R) (musical toys and audio products), American Frontier(TM)
(western role play toys), Combat Force Rangers(TM) (military role play toys)
and My Music Maker(R) (musical toys and pre-school audio products). The Company
believes that its use of brand names to market its products has increased name
recognition of its products and
3
<PAGE>
contributed to the Company's increase in net sales over the past four fiscal
years. The Company believes that it is the leading supplier of walkie-talkies
to the top five United States toy retailers.
The Company sells primarily to retailers, including mass merchandising
discounters such as Wal-Mart Stores, Inc., Kmart Corporation and Target Stores
(a division of Dayton Hudson Corp.), specialty toy stores such as Toys "R" Us,
Inc., Kay-Bee Toy & Hobby Shops, Inc. and F.A.O. Schwarz, and deep discount
stores such as Family Dollar Stores, Inc., Consolidated Stores Corp. and Value
City Department Stores, Inc. Wal-Mart (19.5%), Kmart (13.7%) and Toys "R" Us
(12.0%) each accounted for more than 10% of the Company's net sales for fiscal
1996. Although the Company's sales have been made primarily to customers based
in the United States, international net sales accounted for approximately 19%
of the Company's net sales during fiscal 1996.
Approximately 56% of the Company's net sales were made FOB Asia during fiscal
1996. Products sold FOB Asia are shipped directly to customers from the factory
and are not carried by the Company in inventory, thereby improving working
capital utilization. The Company also maintains an inventory of certain
products in its Houston, Texas facility, principally to support sales by the
Company's customers who offer such products on a year-round basis. In addition,
the Company's Houston facility maintains inventory to support the Company's
television-promoted proprietary products.
The principal executive offices of the Company are located at 1100 West Sam
Houston Parkway (North), Suite A, Houston, Texas 77043, and its telephone
number is (713) 365-9900.
THE OFFERING
<TABLE>
<C> <S>
Common Stock Offered by the Company................ 2,500,000 shares
Common Stock Offered by the Selling Shareholder.... 500,000 shares (1)
Common Stock to be Outstanding after the Offering.. 6,000,000 shares (2)
Use of Proceeds.................................... For (i) repayment of
approximately $19.5
million in debt of the
Company, consisting of a
senior term loan of
approximately $4.8
million, a subordinated
term loan of approximately
$1.6 million, outstanding
principal under a
revolving line of credit
of approximately $6.0
million, and indebtedness
to the Estate of Mr. Moss
of approximately $7.1
million, and (ii) $3.0
million for working
capital and general
corporate purposes. See
"Use of Proceeds."
Nasdaq National Market Symbol...................... DSIT
</TABLE>
- --------
(1) The Selling Shareholder is the Tommy Moss Living Trust, a trust formed by
Tommy Moss, the founder and former sole shareholder of the Company. In
December 1995, a recapitalization transaction occurred which resulted in
the sale by Mr. Moss of approximately 77.7% of the then outstanding Common
Stock. Mr. Moss died in November 1996. See "The Recapitalization" and
"Principal and Selling Shareholders."
(2) Excludes (i) 600,000 shares of Common Stock reserved for issuance under the
Company's 1997 Stock Option Plan, of which options covering 90,000 shares
will be outstanding after the Offering, and (ii) 638,888 shares of Common
Stock issuable upon exercise of warrants to be outstanding after the
Offering. If the Underwriters' over-allotment option is exercised in full,
after the Offering there will be 6,169,000 shares of Common Stock
outstanding and 488,888 shares issuable upon the exercise of outstanding
warrants. See "Management--1997 Stock Option Plan," "Principal and Selling
Shareholders," "Description of Capital Stock" and "Underwriting."
The offering of the shares of Common Stock described herein is referred to as
the "Offering."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............................. $36,576 $36,734 $45,219 $63,146 $63,219
Gross profit.......................... 7,484 6,612 11,605 19,718 21,196
Selling, general and administrative
expenses............................. 4,524 5,680 7,910 14,625 15,569
Former sole shareholder bonus (1)..... 1,380 347 2,000 1,000 --
Operating income...................... 1,580 585 1,695 4,093 5,627
Interest expense...................... 226 147 333 701 2,600
Net income............................ 907 362 969 2,327 2,151
Earnings per share (2)................ $ 0.26 $ 0.10 $ 0.28 $ 0.66 $ 0.58
Weighted average shares outstanding
(2).................................. 3,500 3,500 3,500 3,500 3,739
</TABLE>
<TABLE>
<CAPTION>
END OF FISCAL YEAR
--------------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------- -------- ------------------------
ACTUAL AS ADJUSTED(3)
-------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........ $2,093 $1,569 $ 2,121 $ 3,510 $ 2,621 $ 8,902
Total assets........... 8,349 7,460 10,389 17,390 16,304 22,254
Long-term debt (less
current portion)(4)... -- -- 17 18,188 14,203 --
Shareholders' equity
(deficit) (4)......... 3,817 4,179 5,147 (11,582) (9,422) 13,083
</TABLE>
- --------
(1) Consists of bonus paid to the Company's former sole shareholder. Bonuses
paid to other officers and employees are included in selling, general and
administrative expenses. See "Management--Bonuses."
(2) Earnings per share is calculated using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
(3) Adjusted to reflect the sale by the Company of 2,500,000 shares of Common
Stock offered hereby and the anticipated use of net proceeds to the Company
therefrom. See "Use of Proceeds" and "Capitalization."
(4) For a description of the recapitalization transaction that occurred in
December 1995, resulting in the incurrence of approximately $17.9 million
of indebtedness and a shareholders' deficit at the end of fiscal 1995 and
fiscal 1996, see "The Recapitalization."
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements. The words "anticipate,"
"believe," "expect," "plan," "intend," "estimate," "project," "will," "could,"
"may" and similar expressions are intended to identify forward-looking
statements. These statements include information regarding expected
introduction of products in the market, the buying attitudes and preferences of
its customers, and the Company's relationship with independent inventors,
holders of trademark rights and independent foreign manufacturers. Such
statements reflect the Company's current views with respect to future events
and financial performance and involve risks and uncertainties, including
without limitation the risks described in "Risk Factors." Should one or more of
these risks or uncertainties occur, or should underlying assumptions prove
incorrect, actual results may vary materially and adversely from those
anticipated, believed, estimated or otherwise indicated.
5
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating an investment
in the Common Stock.
CHANGING CONSUMER PREFERENCES; RELIANCE ON NEW PRODUCT INTRODUCTION. As a
result of changing consumer preferences, many toys are successfully marketed
for only one or two years. There can be no assurance that (i) any of the
Company's current products or product lines will continue to be popular with
consumers for any significant period of time or (ii) new products and product
lines introduced by the Company will achieve an acceptable degree of market
acceptance, or that if such acceptance is achieved, it will be maintained for
any significant period of time. Furthermore, sales of the Company's existing
products are expected to decline over time and may decline at rates faster
than expected. The Company's success will be dependent upon the Company's
ability to enhance existing product lines and develop new products and product
lines. The failure of the Company's new products and product lines to achieve
and sustain market acceptance and to produce acceptable margins could have a
material adverse effect on the Company's financial condition and results of
operations.
DEPENDENCE ON LIMITED NUMBER OF CUSTOMERS. For fiscal 1996, the Company's
five largest customers accounted for 54.5% of the Company's net sales. Sales
to Wal-Mart, Kmart and Toys "R" Us, the Company's three largest customers,
aggregated 45.2% of the Company's net sales during the same period. The
Company expects to continue to rely on a relatively small number of customers
for a significant percentage of sales for the foreseeable future. Because of
the large portion of the Company's sales to the Company's three largest
customers and the significant share of the market for toy sales to consumers
represented by these same customers, the loss of any one of them as a
customer, or a significant reduction in sales to any one of them, would have a
material adverse effect on the Company's financial condition and results of
operations. See "Business--Customers."
DEPENDENCE ON INDEPENDENT DESIGNERS; LICENSES AND OTHER PROPRIETARY
RIGHTS. For certain of its proprietary products, the Company is dependent on
concepts, technologies and other intellectual property rights licensed from
third parties, such as rights to trademarks. For each of these proprietary
products and product lines, the Company typically enters into a license
agreement with the owner of the intellectual property to permit the Company to
use the intellectual property. These license agreements typically provide for
royalty payments by the Company to the licensor based on the net sales of the
product incorporating the licensed property. For fiscal 1996, net sales of
products developed and sold under the Company's license agreements accounted
for 51.3% of the Company's net sales, including 9.9% of net sales of products
incorporating the Kawasaki(R) trademark. The Company's existing license
agreements generally have terms ranging from 2 to 15 years. The Company's
license agreement with Kawasaki Motors Corp., USA expires in December 1998.
There can be no assurance that the Company will be able to procure new license
agreements, renew existing license agreements (on commercially reasonable
terms, or at all), or that existing license agreements will not be terminated.
The Company's license agreements may contain restrictions on products
manufactured and permitted sales territories, and may give the licensor the
right to approve the manufacturer to be utilized by the Company to produce the
product. Certain of the Company's license agreements are non-exclusive.
Licenses that overlap the Company's licenses with respect to products,
geographic areas and markets have been and may continue to be granted to
competitors of the Company. See "Business--License Agreements."
In addition to rights licensed from third parties, the Company also relies
on a combination of design patent, copyright, trademark and trade secret
protection and non-disclosure agreements with employees to establish and
protect the proprietary rights that the Company has in its products. There can
be no assurance that the Company's competitors will not independently develop
or acquire proprietary technologies that are substantially equivalent or
superior to those of the Company. There also can be no assurance that the
measures adopted by the Company to protect its proprietary rights will be
adequate to do so. The ability of the Company's competitors to develop
6
<PAGE>
or acquire technologies or other proprietary rights equivalent or superior to
those of the Company or the inability of the Company to enforce its
proprietary rights could have a material adverse effect on the Company.
The Company does not believe that any of its products infringe on the
proprietary rights of third parties in any material respect. There can be no
assurance, however, that third parties will not claim infringement by the
Company with respect to current or future products. Any such claim, with or
without merit, could be time-consuming, result in costly litigation, cause
product shipment delays or require the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may
not be available on terms acceptable to the Company or at all, which could
have a material adverse effect on the business, results of operations and
financial condition of the Company.
INVENTORY MANAGEMENT. Most of the Company's largest retail customers utilize
an inventory management system to track sales of products and rely on reorders
being rapidly filled by the Company and other suppliers rather than
maintaining large product inventories. These types of systems put pressure on
suppliers like the Company to promptly fill customer orders and shift some of
the inventory risk from the retailer to suppliers. Production of excess
products by the Company to meet anticipated retailer demand could result in
price markdowns and increased inventory carrying costs for the Company.
Similarly, if the Company fails to predict consumer demand for a product, it
may not be able to deliver an adequate supply of products on a timely basis
and will, as a result, lose sales opportunities. See "Business--Distribution."
RETURNS AND MARKDOWNS. The Company historically has permitted certain
customers to return slow-moving items for credit or has provided price
protection by making any price reductions effective as to certain products
then held by retailers in inventory. The Company expects that it will continue
to be required to make such accommodations in the future. Any significant
increase in the amount of returns or markdowns could have a material adverse
effect on the Company's financial condition and results of operations. See
"Business--Sales and Marketing."
SEASONALITY AND QUARTERLY FLUCTUATIONS. The Company's sales are seasonal in
that a substantial portion of net sales is made to retailers in anticipation
of the Christmas holiday season. During fiscal 1996, 75.1% of the Company's
net sales were made during the Company's second and third fiscal quarters (May
through October) in connection with retail sales for the Christmas holiday
season. Adverse business or economic conditions during these periods may
adversely affect results of operations for the full year. As a result of the
seasonality of the Company's net sales, the Company expects to incur a loss in
the first quarter of each fiscal year for the foreseeable future and may incur
a loss in the fourth quarter of such fiscal year depending upon the timing of
product shipments. The Company's financial results for a particular quarter
may not be indicative of results for an entire year, and the Company's
revenues and/or expenses will vary from quarter to quarter. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Seasonality" and "Business--Seasonal Patterns."
RELIANCE ON MANUFACTURERS BASED IN HONG KONG AND CHINA; TRADE RELATIONS. To
date, most of the Company's products have been manufactured by Hong Kong
manufacturers at facilities located in the Peoples' Republic of China (the
"PRC"). According to reports published by the Toy Manufacturers Association
("TMA"), an industry trade group, the PRC is the world's largest producer of
toys. The Company does not have any long-term contracts with its
manufacturers. There is still some uncertainty surrounding the June 1997
political and economic consolidation of Hong Kong with the PRC and the extent
to which such consolidation could disrupt business in Hong Kong or in the PRC.
In the event of any such disruption or other political or economic change in
Hong Kong or the PRC affecting the Company's business, the Company would be
required to seek alternate manufacturing sources. The Company currently does
not have in place plans or arrangements for securing alternate manufacturing
sources in the event that its present relationships with manufacturers prove
impracticable to maintain, and there can be no assurance that there would be
sufficient alternative facilities to meet the increased demand for production
that would likely result from a disruption of manufacturing operations in the
PRC. Furthermore, such a shift to alternate facilities would likely result in
increased manufacturing costs and could subject the Company's products to
increased duties, tariffs or other restrictions. During fiscal 1996,
7
<PAGE>
three manufacturers accounted for approximately 56% of the Company's purchases
of products. The loss of any one of these manufacturers, or a substantial
interruption of the Company's manufacturing arrangements with any one of these
manufacturers, could cause a delay in production of the Company's products for
delivery to its customers and could have a material adverse effect on the
Company. While the Company believes that alternate manufacturers exist, there
can be no assurance that alternate arrangements could be provided in a timely
manner or on terms acceptable to the Company. See "Business--Manufacturing"
and "Business--Tariffs and Duties."
Currently, the PRC has Most Favored Nation ("MFN") trade status. As such,
most toys imported into the United States from the PRC are not subject to
import duties. Recently, however, the United States and the PRC have at times
been at odds over trade policies. There can be no assurance that in the future
trade relations between the United States and the PRC will not deteriorate or
that the MFN status of the PRC will not be altered or revoked such that, as a
result, the United States would impose duties or other trade sanctions that
would affect the cost of toys imported from the PRC. The imposition of such
duties could have a material adverse effect on the Company. See "Business--
Tariffs and Duties."
GENERAL RISKS OF FOREIGN OPERATIONS. Foreign operations are generally
subject to risks such as transportation delays and interruptions, political
and economic disruptions, the imposition of tariffs and import and export
controls, difficulties in staffing and managing foreign operations, longer
payment cycles, problems in collecting accounts receivable, changes in
governmental policies, restrictions on the transfer of funds, currency
fluctuations and potentially adverse tax consequences. While the Company to
date has not experienced any material adverse effects due to its foreign
operations, there can be no assurance that such events will not occur in the
future. Any growth of the Company's international operations will subject the
Company to greater exposure to risks of foreign operations. The occurrence of
such an event, particularly one affecting the Company's relations with its
manufacturers in the PRC, would have a material adverse effect on the Company.
RISKS ASSOCIATED WITH GROWTH. Between fiscal 1993 and fiscal 1996, the
Company has experienced continuous growth in net sales. There can be no
assurance that such growth will continue or that the Company will be able to
maintain its present level of net sales or profitability. Furthermore, future
growth, if achieved, might place a strain on the Company's management and
financial control systems, and there can be no assurance that management of
the Company would be able to manage such growth effectively. Failure to manage
any future growth experienced by the Company could have a material adverse
effect on the Company.
RELIANCE ON KEY PERSONNEL. The Company's future success will be dependent on
the continued efforts of Richard Neitz, the Company's current President and
Chief Operating Officer, and Yau Wing Kong ("Tommy Yau"), Managing Director of
DSI(HK). The Company has entered into employment and non-competition
agreements with Mr. Neitz and Mr. Yau. The loss of the services of one or both
of such individuals could have a material adverse effect on the Company. The
Company does not maintain key man insurance on the lives of either of these
individuals. The Company's success is also dependent on the Company's ability
to attract and/or retain key managerial, sales, marketing, product development
and other personnel. There can be no assurance that the Company will be
successful in attracting and/or retaining such personnel. See "Management."
PRODUCT SAFETY AND LIABILITY; REGULATION. Products that have been or may be
developed or sold by the Company may expose the Company to potential liability
from personal injury or property damage claims by end-users of such products.
The Company has never been and is not presently a defendant in any product
liability lawsuit; however, there can be no assurance that such a suit will
not be brought in the future against the Company. The Company currently
maintains product liability insurance coverage in the amount of $1.0 million
per occurrence, with a $6.0 million excess product liability policy. There can
be no assurance that the Company will be able to maintain such coverage or
obtain additional coverage on acceptable terms, or that such insurance will
provide adequate coverage against all potential claims. Moreover, even if the
Company maintains adequate insurance, any successful claim could materially
and adversely affect the reputation and prospects of the Company, as well as
divert management time. The United States Consumer Products Safety Commission
(the
8
<PAGE>
"CPSC") has the authority under certain federal laws and regulations to
protect consumers from hazardous goods. The CPSC may exclude from the market
goods it determines are hazardous, and may require a manufacturer to
repurchase such goods under certain circumstances. Some state, local and
foreign governments have similar laws and regulations. In the event that such
laws or regulations change or the Company is found in the future to have
violated any such law or regulation, the sale of the relevant product could be
prohibited and the Company could be required to repurchase such products. See
"Business--Government and Industry Regulation."
COMPETITION. The toy industry is highly competitive. Many of the Company's
competitors have longer operating histories, broader product lines and greater
financial resources and advertising budgets than the Company. In addition, the
toy industry has nominal barriers to entry. Competition is based primarily on
the ability to design and develop new toys, procure licenses for popular
products, characters and trademarks, and successfully market products. Many of
the Company's competitors offer similar products or alternatives to the
Company's products. The Company's products compete with other products for
retail shelf space. There can be no assurance that shelf space in retail
stores will continue to be available to support the Company's existing
products or any expansion of the Company's products and product lines. There
can be no assurance that the Company will be able to continue to compete
effectively in this marketplace. See "Business--Competition."
CONTROL BY CURRENT MANAGEMENT. Immediately following the completion of the
Offering, the directors and officers of the Company and their affiliates will
beneficially own, or have the right to vote, in the aggregate approximately
36.4% of the outstanding Common Stock (35.4% if the Underwriters' over-
allotment is exercised in full). As a result of such persons' ownership and/or
control of Common Stock and their directorship and management positions, they
will have significant influence over all matters requiring approval by the
shareholders of the Company, including the election of directors. See
"Management" and "Principal and Selling Shareholders."
DILUTION. Purchasers of shares of Common Stock in the Offering will
experience immediate and substantial dilution of $7.82 per share in the net
tangible book value per share of Common Stock from the assumed initial public
offering price of $10.00 (the midpoint of the range of the anticipated initial
public offering price). See "Dilution."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE. Prior to
this Offering, there has been no public market for the Common Stock. Although
the Common Stock has been approved for listing in the Nasdaq National Market,
subject to official notice of issuance, there can be no assurance that an
active market for the Common Stock will develop or be sustained following this
Offering. The initial public offering price for the shares of Common Stock
offered hereby was determined through negotiation between the Underwriters and
the Company and does not necessarily reflect the market price for the Common
Stock following this Offering. The market price of the Common Stock may be
highly volatile and could be subject to wide fluctuations in response to
quarterly variations in operating results, announcements of new products by
the Company or its competitors, changes in financial estimates by securities
analysts, or other events or factors. In the event that the Company's
operating results are below the expectations of public market analysts and
investors in one or more future quarters, it is likely that the price of the
Common Stock will be materially adversely affected. General market
fluctuations may adversely affect the market price of the Common Stock. See
"Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock in the public market following the Offering could adversely affect the
market price for the Common Stock. In general, the 3,000,000 shares offered
hereby will be eligible for immediate sale in the public market without
restriction. Beginning 180 days after the date of this Prospectus (or earlier
upon consent of the Representatives of the Underwriters), 3,000,000 shares of
Common Stock will be available for immediate sale in the public market upon
the expiration of certain stock transfer restriction agreements with the
Underwriters. The sale of all such shares will be subject to the volume
limitations and other restrictions of Rule 144 of the Securities Act of 1933,
as amended (the "Securities Act"). In addition, the Selling Shareholder and
the holders of warrants issued to Hibernia
9
<PAGE>
Corporation and the Representatives have the right to demand that the Company
file a registration statement under the Securities Act covering the sale of
all or any part of their Common Stock holdings. See "Description of Capital
Stock--Registration Rights," "Shares Eligible for Future Sale" and
"Underwriting."
POTENTIAL ADVERSE IMPACT OF ANTI-TAKEOVER PROVISIONS. The Company's Articles
of Incorporation and Bylaws (and the provisions of the Texas Business
Corporation Act) contain provisions that may have the effect of delaying,
deterring or preventing a change in control or an acquisition of the Company,
even though such an attempt might be economically beneficial to the holders of
Common Stock. Such provisions may have an adverse effect from time to time on
the price of the Common Stock. Such provisions authorize, among other things,
the issuance of shares of preferred stock, with respect to which the Board of
Directors has the power to fix the rights, preferences, privileges and
restrictions without any further vote or action of the shareholders. See
"Description of Capital Stock."
10
<PAGE>
THE RECAPITALIZATION
In December 1995, a series of transactions (the "Recapitalization") was
consummated between the then sole shareholder of the Company, Tommy Moss, and
Rosie Acquisition Company, L.L.C. ("RAC"), an entity controlled by M. D.
Davis, Barry B. Conrad, Jack R. Crosby and Joseph N. Matlock, whereby RAC
acquired a controlling interest in the Company. Pursuant to the
Recapitalization, (i) the Company repurchased from Mr. Moss 2,719,000 shares
(77.7%) of Common Stock for $22.2 million ($8.15 per share) and (ii) RAC
acquired 2,719,000 shares of newly issued Common Stock from the Company for
$3.8 million (approximately $1.40 per share). The purchase price for
Mr. Moss's shares consisted of (i) $14.4 million of cash funded by (a) $6.0
million of proceeds from a new five year term loan with Bank One, Texas, N.A.
(the "Bank One Loan"), (b) $3.0 million of proceeds from a new five year
subordinated term loan with Hibernia Corporation (the "Hibernia Loan"), (c)
$3.8 million from the proceeds of the sale of Common Stock to RAC and (d) $1.6
million from an advance under the Company's existing revolving credit facility
with Bank One, Texas, N.A. (the "Revolver"), (ii) two notes issued by the
Company to Mr. Moss in the respective principal amounts of $6.0 million (the
"Moss Note") and $1.3 million, including the grant of a warrant to Mr. Moss to
purchase 700 million shares of Common Stock at $.001 per share, exercisable in
the event of a payment default (which warrant will terminate upon repayment of
the notes with a portion of the net proceeds from this Offering), and (iii)
the conveyance to Mr. Moss of two tracts of land which had a book value of
approximately $452,000. The obligation of the Company under the $1.3 million
term note issued to Mr. Moss was offset against a $1.3 million term note
issued by Mr. Moss to the Company evidencing the obligation of Mr. Moss to
repay advances previously made by the Company to Mr. Moss. For a description
of the terms of the outstanding notes, see "Use of Proceeds." In connection
with the subordinated term loan, the Company issued to Hibernia Corporation
warrants to purchase an aggregate of 388,888 shares of Common Stock at an
exercise price of $2.00 per share. See "Description of Capital Stock--
Warrants." The difference between the amount paid by RAC to the Company and
the amount paid to Mr. Moss by the Company is due to the fact that, following
the purchase of Mr. Moss's shares, the Company had additional indebtedness of
approximately $17.9 million and a reduced net worth resulting from such
additional indebtedness and the payment of transaction expenses of $1.9
million.
In connection with the Recapitalization, the Company entered into a
consulting agreement with Mr. Moss, pursuant to which Mr. Moss was to serve as
a consultant to the Company for three years in exchange for compensation in
the amount of $300,000 per year. The consulting agreement also required the
Company to maintain health and disability insurance policies for the benefit
of Mr. Moss for the term of his life. Pursuant to the consulting agreement,
the Company agreed to maintain Mr. Moss's office space for his use for the
term of the consulting agreement and to provide to Mr. Moss for 180 days the
services of certain Company employees for his outside business, provided that
such services did not exceed 30% of the time of each of such employees. This
agreement terminated upon Mr. Moss's death on November 19, 1996. In addition,
the Company issued a $1.0 million note to Mr. Moss (the "Moss Bonus Note") on
January 3, 1996.
In connection with services rendered by Mr. Matlock relating to the
Recapitalization, the Company agreed to pay Mr. Matlock the sum of $240,000 in
three equal payments due on January 1, 1996, 1997 and 1998. See "Certain
Transactions." As compensation for services provided by Conrad/Collins
Merchant Banking Group Ltd. ("MBG") in connection with the Recapitalization,
the Company paid MBG a fee of $400,000 and repaid its out-of-pocket expenses
in the amount of approximately $15,000.
RAC was formed in connection with the Recapitalization by Messrs. Davis,
Conrad, Crosby and Matlock who, prior to the Recapitalization, had no
relationship with the Company. These four individuals (or entities controlled
by such individuals) collectively hold approximately 61% of the membership
interests in RAC. The remaining membership interests are held primarily by
employees of the Company. Messrs. Davis, Conrad, Crosby and Matlock were
elected as directors of the Company following the Recapitalization.
In connection with the sale of the shares of Common Stock pursuant to this
offering, RAC will be dissolved and the 2,719,000 shares of Common Stock held
by RAC will be distributed to the members of RAC. See "Principal and Selling
Shareholders" and "Shares Eligible for Future Sale."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 2,500,000 shares of Common
Stock offered hereby, assuming an initial offering price of $10.00 per share
(the midpoint of the range of the anticipated initial offering price), are
expected to be approximately $22.5 million ($23.0 million if the Underwriters'
over-allotment option is exercised in full) after deducting underwriting
discounts and commissions and estimated offering expenses, including a fee of
$100,000 payable to MBG for financial advisory services. See "Certain
Transactions--Financial Advisory Fee." The Company intends to use such net
proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE AMOUNT
------------------
(IN MILLIONS)
<S> <C>
Repayment of Bank One Loan .................................. $4.8
Reduction of indebtedness under Revolver..................... 6.0
Repayment of Hibernia Loan................................... 1.6
Repayment of Moss Note....................................... 6.1
Repayment of Moss Bonus Note................................. 1.0
Working capital and general purposes......................... 3.0
-----
Total.................................................... $22.5
=====
</TABLE>
From time to time the Company may examine potential opportunities to acquire
companies engaged in the toy business. The Company currently has no plans to
make any such acquisitions. Pending use of the net offering proceeds, the
Company will invest the proceeds in short-term, investment grade, interest-
bearing securities.
At January 31, 1997, the Company's outstanding indebtedness under the Bank
One Loan was $5.0 million. The outstanding indebtedness under the Bank One
Loan bears interest at a rate per annum equal to the prime rate of Bank One,
Texas, N.A. ("Bank One") plus 1%, which at March 31, 1997 was 9.5%. The
principal of the Bank One Loan is payable in quarterly installments of
$250,000 with a final maturity on December 11, 2000. Repayment of the Bank One
Loan is secured by a lien on all the Company's assets, 65% of the stock of
DSI(HK) held by the Company, and the shares of Common Stock held by RAC. The
Company intends to use a portion of the net proceeds of the Offering to repay
all outstanding indebtedness under the Bank One Loan. The terms of the Bank
One Loan do not include any prepayment penalties.
At January 31, 1997, the Company's outstanding indebtedness under the
Revolver was $3.1 million. The Company anticipates that the amount of
outstanding indebtedness at the date of closing of the Offering will be
approximately $6.0 million. The advances under the Revolver have been used by
the Company to provide working capital, including $3.0 million which was used
to pay outstanding indebtedness to Mr. Moss and certain expenses incurred in
connection with the Recapitalization. The outstanding indebtedness under the
Revolver bears interest at a rate per annum equal to Bank One's prime rate
plus 0.75% and is repayable on May 31, 1998. At March 31, 1997, the
outstanding indebtedness accrued interest at the rate of 9.25%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
At January 31, 1997, the Company's outstanding indebtedness under the
Hibernia Loan was $1.5 million. The outstanding indebtedness under the
Hibernia Loan bears interest at 13% per annum. The principal of the Hibernia
Loan is payable in quarterly installments of $75,000 and a final maturity on
January 31, 2002. Repayment of principal prior to the scheduled date of
repayment requires a prepayment penalty of 4% of any principal amount prepaid
prior to January 31, 1998 and 3% of any principal amount prepaid thereafter.
The Hibernia Loan is secured by a subordinated lien on all the Company's
assets and is subordinated to the Bank One Loan and the Revolver. For more
information regarding the Bank One Loan, the Moss Note and the Hibernia Loan,
see "The Recapitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
At January 31, 1997, the Company's outstanding indebtedness under the Moss
Note was $6.0 million. The outstanding indebtedness under the Moss Note
currently bears interest at the rate of 12% per annum. The
12
<PAGE>
principal due under the Moss Note is payable in $1.0 million annual
installments beginning on March 31, 1998, with an additional $1.0 million
installment due December 31, 2000, with the full amount of outstanding
principal and accrued unpaid interest due upon the earlier of the third
business day after the closing of the Company's initial public offering or
March 31, 2001.
At January 31, 1997, the Company's outstanding indebtedness under the Moss
Bonus Note was $1.0 million. The outstanding indebtedness under the Moss Bonus
Note currently bears interest at the rate of 12% per annum. The principal of
the Moss Bonus Note is payable on the earlier to occur of the third business
day after the closing of the Company's initial public offering or May 31,
1997.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Shareholder. In the event the Underwriters' over-
allotment option is exercised in full, the Company will not receive any
proceeds from the sale of shares by Hibernia Corporation, but will receive
$300,000 upon exercise of the warrants related to such shares.
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on the Common Stock.
The Company currently intends to retain any earnings for use in the operation
and expansion of its business and does not anticipate declaring or paying any
cash dividends in the foreseeable future. In deciding whether or not to
declare or pay dividends in the future, the Board of Directors will consider
all relevant factors, including the Company's earnings, working capital, and
capital expenditure requirements, any restrictions contained in any financing
or other agreements the Company may enter into in the future, and general
business conditions. Under the terms of the Revolver, the Company cannot pay
dividends on the Common Stock without the written consent of Bank One.
13
<PAGE>
DILUTION
Purchasers of the shares of Common Stock offered hereby will experience an
immediate and substantial dilution in the net tangible book value per share of
their Common Stock from the initial offering price. As of January 31, 1997,
the net tangible deficit of the Common Stock was $9.4 million or $2.69 per
share. Net tangible deficit per share represents the amount of total tangible
assets less total liabilities, divided by the number of shares of Common Stock
outstanding. Assuming no changes in the net tangible deficit after January 31,
1997, other than to give effect to the sale by the Company of 2,500,000 shares
of Common Stock offered hereby at an assumed initial offering price of $10.00
per share (the midpoint of the range of the anticipated initial offering
price) and after deducting underwriting discounts and estimated offering
expenses payable by the Company, the pro forma net tangible book value of the
Company as of January 31, 1997 would have been $13.1 million, or $2.18 per
share ($2.20 per share assuming the Underwriters' over-allotment option is
exercised in full), representing an immediate increase in net tangible book
value per share of $4.87 to existing shareholders and an immediate dilution of
$7.82 per share to new investors purchasing shares of Common Stock in the
Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial offering price per share................. $10.00
------
Net tangible deficit per share before the Offering....... $(2.69)
Increase per share attributable to sale of shares to new
investors............................................... 4.87
------
Net tangible book value per share after the Offering..... 2.18
------
Dilution per share to new investors...................... $ 7.82
======
</TABLE>
The following table sets forth as of January 31, 1997, the number of shares
of Common Stock purchased or to be purchased from the Company, the total
effective cash consideration paid or to be paid to the Company, and the
average price per share paid by existing shareholders and by new investors
purchasing shares sold by the Company in the Offering at an assumed initial
offering price of $10.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
----------------------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- --------------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders
(1).................... 3,500,000 58.3% $ 3,802,500 13.2% $ 1.09
New investors........... 2,500,000 41.7% 25,000,000 86.8 $10.00
----------- ------- ----------- -----
Total................. 6,000,000 100.0% $28,802,500 100.0%
=========== ======= =========== =====
</TABLE>
- --------
(1) Excludes 388,888 shares of Common Stock issuable upon exercise of warrants
issued to Hibernia Corporation at an exercise price of $2.00 per share and
250,000 shares issuable upon exercise of the Representatives' Warrants.
See "Principal and Selling Shareholders," "Description of Capital Stock"
and "Underwriting."
14
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of January 31, 1997, on a historical basis and as adjusted to give
effect to the sale by the Company of 2,500,000 shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom:
<TABLE>
<CAPTION>
JANUARY 31, 1997
-------------------
AS
HISTORICAL ADJUSTED
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt:
State Street revolving bank loan.......................... $ 485 $ 485
Bank One Loan............................................. 1,000 --
Hibernia Loan, net of $29,000 discount.................... 271 --
Moss Note................................................. 1,000 --
------- -------
Total short-term debt.................................... $ 2,756 $ 485
======= =======
Long-term debt (net of current maturities):
Revolver(1)............................................... $ 3,055 $ --
Bank One Loan............................................. 4,000 --
Hibernia Loan, net of $52,000 discount.................... 1,148 --
Moss Note................................................. 5,000 --
Moss Bonus Note........................................... 1,000 --
------- -------
Total long-term debt..................................... 14,203 --
------- -------
Shareholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized;
none issued.............................................. -- --
Common stock, $0.01 par value; 20,000,000 shares autho-
rized;
Issued: 6,219,000, actual; 8,719,000, as adjusted
Outstanding: 3,500,000, actual; 6,000,000, as adjusted
(2)...................................................... 62 87
Additional paid-in capital................................ 3,443 25,923
Common stock warrants..................................... 100 100
Retained earnings......................................... 9,624 9,624
Cumulative translation adjustment......................... 9 9
Less--Treasury stock, 2,719,000 shares, at cost........... (22,660) (22,660)
------- -------
Total shareholders' equity (deficit)..................... (9,422) 13,083
------- -------
Total capitalization.................................... $ 4,781 $13,083
======= =======
</TABLE>
- --------
(1) The Company anticipates that the amount of outstanding indebtedness under
the Revolver at the date of closing of the Offering will be approximately
$6.0 million, of which the Company intends to repay the full amount using
net proceeds of the Offering.
(2) Excludes (i) 600,000 shares of Common Stock reserved for issuance under
the Company's 1997 Stock Option Plan, of which options covering 90,000
shares will be outstanding after the Offering and (ii) 638,888 shares of
Common Stock issuable upon exercise of warrants to be outstanding after
the Offering. See "Management--1997 Stock Option Plan," "Description of
Capital Stock" and "Underwriting."
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated statement of income and balance sheet
data have been derived from the Company's consolidated financial statements
which have been audited by Price Waterhouse LLP. The selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and related notes included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales.................... $36,576 $36,734 $45,219 $63,146 $63,219
Cost of goods sold........... 29,092 30,122 33,614 43,428 42,023
------- ------- ------- ------- -------
Gross profit................. 7,484 6,612 11,605 19,718 21,196
Selling, general and
administrative expenses..... 4,524 5,680 7,910 14,625 15,569
Former sole shareholder bonus
(1)......................... 1,380 347 2,000 1,000 --
------- ------- ------- ------- -------
Operating income............. 1,580 585 1,695 4,093 5,627
Interest expense............. 226 147 333 701 2,600
Other income................. (28) (88) (111) (384) (344)
------- ------- ------- ------- -------
Income before income taxes... 1,382 526 1,473 3,776 3,371
Provision for income taxes... 475 164 504 1,449 1,220
------- ------- ------- ------- -------
Net income................... $ 907 $ 362 $ 969 $ 2,327 $ 2,151
======= ======= ======= ======= =======
Earnings per share (2)....... $ 0.26 $ 0.10 $ 0.28 $ 0.66 $ 0.58
Weighted average shares
outstanding(2).............. 3,500 3,500 3,500 3,500 3,739
Supplemental earnings per
share (3)................... $ 0.59
<CAPTION>
END OF FISCAL YEAR
------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).... $ 2,093 $ 1,569 $ 2,121 $ 3,510 $ 2,621
Property and equipment, net.. 1,513 425 2,336 1,514 1,190
Total assets................. 8,349 7,460 10,389 17,390 16,304
Long-term debt (less current
portion).................... -- -- 17 18,188 14,203
Shareholders' equity (defi-
cit)........................ 3,817 4,179 5,147 (11,582) (9,422)
</TABLE>
- --------
(1) Consists of bonus paid to the Company's former sole shareholder. Bonuses
paid to other officers and employees are included in selling, general and
administrative expenses. See "Management--Bonuses."
(2) Earnings per share is calculated using the weighted average number of
common and dilutive common equivalent shares outstanding during the
period.
(3) Supplemental earnings per share is based on (i) the number of shares of
Common Stock assumed to be outstanding after the Offering of 5,878,000
shares at the end of fiscal 1996 (based on 2,139,000 shares to be sold at
the assumed initial public offering price necessary to raise sufficient
net proceeds, after paying underwriting discounts and commissions and
proportionate estimated offering expenses, to repay certain indebtedness
of the Company as described in "Use of Proceeds") and (ii) net income
increased by the effect of interest expense ($2,014,000), net of tax
($725,000), related to the indebtedness to be repaid.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the Company's
Consolidated Financial Statements and the related notes appearing elsewhere in
this Prospectus.
GENERAL
The Company designs, develops, markets and distributes a variety of toys and
children's consumer electronics. The Company's core product categories are (i)
juvenile audio products, including walkie-talkies, pre-school audio products,
pre-teen audio products and musical toys; (ii) girls' toys, including dolls,
play sets and accessories; and (iii) boys' toys, including radio control
vehicles, action figures and western and military action toys. Sales of
products in these categories accounted for approximately 49.5%, 40.9% and
6.0%, respectively, of the Company's net sales during fiscal 1996.
Historically, the Company's sales have been made primarily to customers based
in the United States, although its international net sales accounted for
approximately 18.6% of the Company's net sales during fiscal 1996. All the
Company's international sales are denominated in United States dollars.
Accordingly, the Company currently is not subject to exchange rate risk with
respect to international sales. FOB Asia sales accounted for 75.6%, 56.1% and
55.8% of the Company's net sales for fiscal 1994, fiscal 1995 and fiscal 1996,
respectively. Products sold FOB Asia are shipped directly to customers from
the factory and are not carried by the Company in inventory.
On December 11, 1995, in connection with the Recapitalization, the Company
repurchased 77.7% of the then outstanding Common Stock from Tommy Moss and
issued 2,719,000 shares of Common Stock to RAC for consideration of $3.8
million. The Recapitalization resulted in the incurrence of an aggregate of
$17.9 million of additional indebtedness and $1.9 million of expenses and a
reduction in the Company's net worth. Approximately $19.5 million of the net
proceeds of the Offering will be used to reduce the indebtedness incurred by
the Company, including indebtedness incurred in connection with the
Recapitalization. See "The Recapitalization" and "Use of Proceeds."
In the past, a significant part of the Company's profits has been
distributed as a bonus to the Company's former sole shareholder. The Company
will not distribute profits in this manner in the future. The Company has
entered into employment agreements with three executive officers, pursuant to
which the Company will pay performance bonuses based on the Company's
profitability if the Company's operations generate a specified level of
income. If paid, these bonuses will be included in selling, general and
administrative expenses. See "Management--Bonuses." The Company expects
general and administrative expenses in future periods to increase due to an
increase in salary expense relating to the recent hiring of new management
personnel and the incurrence of additional expenses associated with operating
as a public company.
The Company expects that the amounts it expends for advertising will
increase in connection with its greater emphasis on the development of
proprietary products. A portion of the annual advertising expenses will be
accrued during each fiscal quarter based on the amount of net sales of the
related product for such fiscal quarter compared to the projected annual net
sales for such product. To the extent actual net sales vary from estimates,
adjustments in the quarterly accruals of advertising expenses will be made.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain income and
expense items expressed as a percentage of net sales:
<TABLE>
<CAPTION>
PERCENT OF NET SALES
----------------------
FISCAL YEAR
----------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Net sales................................... 100.0% 100.0% 100.0%
Cost of goods sold.......................... 74.3 68.8 66.5
----- ----- -----
Gross profit................................ 25.7 31.2 33.5
Selling, general and ad-
ministrative expenses...................... 17.5 23.1 24.6
Former sole shareholder
bonus...................................... 4.4 1.6 --
Interest expense (net)...................... 0.7 1.1 4.1
Other income................................ (0.2) (0.6) (0.5)
----- ----- -----
Income before income
taxes...................................... 3.3 6.0 5.3
Provision for income
taxes...................................... 1.2 2.3 1.9
----- ----- -----
Net income.................................. 2.1% 3.7% 3.4%
===== ===== =====
</TABLE>
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Net sales. Net sales increased $73,000, or 0.1%, to $63.2 million during
fiscal 1996, from $63.1 million during fiscal 1995.
Net sales of juvenile audio products increased $2.1 million, or 7.0%, to
$31.3 million during fiscal 1996, from $29.2 million during fiscal 1995. Net
sales of girls' toys increased $4.6 million, or 21.7%, to $25.8 million during
fiscal 1996, from $21.2 million during fiscal 1995. During fiscal 1996, the
Company introduced a new doll, Pattie(TM), which generated $11.8 million of
net sales during fiscal 1996. These new sales were partially offset by a
decline in sales of the Rosie(R) doll. The net sales increases in the juvenile
audio and girls' toys categories were mostly offset by a decrease in net sales
of boys' toys of $4.7 million, or 55.3%, to $3.8 million during fiscal 1996,
from $8.5 million during fiscal 1995. Net sales of boys' toys decreased
primarily as a result of a decline in popularity of action figures and toy
tool sets. Net sales of products in other categories decreased $1.9 million,
or 45.2%, to $2.3 million during fiscal 1996, from $4.2 million during fiscal
1995.
International net sales increased $739,000, or 6.7%, to $11.8 million for
fiscal 1996 from $11.0 million in fiscal 1995. International net sales
increased as a percentage of total net sales to 18.6% for fiscal 1996 from
17.5% for fiscal 1995.
Gross Profit. Gross profit was 33.5% of net sales during fiscal 1996,
compared to 31.2% during fiscal 1995. During fiscal 1996, gross profit
increased $1.5 million primarily due to (i) increased sales of proprietary
products, which generally have higher gross margins, and (ii) lower shipping
costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were approximately $15.6 million, or 24.6% of net
sales, during fiscal 1996, compared to approximately $14.6 million, or 23.1%
of net sales, during fiscal 1995. The increase in expenses resulted
principally from an increase of approximately $2.9 million in advertising
costs related to the introduction of the Pattie(TM) doll during fiscal 1996.
The increase in advertising costs was partially offset by a decrease in
professional and consulting fees. The Company incurred approximately $1.9
million of selling, general and administrative expenses during fiscal 1995 in
connection with the Recapitalization.
18
<PAGE>
Former Sole Shareholder Bonus. Former sole shareholder bonus decreased $1.0
million to $0.0 during fiscal 1996, from fiscal 1995.
Interest Expense. Interest expense increased $1.9 million, or 270.9%, to
$2.6 million during fiscal 1996 from $701,000 during fiscal 1995. This
increase was due primarily to the Recapitalization which ocurred in the fourth
quarter of fiscal 1995, which resulted in the incurrence of an aggregate of
$17.9 million of additional indebtedness. See "--General" and "The
Recapitalization."
Income Taxes. Provision for income taxes decreased $229,000, or 15.8%, to
$1.2 million during fiscal 1996 from $1.4 million during fiscal 1995. The
Company's effective income tax rate was 36.2% for fiscal 1996, compared to
38.4% for fiscal 1995. The decrease in the effective tax rate related
principally to certain nondeductible items and other matters relating to the
Recapitalization incurred in fiscal 1995.
Net Income. As result of the foregoing factors, net income decreased
$176,000, or 7.6% to $2.1 million during fiscal 1996 from $2.3 million during
fiscal 1995, and decreased as a percentage of net sales to 3.4% during fiscal
1996 from 3.7% during fiscal 1995.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
Net Sales. Net sales increased $17.9 million, or 39.6%, to $63.1 million
during fiscal 1995, from $45.2 million during fiscal 1994. This increase was
due primarily to (i) the introduction of the Rosie(R) doll during fiscal 1995,
(ii) an $8.7 million increase in net sales to Wal-Mart and (iii) the addition
of Target as a customer (accounting for $2.6 million in net sales during
fiscal 1995).
Net sales of juvenile audio products increased $7.3 million, or 33.3%, to
$29.2 million during fiscal 1995, from $21.9 million during fiscal 1994. This
increase was due primarily to increased sales of head set walkie talkies. Net
sales of girls' toys increased $19.4 million, or 1,055.4%, to $21.2 million
during fiscal 1995 from $1.8 million during fiscal 1994 due to sales of the
Rosie(R) doll. The net sales increases in the juvenile audio and girls' toy
categories were partially offset by a decline in net sales of boys' toys of
approximately $7.8 million, or 47.9%, to $8.5 million during fiscal 1995 from
$16.3 million during fiscal 1994. Net sales of boys' toys declined primarily
as a result of a decline in popularity of action figures and toy guns. Net
sales of products in other categories decreased $895,000, or 17.5%, to $4.2
million, during fiscal 1995, from $5.1 million during fiscal 1994.
International net sales increased $2.3 million, or 26.2%, to $11.0 million
during fiscal 1995, from $8.7 million in fiscal 1994. However, international
net sales declined as a percentage of total net sales to 17.5% during fiscal
1995 from 19.3% during fiscal 1994.
Gross Profit. Gross profit was 31.2% of net sales during fiscal 1995,
compared to 25.7% during fiscal 1994. During fiscal 1995, gross profit
increased due to (i) a $15.6 million increase in net sales of proprietary
toys, including the Rosie(R) doll, which generally have higher margins, (ii)
elimination of the United States customs duty rate applicable to most of the
Company's toys from the PRC (resulting in a $376,000 decrease in customs
duties), (iii) an $80,000 decrease in the costs associated with mock-up and
design (resulting from moving certain package design functions in-house) and
(iv) a slight decrease in depreciation associated with manufacturing and
tooling. The increase in gross profit was negatively impacted by increases in
the costs of freight, paper, plastic, computer chips and other materials
during fiscal 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were approximately $14.6 million, or 23.1% of net
sales, during fiscal 1995, compared to approximately $7.9 million, or 17.5% of
net sales during fiscal 1994. The increase in expenses resulted from (i) an
increase of approximately $3.1 million in advertising costs during fiscal 1995
related to the Company's television advertising campaign for the Rosie(R)
doll, (ii) the expenses of approximately $1.9 million incurred in connection
with the Recapitalization during fiscal 1995, (iii) the payment of $375,000 in
lawsuit settlements and (iv) other increased selling expenses, including
payroll-related costs, product insurance, and marketing and promotional
expenses.
19
<PAGE>
Former Sole Shareholder Bonus. Former sole shareholder bonus decreased $1.0
million, or 50.0%, to $1.0 million during fiscal 1995 from $2.0 million during
fiscal 1994.
Interest Expense. Interest expense increased $368,000, or 110.7%, to
$701,000 during fiscal 1995, from $333,000 during fiscal 1994. The increase
was due principally to the Recapitalization which occurred in the fourth
quarter of fiscal 1995, which resulted in the incurrence of an aggregate of
$17.9 million of additional indebtedness. See "--General" and "The
Recapitalization."
Income Taxes. Provision for income taxes increased $946,000, or 187.6%, to
$1.4 million during fiscal 1995 from $504,000 during fiscal 1994. The
Company's effective tax rate was 38.4% for fiscal 1995, compared to 34.2% for
fiscal 1994. The increase in the effective tax rate related principally to
certain nondeductible items and other matters relating to the Recapitalization
incurred in fiscal 1995.
Net Income. As a result of the foregoing factors, net income increased $1.4
million, or 140.1%, to $2.3 million during fiscal 1995 from $969,000 during
fiscal 1994 and increased as a percentage of net sales to 3.7% during fiscal
1995 from 2.1% during fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has funded its operations and capital requirements
from cash generated from operations and borrowings. The Company's primary
capital needs have consisted of acquisitions of inventory, funding accounts
receivable, obtaining letters of credit and capital expenditures for product
development. The Company's working capital at January 31, 1997 was
approximately $2.6 million and unrestricted cash was approximately $1.5
million.
The Company's operating activities provided net cash of $4.4 million during
fiscal 1996, consisting primarily of a net increase in deferred income taxes,
accounts payable and accrued liabilities and a decrease in accounts
receivable, partially offset by an increase in inventories. Net cash used in
investing activities during fiscal 1996 was $943,000, and consisted primarily
of capital expenditures for manufacturing molds and equipment and an increase
in shareholder insurance receivable and other assets. Net cash used by
financing activities was $4.6 million during fiscal 1996, and represented a
net repayment of the Company's borrowings.
The seasonal nature of the toy business results in complex working capital
needs. The Company's working capital needs, which the Company generally
satisfies through short-term borrowings, are greatest in the first two fiscal
quarters. To manage these working capital requirements, the Company maintains
a line of credit facility (the "Hong Kong Credit Facility") with State Street
Bank and Trust Company, Hong Kong Branch ("State Street"), and the Revolver
with Bank One. Generally, the Company's factories provide open account credit
with terms ranging from net 7 days to net 20 days. During each of fiscal 1995
and 1996, approximately 69% of the Company's FOB Asia net sales was made to
customers that opened irrevocable letters of credit. This arrangement
obligates the bank which opened the letter of credit to pay the Company when
the finished product is delivered to the customer or the customer's freight
consolidator in Asia.
Under the Hong Kong Credit Facility, the Company may borrow up to 35% of the
stated value of a customer's letter of credit upon delivery of the letter of
credit, not to exceed $1.5 million for all letters of credit. The Company may
borrow up to 100% of the stated value of the letter of credit, up to the
available limit under the Hong Kong Credit Facility, when title passes to the
customer or the customer's freight consolidator. The letters of credit are
actually collected by State Street.
The Hong Kong Credit Facility is a $5.0 million line of credit facility with
State Street. Outstanding borrowings under the Hong Kong Credit Facility bear
interest at State Street's prime rate of interest. Each outstanding borrowing
under the line of credit is secured by a pledge of a letter of credit of like
amount issued to the Company by a customer. The Company has also pledged
$150,000 in cash as security for its obligations under the Hong Kong Credit
Facility. The Hong Kong Credit Facility is terminable by State Street in its
sole
20
<PAGE>
discretion, at which time the Company's obligations to State Street will be
due and payable. In the event the Hong Kong Credit Facility is cancelled, the
Company would need to replace it with a substitute facility. There can be no
assurance the Company would be able to obtain such a substitute facility. As
of March 31, 1997, the Company had outstanding indebtedness under the Hong
Kong Credit Facility of $34,000, which accrued interest at 8.50%.
The Revolver is a revolving line of credit with Bank One under which the
Company may borrow up to the lesser of $9.0 million or its borrowing loan
limit. Under the terms of the Revolver, the Company's borrowing loan limit is
equal to (i) 80% of the Company's eligible accounts, plus (ii) 50% of the net
value of all the Company's inventory located in, or in transit, to the United
States, less (iii) principal amounts outstanding under the Revolver and the
Bank One Loan, less (iv) the amount of all outstanding letters of credit. As
of March 31, 1997, the borrowing loan limit calculated in this manner was $6.7
million. Borrowings under the Revolver bear interest at a fluctuating rate per
annum equal to Bank One's prime rate plus 0.75%. In addition, the Company is
required to pay a quarterly commitment fee equal to 0.25% of the average daily
undrawn amounts. The obligations of the Company under the Revolver are secured
by all the Company's United States accounts receivable, inventory, equipment,
general intangibles and fixtures and 65% of the capital stock of DSI(HK) held
by the Company. The Revolver contains various covenants, including, among
others, maintenance of a minimum defined net worth, restrictions on dividends,
and maintenance of certain financial ratios. The Revolver terminates on May
31, 1998, at which time all outstanding indebtedness is repayable in full. The
Company has received a commitment letter from Bank One which provides that the
termination date for the Revolver will be extended to May 31, 1999, upon the
completion of the Offering. As of March 31, 1997, the Company had outstanding
borrowings under the Revolver of approximately $5.8 million, which accrued
interest at 9.25% per annum.
The percentage of net sales represented by FOB Asia sales has decreased as
the Company has increased its sales of basic products (products carried on a
year-round basis) and has shifted its focus to sales of promoted products,
both of which have resulted in the Company carrying more Houston inventory and
related accounts receivable. To finance purchases of inventory and accounts
receivable, primarily during the peak selling season, the Company utilizes
borrowings under the Revolver and the Hong Kong Credit Facility. During fiscal
1996, the highest level of aggregate borrowings under the Revolver and the
Hong Kong Credit Facility was $9.9 million (on August 15, 1996).
The Company believes that available borrowings under the Revolver and the
Hong Kong Credit Facility, cash from operations and net proceeds from the
Offering to the Company will be sufficient to meet the Company's operating
cash requirements, fund the Company's anticipated capital expenditures and
fund scheduled debt service for the foreseeable future. The Company has
budgeted approximately $850,000 for capital expenditures, consisting of
purchases of tools, molds, office equipment and furnishings, for fiscal 1997.
At March 31, 1997, the Company had an additional borrowing capacity of an
aggregate of $1.3 million under the Revolver and the Hong Kong Credit
Facility.
The Company is obligated to make future minimum royalty payments under
certain of its license agreements. As of January 31, 1997, the Company was
required to make an aggregate of approximately $52,000 in payments of
guaranteed royalties under these licenses in fiscal 1997 and $180,000
thereafter.
As a part of the Company's strategy, the Company will evaluate potential
acquisitions of other toy businesses or product lines which the Company
believes would complement its existing business. As of the date of this
Prospectus, the Company has no present understanding or agreement with respect
to any acquisitions.
In connection with any future cash needs or acquisition opportunities, the
Company may incur additional debt or issue additional equity or debt
securities depending on market conditions and other factors.
21
<PAGE>
SEASONALITY
The toy industry is very seasonal with the Christmas holiday season
representing over two-thirds of total annual retail toy sales. The Company has
experienced this seasonal pattern in its net sales. To accommodate this peak
selling season, holiday toy lines are introduced early in the first calendar
quarter. Retailers commit to their holiday season purchases during the first
two calendar quarters and those orders are shipped from Asia to the retailers'
distribution centers on a scheduled basis from May through September. As a
result of the seasonality of the Company's business, the Company expects to
incur a loss in the first quarter of each fiscal year for the foreseeable
future and may incur a loss in the fourth quarter of such fiscal year
depending upon the timing of product shipments.
The following table depicts the seasonality of the Company's net sales by
fiscal quarter for the 1994, 1995 and 1996 fiscal years:
<TABLE>
<CAPTION>
NET SALES BY FISCAL QUARTER
--------------------------------------------------------
FISCAL 1994 FISCAL 1995 FISCAL 1996
------------------ ------------------ ------------------
FISCAL QUARTER AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
- -------------- ------- ---------- ------- ---------- ------- ----------
(IN THOUSANDS EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
First................. $ 3,225 7.1% $ 5,149 8.2% $ 5,856 9.3%
Second................ 18,004 39.8 19,314 30.6 18,097 28.6
Third................. 17,775 39.3 28,960 45.8 29,348 46.4
Fourth................ 6,215 13.8 9,723 15.4 9,918 15.7
------- ----- ------- ----- ------- -----
Total................ $45,219 100.0% $63,146 100.0% $63,219 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
INFLATION
The Company does not believe that the relatively moderate rates of inflation
in the United States in recent years have had a significant effect on its
operations. Although recent rates of inflation in the Asia have resulted in an
increase in the cost of manufacturing the Company's products, this increase in
costs has been partially offset by an increase in total product sales prices.
Thus, although increased costs have had a modest impact on margins, the
Company does not believe that inflation in Asia has had a materially adverse
effect on its operations.
RECENT ACCOUNTING PRONOUNCEMENTS
During the first quarter of fiscal 1995, the Company adopted Statement of
Financial Accounting Standard No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). The
adoption of SFAS 121 did not have any impact on the Company's financial
position or results of operations. Upon approval of the Company's 1997 Stock
Option Plan, the Company will adopt Statement of Financial Accounting Standard
No. 123, Accounting for Stock Based Compensation ("SFAS 123"). The Company
does not anticipate that the adoption of SFAS 123 will have any impact on its
financial position or results of operations. With the adoption of SFAS 123,
the Company will measure stock compensation costs using the intrinsic value
method prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees, and will provide pro forma disclosures of net income and earnings
per share as if the fair value based method prescribed by SFAS 123 had been
applied in measuring compensation expense in its annual financial statements.
22
<PAGE>
BUSINESS
GENERAL
The Company designs, develops, markets and distributes high quality, value-
priced toys and children's consumer electronics. The Company's core product
categories are (i) juvenile audio products, including walkie-talkies, pre-
school audio products, pre-teen audio products and musical toys; (ii) girls'
toys, including dolls, play sets and accessories; and (iii) boys' toys,
including radio control vehicles, action figures and western and military
action toys. Founded in 1970, the Company historically was principally a
supplier of non-proprietary toys to deep discount stores and regional drug
store chains. With the addition of new senior management personnel in 1990,
the Company began to market its expanding product line to major toy retailers
by emphasizing innovative packaging and developing in-house brands. Further,
in fiscal 1993, the Company began to emphasize the development and marketing
of proprietary products, consisting of toys developed by the Company
incorporating concepts licensed from outside inventors, products designed in-
house, products for which the Company owns the mold and products incorporating
well-known trademarks licensed to the Company. The Company introduced its
first television-promoted proprietary product, the Rosie(R) doll, in fiscal
1995. Rosie(R) ranked as the number two selling doll by dollar amount (and
number three by unit), in the large doll category during calendar 1995, as
measured by the Toy Retail Sales Tracking Service.
Traditionally a supplier of juvenile audio products and boys' toys, the
Company has diversified its product offerings over the last two fiscal years,
primarily through its expansion into the girls' toys category with the
introduction of the Rosie(R) doll in fiscal 1995 and the Pattie(TM) doll in
fiscal 1996. For fiscal 1997, the Company has introduced new products in its
three core categories, as well as a new children's action game, Hoppin'
Poppin' Spaceballs(TM). The Company seeks to enhance its position as a leading
supplier of high quality, value-priced toys and intends to continue developing
proprietary products, primarily through pursuing opportunities to license toy
concepts from outside inventors and to license recognized trademarks. The
Company believes that it offers its customers many value-priced products,
which the Company believes are lower-priced alternatives to comparable
products sold by other toy companies. The Company believes that this strategy
of offering lower priced products to its customers provides them with
opportunities to realize higher margins on sales of the Company's products as
compared to sales of products offered by other toy companies.
Since fiscal 1993, the Company's net sales have grown from $36.7 million to
$63.2 million (or 72%) for fiscal 1996, and net income has grown from $362,000
to $2.2 million (or 494%) during the same period. The Company believes that
this growth is attributable to several factors, including its ability to
identify new products with broad appeal and to rapidly develop and market
these products. The Company believes that its use of innovative packaging and
increased utilization of brand names have also contributed to its growth. The
Company offers several licensed products under the Kawasaki(R) brand name,
including a radio-controlled motorcycle, guitars, keyboards and a percussion
instrument. The Company also has developed and currently is marketing products
incorporating several in-house brand names, including Digi-Tech(TM) (walkie-
talkies), LA Rock(R) (musical toys and audio products), American Frontier(TM)
(western role play toys), Combat Force Rangers(TM) (military role play toys)
and My Music Maker(R) (musical toys and pre-school audio products). The
Company believes that its use of brand names to market its products has
increased name recognition of its products and contributed to the Company's
increase in net sales over the past four fiscal years. The Company believes
that it is the leading supplier of walkie-talkies to the top five United
States toy retailers.
The Company sells primarily to retailers, including mass merchandising
discounters such as Wal-Mart, Kmart and Target, specialty toy stores such as
Toys "R" Us, Kay-Bee Toy & Hobby and F.A.O. Schwarz, and deep discount stores
such as Family Dollar Stores, Inc., Consolidated Stores Corporation and Value
City Department Stores, Inc. Wal-Mart (19.5%), Kmart (13.7%) and Toys "R" Us
(12.0%) each accounted for more than 10% of the Company's net sales in fiscal
1996. Although the Company's sales have been made primarily to customers based
in the United States, international net sales accounted for approximately 19%
of the Company's net sales during fiscal 1996.
Approximately 56% of the Company's net sales (by dollar volume) were made
FOB Asia during fiscal 1996. Products sold FOB Asia are shipped directly to
customers from the factory and are not carried by the Company
23
<PAGE>
in inventory, thereby improving working capital utilization. The Company also
maintains an inventory of certain products in its Houston, Texas facility,
principally to support sales by the Company's customers who offer such
products on a year-round basis. In addition, the Company's Houston facility
maintains inventory to support the Company's television-promoted proprietary
products.
INDUSTRY BACKGROUND
The TMA, which tracks toy industry data, reported that for 1996, total
domestic toy sales at the wholesale level, excluding video games, were
approximately $13.9 billion, up from $13.4 billion in 1995. Domestic toy sales
at the wholesale level, other than video games, have grown an average of 4.8%
per year since the beginning of 1992. According to TMA, the United States is
the world's largest market for toys, followed by Japan and Western Europe. The
Company believes that the international markets represent an opportunity for
future expansion.
According to TMA, the top five toy retailers in the United States are Toys
"R" Us, Wal-Mart, Kmart, Target and Kay-Bee Toy & Hobby. Collectively, these
retailers accounted for approximately 54.4% of the domestic market for retail
toy sales in 1995. The Company believes that the purchasing power of such
large, discount oriented retailers has required toy suppliers, including the
Company, to maintain competitive prices and to implement inventory control
methods in order to respond quickly to consumer demands.
STRATEGY
The Company seeks to enhance its position as a leading supplier of high
quality, value-priced toys. The key components of the Company's strategy to
achieve this goal are:
Expansion of Product Offerings. The Company plans to continue to
aggressively develop and market products in its three core categories, while
taking a more opportunistic approach with respect to development of products
outside its core categories. In furtherance of its strategy, in the girls' toy
category the Company has introduced Baby Pick Me Up(TM) and the Dreamie
Sweets(TM) line of dolls for fiscal 1997. In the juvenile audio category, the
Company recently introduced the Kawasaki(R) Air Guitar(TM) and the Kawasaki(R)
Big Bam Boom(TM) (an electronic percussion instrument), and in the boys' toys
category, the Company introduced the Kawasaki(R) Ninja(R) Supergyro(TM)
Motorcycle. The Company also has introduced its new children's action game,
Hoppin' Poppin' Spaceballs(TM), for sale in the Spring/Summer of 1997. The
Company intends to seek opportunities to acquire products, product lines and
businesses that are complementary to the Company's products and business.
Increased Emphasis on Proprietary Products. The Company intends to continue
to develop proprietary products, which include products (i) that are based on
concepts licensed from outside inventors (such as the Rosie(R) and Pattie(TM)
dolls), (ii) that incorporate trademarks licensed by the Company (such as
Kawasaki(R) guitars and keyboards), (iii) designed in-house or (iv) for which
the Company owns the mold to manufacture the toy (such as the American
Frontier(TM) line of western toy guns). Net sales of the Company's proprietary
products have increased from approximately $8.7 million in fiscal 1993 to
approximately $37.0 million in fiscal 1996. The Company believes that it has
an ability to quickly bring new toy concepts from the development stage to
market which, when successful, provides toy inventors with a royalty stream on
an expedited basis. As a result, toy inventors increasingly are approaching
the Company with innovative concepts, thus expanding the Company's access to
proprietary products. The Company plans to seek exclusive rights to market and
distribute toys licensed from toy inventors so that these toys, when
introduced, are unique in the marketplace. The Company also plans to pursue
trademark licensing opportunities with companies that have recognized names.
Consistent with its past practices, the Company plans to take an opportunistic
approach with respect to developing and marketing products based upon licenses
for entertainment characters.
Increased Utilization of Brands. The Company intends to continue to expand
its use of brands in marketing its toys. A key component of the Company's
strategy is to pursue attractive trademark licensing opportunities with
companies that have recognized brand names that can be incorporated into the
designs or
24
<PAGE>
names of the Company's products. The Company currently licenses the
Kawasaki(R) brand name for use in the names and designs of toys modelled on
products that are not normally associated with the Kawasaki(R) name, such as
walkie-talkies, keyboards and toy musical instruments, as well as the new
Kawasaki(R) Ninja(R) Supergyro(TM) Motorcycle. The Company believes that the
Kawasaki(R) brand name is well-recognized by consumers of all ages and will
seek to continue to capitalize on this brand-recognition. The Company will
continue to seek opportunities to develop strategic relationships with other
companies with well-recognized brand names. The Company also plans to
introduce new products under its current in-house brand names and to develop
new brand names as it increases the diversity of its product offerings.
Current in-house brand names include Digi-Tech(TM), LA Rock(R), My Music
Maker(R), American Frontier(TM) and Combat Force Rangers(TM).
Emphasis on Marketing/Packaging and Pricepoint. The Company's innovative
packaging skills are an important element of its product marketing strategy.
The Company attempts to package products using eye-catching colors and
graphics, often using "try me" packaging that encourages consumers to try or
"self-demonstrate" a product still in its packaging. The Company believes that
such packaging often differentiates its products from its competitors'
products. The vast majority of the Company's products are priced at or below a
retail price of $20. The Company believes that its products generally offer
attractive, lower-priced alternatives to comparable products sold by other toy
companies.
Expansion of Distribution and Customer Base. The Company intends to seek
opportunities to increase sales to existing customers and to expand its
customer base in both the United States and international markets. In order to
generate additional sales to the Company's existing customers, the Company
will continue to emphasize new product offerings, product quality,
presentation and packaging, value pricing, product safety, and rapid and
accurate order fulfillment. The Company also believes that opportunities exist
for sales to additional retailers, international distributors and non-
traditional customers such as home television shopping networks. The Company
believes that television advertising will have a positive effect on sales to
its existing customers and will increase its opportunity to make sales to new
customers.
25
<PAGE>
PRODUCTS
The Company's product philosophy is to provide high quality toys in
attractive and innovative packaging. The Company employs a value-pricing
concept, with the vast majority of its products priced at or below $20 retail.
The Company attempts to package products using eye-catching colors and
graphics, often using "try me" packaging that encourages consumers to try a
product still in its packaging. The following chart sets forth by category the
Company's major products:
<TABLE>
<CAPTION>
CATEGORY/Lines REPRESENTATIVE PRODUCTS
-------------- ------------------------------------------------
<C> <C> <S>
GIRLS' TOYS
Dolls Rosie(R), a soft-body doll that sings the
children's song "Ring Around the Rosie" when
the doll's hands are held; available in 17
LOGO languages.
Rosie's Best Friend, Pattie(TM), a soft-body
doll that recites the children's rhyme "pattie-
cake" when her hands are clapped together;
LOGO available in four languages.
Baby Pick Me Up(TM), a soft-body doll that says,
"Pick me up, Mommy," laughs and giggles, and
LOGO asks to "Do it again." (New for fiscal 1997)
Dreamie Sweets(TM), a soft-body doll line
consisting of five separately-sold, 10-inch
dolls, each with a wand that lights up when her
LOGO hand is held. (New for fiscal 1997)
BOYS' TOYS
American Frontier(TM), a brand of western toy
Western Toys guns and play sets.
Combat Force Rangers(TM), a brand of military
Military Toys LOGO toy guns and play sets.
Real Tech(R), a brand of battery operated light
Fantasy Space Guns and sound space guns.
Radio Control Vehicles Kawasaki(R) Ninja(R) Supergyro(TM) Motorcycle, a
radio-controlled motorcycle that uses unique
gyroscope technology for stability. (New for
LOGO fiscal 1997)
JUVENILE AUDIO
PRODUCTS
Walkie-Talkies Digi-Tech(TM), Escort(R), Kawasaki(R) and Combat
Force Rangers(TM), brands of hand-held and
headset units, base station units and other
LOGO models.
Musical Toys Kawasaki(R) Power Chords(TM), a battery-operated
LOGO guitar.
My Music Maker(R) battery-operated keyboards.
Kawasaki(R) Air Guitar(TM), a battery-operated
guitar that plays six different bars of rock
music, with five control keys and a "whammy"
bar. (New for fiscal 1997)
Kawasaki(R) Big Bam Boom(TM), an electronic
percussion instrument with four drum pads and
nine buttons that allow children to create drum
riffs and other percussion effects. (New for
fiscal 1997)
Kawasaki(R) Country Guitar, a battery-operated
guitar that plays six different bars of country
music, with five control keys and a "whammy"
bar. (New for fiscal 1997)
My Music Maker(R) sing-along cassette players
Pre-school Audio and radios.
Pre-teen Audio LOGO LA Rock(R) personal cassette players and radios.
OTHER
Games Hoppin' Poppin' Spaceballs(TM), a table-top
action game for children aged four and older,
engaging two to four players who attempt to
LOGO capture colored balls that fly around in an
enclosed dome. (New for fiscal 1997)
Play Table Build-A-Lot(TM) block building table, a
children's play table that can be used as a
base for plastic building blocks. (New for
LOGO fiscal 1997)
</TABLE>
26
<PAGE>
The following table depicts the Company's net sales, as a percentage of
total net sales, by product category for the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------
PRODUCT CATEGORY 1994 1995 1996
- ---------------- ----- ----- -----
<S> <C> <C> <C>
Juvenile audio products.................................... 48.5% 46.3% 49.5%
Girls' toys................................................ 4.0 33.5 40.8
Boys' toys................................................. 36.2 13.5 6.0
Other...................................................... 11.3 6.7 3.7
----- ----- -----
Total.................................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Between 30% and 40% of the Company's products (by dollar volume of net
sales) are replaced each year through the introduction of new products. As a
result of this turnover, product development is a critical and ongoing
concern. The Company develops both proprietary and non-proprietary products.
The Company's proprietary product lines currently consist of approximately 38
products (i) that are licensed from outside inventors and designers, (ii) that
incorporate trademarks licensed by the Company, (iii) designed in-house or
(iv) for which the Company owns the mold to manufacture the toy. For each
product in the fourth proprietary category, the Company or the inventor owns
the intellectual property of the design, and the Company owns the required
tooling, dies and molds necessary to manufacture the product. Proprietary toys
accounted for approximately 51% and 59% of the Company's net sales during
fiscal 1995 and fiscal 1996, respectively. The Company's proprietary products
generally yield higher gross margins to the Company than non-proprietary toys.
Non-proprietary products are defined by the Company as toys designed and
manufactured by independent toy manufacturers and marketed by the Company,
usually on an exclusive basis in the Company's primary markets. The Company
selects its non-proprietary product introductions on the basis of the
Company's evaluation of several factors, including the quality and pricing of
the product, as well as whether the product presents an opportunity for the
Company to utilize its packaging and marketing skills to differentiate the
product from other toys. The Company often markets these toys under in-house
brands, such as Digi-Tech(TM) and LA Rock(R). Non-proprietary products
accounted for approximately 49% and 41% of the Company's net sales for fiscal
1995 and fiscal 1996, respectively.
LICENSE AGREEMENTS
The Company enters into license agreements with toy inventors and designers
that give the Company the right to manufacture and market a product or
technology invented or designed by the inventor. In return, the Company agrees
to pay to the inventor a percentage of net sales of the Company's product that
is based on the inventor's product or technology. Typically, this annual
royalty ranges from 4% to 7% of net sales. Sales of products that are based on
products or technology acquired by the Company from the inventor thereof, such
as the Rosie(R) doll, accounted for approximately 31% and 41% of the Company's
net sales during fiscal 1995 and fiscal 1996, respectively. The acquisition of
licenses typically requires the payment of non-refundable advances and/or
guaranteed minimum royalties. As of January 31, 1997, minimum future
guaranteed payments by the Company under licenses aggregated approximately
$232,000. The Company has a license agreement with Kawasaki Motors Corp., USA
authorizing the Company to use the Kawasaki(R) brand name in connection with
several different products, including the Kawasaki(R) Ninja(R) Supergyro(TM)
Motorcycle, which the Company has introduced for fiscal 1997. See "Business--
Products."
The Company does not rely significantly upon licenses of characters and
trademarks from entertainment companies. During fiscal 1996, sales of toys
that were the subject of license agreements with entertainment companies
accounted for less than 1% of the Company's net sales. The Company believes
that although development of products under entertainment licenses can fuel
rapid growth, such licenses may also subject the licensee to substantial risk
and expense if they provide for substantial up-front royalty commitments, high
minimum guaranteed royalty payments and restrictions on product development.
Consistent with its past
27
<PAGE>
practices, the Company plans to take an opportunistic approach with respect to
opportunities to develop and market products based upon licenses for
entertainment characters.
CUSTOMERS
The Company made sales to over 400 different customers in approximately 40
countries during fiscal 1996. The table below sets forth the Company's net
sales by geographic area as a percentage of total net sales for the specified
periods.
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------
GEOGRAPHIC AREA 1994 1995 1996
- --------------- ----- ----- -----
<S> <C> <C> <C>
United States.............................................. 80.6% 82.5% 81.4%
Europe..................................................... 8.3 8.1 9.2
Other North America (Canada and Mexico).................... 5.0 4.2 3.7
Oceana..................................................... 2.9 2.7 2.4
South and Central America.................................. 2.3 1.5 1.7
Asia....................................................... 0.4 0.7 1.4
Other (Middle East and Africa)............................. 0.5 0.3 0.2
----- ----- -----
Total.................................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
The Company's principal customers are retailers, including mass
merchandising discounters such as Wal-Mart, Kmart and Target, specialty toy
stores such as Toys "R" Us, Kay Bee Toy & Hobby, F.A.O. Schwarz and Noodle
Kidoodle (Greenman Bros., Inc.), and deep discount stores such as Family
Dollar Stores, Consolidated Stores and Value City Department Stores. The
Company's top five customers accounted for approximately 54.5% of the
Company's net sales in fiscal 1996. Wal-Mart (19.5%), Kmart (13.7%) and Toys
"R" Us (12.0%) each accounted for more than 10% of the Company's net sales
during the same period. For the prior two fiscal years, the only customers
that accounted for more than 10% of the Company's net sales were Wal-Mart
(17.2%) and Kmart (12.7%) for fiscal 1995 and Kmart (11.3%) and West Coast
Liquidators (10.4%) for fiscal 1994. During fiscal 1996, the Company's sales
to Toys "R" Us, Wal-Mart, Kmart, Target and Kay-Bee Toy & Hobby, the five
largest toy retailers in the United States, increased as a percentage of the
Company's net sales to 54.5%, compared to 44.9% during fiscal 1995 and 27.9%
during fiscal 1994.
SALES AND MARKETING
The Company has implemented a selling strategy that consists of supporting
the marketing and sales efforts of its executive management with a combination
of in-house sales personnel and a network of independent, commission-based
sales representatives. All significant product presentations are made by
either executive management, in the case of new product presentations, or in-
house sales personnel. The independent sales representatives manage the day-
to-day account administration.
New toys are marketed primarily by members of the Company's executive
management at the Company's showrooms in Hong Kong, New York and Dallas during
the times when major, international toy shows are taking place in those cities
(Hong Kong in January, June and September/October, Dallas in January, and New
York in February). The Company believes that most of its customers are active
at these toy shows. The Company also maintains a showroom at its headquarters
in Houston.
The Company generally accepts returns for defective merchandise, although
the value of such returns has historically not been significant. In accordance
with industry practice, the Company sometimes allows retailers to return slow-
moving items for credit and also sometimes provides price protection by making
any price reductions effective as to all products then held by retailers in
inventory. The Company expects that it will continue to make such
accommodations in the future.
28
<PAGE>
In international markets, the Company generally sells its products to
independent distributors. These distributors retain their own sales
representatives and product showrooms at which products such as the Company's
are marketed and sold. The Company also makes some sales directly to
international retailers, principally as a result of contacts made at the
Company's showrooms.
ADVERTISING
The Company currently allocates a majority of its advertising budget to
television promotion. The Company utilized a television campaign for the first
time in fiscal 1995 in connection with the introduction of the Rosie(R) doll.
The Company increased its television advertising budget in fiscal 1996, using
television commercials to promote both the Rosie(R) and Pattie(TM) dolls. The
Company intends to continue to utilize a promotional strategy whereby the
Company will advertise certain of its proprietary products. The Company
believes that television advertising, properly utilized, has a positive effect
on sales. Although a majority of the Company's advertising budget is allocated
to television, the Company continues to expend a portion of its advertising
budget to promote its products through retail catalogs, advertisement in trade
magazines, and cooperative promotional efforts of retailers. The Company has
begun utilizing in-store radio promotions at Toys "R" Us to promote certain of
its products. The Company's Director of Marketing helps coordinate the
advertising efforts of the Company.
MANUFACTURING
The Company annually contracts with approximately 40 independent
manufacturers located principally in the PRC within a 200-mile radius of Hong
Kong for the manufacturing of its products. The Company may use more than one
manufacturer to produce a single product. The only manufacturers that
accounted for more than 10% of the Company's purchases of products during
fiscal 1996 were GMT Industrial Ltd. (26.1%), which manufactured walkie-talkie
and musical toys products for the Company, Ocean Dragon Industrial Co. Ltd.
(15.6%), which manufactured Rosie(R) and Pattie(TM) dolls and Loyal Technology
Co. Ltd. (14.4%), which manufactured certain walkie-talkies and radios.
Manufacturing commitments are made on a purchase order basis. The Company does
not have long-term contractual arrangements with its manufacturers.
Decisions related to the choice of manufacturer for non-proprietary products
generally are based on reliability, quality of merchandise, price and the
ability of the manufacturer to meet the Company's or its customers' timing
requirements for delivery. Proprietary products designed by the Company are
placed with a specific manufacturer whose expertise is in that type of toy.
The Company currently has its tooling placed in several different
manufacturing facilities and generally receives 60 to 90 day delivery after
its orders are booked.
The Company believes that its presence in Hong Kong through its subsidiary
DSI(HK) has enhanced the Company's relationships with manufacturers in the PRC
and has allowed the Company to closely monitor manufacturing operations,
including quality control, production scheduling and order fulfillment.
DSI(HK) utilizes a quality control staff of five degreed engineers, a quality
assurance staff of two engineers, and nine full-time inspectors who rotate
among the various plants at which the Company's products are being
manufactured.
The principal materials used in the production of the Company's products are
plastics, integrated circuits, batteries, corrugated paper (used in packaging
and packing material) and acrylic textiles. The Company believes that an
adequate supply of materials used in the manufacture and packaging of its
products is readily available from existing and alternative sources at
reasonable prices.
DISTRIBUTION
The Company's distribution strategy focuses on distributing its products
either through FOB Asia sales or through direct sales made from inventory
maintained at its Houston facility. For FOB Asia sales, the customer places
its order and shipping instructions, and the toys are then manufactured and
shipped directly to the customer or its freight consolidator from the factory.
Following the October 1993 acquisition by DSI(HK) of
29
<PAGE>
certain assets of its Hong Kong distributor, the Company has used its Hong
Kong personnel to conduct the FOB Asia business. The Company believes that its
Hong Kong presence has contributed to the success of its FOB Asia business
because the Company does not have to utilize independent agents, who may have
conflicting interests.
Basic, continuous stock toys that are offered by retailers on a year-round
basis generally are shipped to customers by the Company from its inventory in
Houston. In addition, certain faster-selling toys are often shipped directly
to major customers for seasonal selling as well as stocked by the Company in
Houston for peak season back-up and continuous supply. The Company also
maintains inventory which is committed to specific customers for peak holiday
season support as well as some inventory which is available for smaller
retailers and for opportunistic selling strategies. The Company's television-
promoted proprietary products generally are shipped to customers from the
Company's inventory in Houston.
Most of the Company's larger customers have instituted electronic data
interchange ("EDI") programs to reduce the retailers' inventory carrying
requirements and place more inventory risk on the supplier. When selling toys
out of its Houston inventory, the Company participates in the EDI programs of
most of its customers who have established an EDI program, including Kmart,
Wal-Mart, Toys "R" Us, Target and Kay-Bee Toy & Hobby. Although these programs
require the Company to bear some inventory risk, the Company believes the
programs can be utilized to monitor store inventory levels, schedule
production to meet anticipated reorders and maintain sufficient inventory
levels to both serve its customers and better manage its own inventory.
COMPETITION
The toy industry is highly competitive. Dun & Bradstreet categorizes over
1,000 companies, including the Company, as toy manufacturers. Competitive
factors include product appeal, new product development, price and order
fulfillment. The Company competes with many companies that have greater
financial resources and advertising budgets than the Company. The largest
United States toy companies are Mattel, Inc., Hasbro, Inc. and Tyco Toys, Inc.
(which has agreed to merge with Mattel, Inc.), and the Company considers YES!
Entertainment Corporation, Toy Biz, Inc., Galoob Toys, Inc., Kidd Designs,
Inc. (a division of SDI Technologies Inc.) and Alaron, Inc. to be among its
other competitors. In addition, due to the low barriers to entry into the toy
business, the Company competes with many smaller toy companies, some of which
market single products.
SEASONAL PATTERNS
The toy industry is very seasonal with the holiday selling season
representing over two-thirds of annual sales at retail. To accommodate this
peak selling season, holiday toy lines are introduced early in the first
quarter at toy shows in Hong Kong, Dallas and New York. Generally, retailers
commit to their holiday season purchases during the first two calendar
quarters and those orders are shipped from Asia to the retailers' distribution
centers on a scheduled basis from May through September. During the last two
full fiscal years, an average of approximately 87% of the Company's annual
Hong Kong-based sales have occurred between the months of May through October.
Sales from Houston historically have tended to occur closer to the holiday
season to provide peak holiday season inventory to certain large retailers and
to ship to smaller retailers that have not chosen to purchase products FOB
Asia. During the last two fiscal years, an average of approximately 66% of the
Company's annual Houston-based sales have occurred during the months of August
through November.
GOVERNMENT AND INDUSTRY REGULATION
The Company is subject to the provisions of the Federal Hazardous Substances
Act and the Federal Consumer Product Safety Act. Such Acts empower the United
States Consumer Products Safety Commission (the "CPSC") to protect the public
from hazardous goods. The CPSC has the authority to exclude from the market
goods that are found to be hazardous and require a manufacturer to repurchase
such goods under certain circumstances. The Company sends samples of all of
its marketed products to independent laboratories to test for compliance with
the CPSC's rules and regulations, as well as with the product standards of the
TMA. The
30
<PAGE>
Company is not required to comply with the product standards of the TMA, but
voluntarily does so. Similar consumer protection laws exist in state and local
jurisdictions within the United States as well as certain foreign countries.
The Company designs its products to exceed the highest safety standards
imposed or recommended either by government or industry regulatory
authorities. To date, the Company has not been found to be in material
violation of any governmental product standard with respect to the Company's
products.
TARIFFS AND DUTIES
In December 1994, the United States approved a trade agreement pursuant to
which import duties on toys, games, dolls and other specified items were
eliminated effective January 1, 1995 from products manufactured in all MFN
countries (including the PRC). Increases in quotas, duties, tariffs or other
changes or trade restrictions which may be imposed in the future would have a
material adverse effect on the Company's financial condition, operating
results or ability to import products. In particular, the Company's costs
would be increased if the PRC's MFN status is revoked. The loss of MFN status
for the PRC would result in substantial duties on the cost of toy products
manufactured in the PRC and imported into the United States.
In 1996, the United States government proposed retaliatory trade sanctions
against the PRC, which would have included increased duties on selected
products, but would not have included the Company's products originating in
the PRC. The United States and PRC eventually agreed on settlement terms
avoiding these sanctions. Any future imposition of trade sanctions by the
United States and subsequent retaliatory actions by the Chinese government
could result in supply disruptions and higher merchandise costs to the
Company. The Company could attempt to mitigate the effects of an increase in
duties by shifting its manufacturing to other countries, but there can be no
assurance that the Company would be successful in this regard.
INTELLECTUAL PROPERTY
The Company has been utilizing the mark "DSI" since 1991 and believes it has
common law trademark rights to the mark. The Company applied for a registered
trademark for "DSI Toys" in the United States in January 1996 and will seek to
register the trademark in other countries where the Company markets and
distributes its products. The Company believes it has the rights to use the
mark in the manner in which it is currently used.
The Company has the following United States registered trademarks for
various products and product categories currently being marketed: Cool
Keys(R), Desert Shield(R), Escort(R), Handyman Jr.(R), Hydro Blaster(R), Hydro
Shield(R), Jam Stand(R), Ka-Splash(R), LA Rock(R), Magic Steering Wheel(R),
Mega Blaster(R), Mountain King Express(R), Music Maker(R), My Music Maker(R),
Police Escort(R), Pop 'N Score(R), Real Tech(R), Rosie(R), Sabre Blaster(R),
Secret Service(R), Star Hunter(R), Trak Champs(R), Ultimatron(R), Vrooom(R),
Wave Weapon(R), and Wheels of Prey(R). The Company believes it has the rights
to use these marks for the product lines on which they are currently used.
The Company believes it has trademark rights with respect to certain
additional products and product lines, including Air Guitar(TM), Big Bam
Boom(TM), Baby Pick Me Up(TM), Build-A-Lot(TM), Country Chords(TM), Dreamie
Sweets(TM), Hoppin' Poppin' Spaceballs(TM), Mad World(TM), Pattie(TM), Rosie's
Best Friend, Pattie(TM), and Tracker(TM) in the United States. The Company has
applied for trademark protection for the mark Rosie(R) in all countries in
which the Rosie(R) doll has been sold. The Company believes it has the rights
to use these marks for the product lines on which they are, or will be, used.
EMPLOYEES
As of January 31, 1997, the Company had a total of 70 employees, of whom 44
are employees of DSI(HK) and are based in Hong Kong, and 26 are employees of
DSI and are based in Houston. Of the Houston based employees, 5 are engaged in
sales and marketing, 4 are involved in design and development, 4 are involved
in warehousing and distribution and 13 are involved in finance and
administration. Of the Hong Kong based
31
<PAGE>
employees, 8 are engaged in sales and merchandising, 14 are engaged in
engineering, including product quality assurance and quality control, 12 are
involved in finance and administration and 10 are involved in shipping and
distribution. None of the Company's employees is subject to a collective
bargaining agreement. The Company has experienced no work stoppages and
believes that its labor relations are satisfactory.
FACILITIES
The Company's principal executive offices and showroom and principal
warehouse are located in Houston, Texas, where the Company occupies
approximately 14,000 square feet of office and showroom space and 32,000
square feet of dock-high warehouse space. The Company leases this space from
Tommy Moss Family Partnership, Ltd. pursuant to a lease that commenced on June
2, 1992 and terminates on August 31, 2002. The base rental for this lease is
$16,100 per month ($4.20 per square foot on an annual basis). The lease
provides for an annual increase in rent based on projected cost of living and
tax escalation adjustments. See "Certain Transactions."
The Company leases a 2,200 square foot showroom in the Toy Center building
in New York at 200 Fifth Avenue. This lease commenced on January 1, 1993 and
will terminate on April 30, 2003. The base rental for this lease is $6,026 per
month ($32.87 per square foot on an annual basis), subject to cost of living
and tax escalations. The facility is staffed only during toy shows and
specially scheduled customer showings.
The Company leases 7,178 square feet of office and showroom space in Hong
Kong under a lease that commenced on January 1, 1995 and terminates in March,
1998. The base rental for the lease term is $32,514 per month based on current
currency exchange rates ($54.35 per square foot on an annual basis).
The Company is leasing 1,080 square feet of showroom space in the World
Trade Center Building in Dallas, Texas for a three-year term that began on
June 1, 1996. The base rental for this lease is currently $925 per month
($10.28 per square foot on an annual basis).
The Company leases a small storage facility in Hong Kong and a small office
in Bentonville, Arkansas. From time to time, the Company rents excess
warehouse facilities in Houston to accommodate peak seasonal needs.
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings and claims incident to
the normal conduct of its business. The Company believes that such legal
proceedings and claims, individually and in the aggregate, are not likely to
have a material adverse effect on its financial position or results of
operations. The Company maintains product liability and general liability
insurance in amounts it believes to be reasonable.
The Company has determined that payments aggregating approximately $1.0
million which were made by DSI(HK) (or its predecessor) from fiscal 1988
through fiscal 1994 were misclassified as sales commissions. An independent
investigator determined that such payments principally were made at the
direction of the Company's former sole shareholder and should have been
classified as compensation expense and consulting fees. In the event the
Company incurs any tax liability relating to such payments, the Company
intends to pursue a claim for indemnification against the Estate of Tommy Moss
under the indemnity agreement entered into among Mr. Moss, RAC and the Company
in connection with the Recapitalization which the Company believes covers any
such tax liabilities.
On February 27, 1997, a former independent sales representative for the
Company sued the Company and the Estate of Tommy Moss for additional royalties
and sales commissions in Probate Court No. 3 of Harris County, Texas. The
representative also is seeking to recover exemplary damages, interest, costs
and attorneys fees. Although the Company believes that it has fulfilled its
obligations to this representative and intends to defend against the claims,
there can be no assurance as to the outcome of this lawsuit.
32
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
M. D. Davis............. 62 Chairman of the Board and Chief Executive Officer
Richard R. Neitz........ 48 President, Chief Operating Officer and Director
Tommy Yau............... 48 Managing Director--DSI(HK)
J. Russell Denson....... 46 Executive Vice President and Chief Financial Officer
Dale Y. Chen............ 45 Vice President and Controller
Thomas V. Yarnell....... 43 Administrative Vice President, General Counsel and Secretary
Barry B. Conrad......... 56 Director
Jack R. Crosby.......... 70 Director
Joseph N. Matlock....... 48 Director
Douglas A. Smith........ 45 Director
</TABLE>
- --------
Set forth below is a description of the backgrounds of each of the directors
and executive officers of the Company.
M. D. Davis has served as the Chairman of the Board and Chief Executive
Officer since December 1995. Prior to joining the Company, Mr. Davis spent
eighteen years with Ernst & Whinney in Houston, where, as a partner, he headed
the healthcare practice. He left Ernst & Whinney in 1981 when he purchased
Southwest Medical Packaging, Inc. This company was sold to Cooper Vision, Inc.
(now Cooper Company, Inc.) in 1985 and later to Alcon Laboratories, Inc. in
1989. During this time, Mr. Davis maintained senior management positions at
both companies. In 1990, Mr. Davis and another employee acquired Southwest
Medical Packaging, Inc. from Alcon Laboratories. In June 1994, this company
was sold to Maxxim Medical, Inc. From June 1994 until December 1995, Mr. Davis
was engaged in personal investment activities.
Richard R. Neitz has served as President of the Company since March 1992 and
Vice President, Marketing and Product Development from March 1990 to March
1992. He has served as Chief Operating Officer and director since December
1995. Prior to joining the Company in 1990, Mr. Neitz served in various
management and marketing positions with Main Street Ltd., Joseph Markovits,
Inc., Toys "R" Us and McCrory Stores. Mr. Neitz has approximately 17 years of
experience in the toy industry and related businesses.
Tommy Yau has served as Managing Director of DSI(HK) since October 1993.
From January 1991 until January 1993 he served as Managing Director of Arco
Toys Ltd. (a Mattel company), and from January 1987 until December 1990, he
served as Vice President of Operations for that company. From April 1986 to
December 1986, he served as Vice President of Operations for Arco Industries
Ltd. Mr. Yau has approximately 28 years of experience in the toy industry.
J. Russell Denson has served as Executive Vice President and Chief Financial
Officer of the Company since March 1997. From February 1992 to February 1997,
Mr. Denson served as President, Chief Financial Officer and a director of
Houston Biotechnology Incorporated, a publicly held biopharmaceutical company,
until it was merged with Medarex, Inc. Mr. Denson will continue to provide
transition services to Medarex, Inc. up to May 31, 1997. From 1987 to 1992,
Mr. Denson was the Managing Partner of The Denson Publishing Group in Houston,
Texas. From 1981 to 1987, Mr. Denson was the Executive Vice President of HEI
Corporation, a publicly held hospital management company, and he served as its
Chief Financial Officer during its initial public offering in 1983. Mr. Denson
is a certified public accountant.
Dale Y. Chen has served as Controller of the Company since August 1992 and
as Vice President of the Company since April 1995. From 1986 to June 1992, Mr.
Chen served as Accounting Manager for SIGMA
33
<PAGE>
Management Company. Prior to 1986, he served as Vice President and Assistant
Treasurer of Ben Milam Savings and Loan Association.
Thomas V. Yarnell has served as Vice President of the Company since October
1989, General Counsel since February 1990 and Secretary since April 1991.
Prior to joining the Company in 1989, Mr. Yarnell worked as an attorney for
Texaco, Inc., Houston Division, and practiced law for a general practice law
firm.
Barry B. Conrad has served as a director of the Company since December 1995.
Mr. Conrad is a co-founder and Managing Partner of Conrad/Collins Merchant
Banking Group Ltd., a Dallas, Texas-based merchant bank formed in 1988 that is
active in leveraged buyouts of middle-market companies in the southwestern
United States. Mr. Conrad has extensive investment banking experience.
Jack R. Crosby has served as a director of the Company since December 1995.
Mr. Crosby is the founder and Chairman of Rust Capital, Ltd., a small business
investment partnership headquartered in Texas. Mr. Crosby has co-founded
and/or financed two private venture capital funds and has been one of the co-
founders of eight multiple system cable companies. He is the founder,
President and CEO of Tescorp, Inc., a publicly traded company which owns and
operates cable television systems in Argentina. He serves on the board of
directors of Tescorp, Inc., Battle Mountain Gold Company and National Dentex
Corporation.
Joseph N. Matlock has served as a director of the Company since December
1995. Mr. Matlock has spent the majority of his career in the financial
services industry. From January 1986 to September 1988, Mr. Matlock served as
Chairman, Chief Executive Officer and President of Franklin Savings
Association in Austin, Texas; and from September 1988 through September 1994,
he served as Chief Executive Officer, President and a director of Franklin
Federal. From September 1994 to January 1996, he was engaged in the merchant
banking and consulting business. From September 1995 to the present, he has
served as President (and was the founder) of AffordAmerica, Inc. which
provides housing for low income families. From January 1996 to the present, he
has served as Director of Business and Community Relations for Bank of
America.
Douglas A. Smith has served as a director of the Company since March 1996.
Since 1983, Mr. Smith has been President of Vanguard Investment Company, which
has been active in leveraged buy-outs of middle market companies. Since July
1996, Mr. Smith has also served as a principal of Wingate Partners, a private
equity group based in Dallas, Texas.
Directors are elected at the annual meeting of shareholders to serve during
the following year and until a successor is duly elected and qualified.
Officers are elected by and serve at the discretion of the Board of Directors.
There are no family relationships between any of the directors or officers of
the Company.
COMPENSATION OF DIRECTORS; COMMITTEES
Directors of the Company who are not full-time employees or retained by the
Company as consultants are paid a retainer of $5,000 per fiscal quarter plus
reasonable out-of-pocket expenses incurred in attending Board of Directors
meetings. In addition, pursuant to the Company's 1997 Stock Option Plan, each
of the current non-employee directors are eligible to receive grants of
options to purchase shares of Common Stock. See "--1997 Stock Option Plan."
The Board of Directors recently has established standing audit and
compensation committees. The audit committee, whose members are Messrs.
Matlock, Davis and Conrad, reviews the scope and results of the audit and
other services provided by the Company's independent accountants. The members
of the compensation committee are Messrs. Conrad, Matlock and Crosby, all of
whom are independent directors. The compensation committee sets the
compensation levels and employment benefits of all officers of the Company.
The compensation committee administers the 1997 Stock Option Plan and makes
awards under such plan. The Board of Directors does not have a nominating
committee. The selection of nominees for the Board of Directors is made by the
entire Board of Directors.
34
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In connection with services rendered by Mr. Matlock in connection with the
Recapitalization, the Company agreed to pay Mr. Matlock the sum of $240,000 in
three equal payments due on January 1, 1996, 1997 and 1998. Mr. Matlock is a
member of the compensation committee of the Board of Directors of the Company.
The Company has agreed to pay MBG a fee of $100,000 upon the consummation of
this Offering as compensation for financial advisory services rendered by MBG
to the Company. The general partner of MBG is Conrad/Collins, Inc., of which
Mr. Conrad is an officer and director and in which Mr. Conrad owns a
controlling interest. Mr. Conrad is a member of the compensation committee of
the Board of Directors of the Company.
No member of the Board of Directors of the Company, its current compensation
committee or the compensation committee that served during the fiscal year
ended January 31, 1997 serves as a member of the Board of Directors or
compensation committee of an entity that has one or more executive officers
serving as a member of the Company's Board of Directors or compensation
committee.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to
compensation paid for fiscal 1996 to the Company's Chief Executive Officer and
the other executive officers of the Company who received compensation in
excess of $100,000 (the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS(1) COMPENSATION(2)
- --------------------------- ---------- ---------- ---------------
<S> <C> <C> <C>
M. D. Davis...................... $ 150,000 500 $ 9,500
Chairman of the Board and Chief
Executive Officer
Richard R. Neitz................. $ 225,000 500 $ 9,500
President, Chief Operating Offi-
cer and Director
Tommy Yau........................ $ 180,000(3) $ 9,500(3)(4) --
Managing Director--DSI(HK)
Dale Y. Chen..................... $ 100,000 $ 6,000 $ 9,500
Vice President and Controller
Thomas V. Yarnell................ $ 90,000 $ 5,300 $ 7,263
Administrative Vice President,
General Counsel and Secretary
</TABLE>
- --------
(1) No individual named above received perquisites or non-cash compensation
during fiscal 1996 exceeding the lesser of $50,000 or an amount equal to
10% of such person's annual salary and bonus.
(2) Consists of Company contributions to a defined contribution plan.
(3) Based on currency exchange rates at January 31, 1997. Mr. Yau's salary is
paid by DSI(HK) in Hong Kong dollars.
(4) Amount represents a discretionary bonus paid to Tommy Yau.
EMPLOYMENT AGREEMENTS
Effective January 2, 1996, M. D. Davis entered into an employment agreement
with the Company, pursuant to which he will be employed as Chairman of the
Board and Chief Executive Officer of the Company until
35
<PAGE>
December 31, 1998 and will be paid an annual salary of $150,000 (which salary
may be raised at the discretion of the Board of Directors). The agreement
contains non-competition and non-solicitation provisions applicable during the
term of employment under the agreement and until one year after termination of
employment. Upon termination of Mr. Davis's employment without cause, the
Company must continue to pay Mr. Davis his salary for a period of six months
(or one year if the non-competition provision is enforced) following
termination.
Effective December 11, 1995, Richard R. Neitz entered into an employment
agreement with the Company. Pursuant to this agreement, Mr. Neitz will be
employed as President and Chief Operating Officer until January 31, 2000 and
will be paid an annual salary of $225,000. Beginning with fiscal 1996, Mr.
Neitz is entitled to a fiscal year-end performance bonus equal to 2% of the
Company's total pre-tax income, provided that such pre-tax income exceeds $5.8
million. The agreement contains non-competition and non-solicitation
provisions applicable during the term of employment under the agreement and
until one year after termination of employment. Upon termination of Mr.
Neitz's employment without cause the Company must continue to pay Mr. Neitz
his salary for a period of six months (or one year if the non-competition
provision is enforced) following termination and must pay a pro-rated
performance bonus.
Effective December 11, 1995, Tommy Yau entered into an employment agreement
with DSI(HK), pursuant to which he will be employed as Managing Director of
DSI(HK) until January 31, 2000 and will be paid a monthly salary of HK
$116,000 (approximately $15,000 based on currency exchange rates as of January
31, 1997). Beginning with fiscal 1996, Mr. Yau is entitled to a fiscal year-
end performance bonus equal to 1.5% of the Company's total pre-tax income,
provided that such pre-tax income exceeds $5.8 million. The agreement contains
non-competition and non-solicitation provisions applicable during the term of
employment under the agreement and until one year after termination of
employment. Upon termination of Mr. Yau's employment without cause, the
Company must continue to pay Mr. Yau his salary for a period of six months (or
one year if the non-competition provision is enforced) following termination
and must pay a pro-rated performance bonus.
Effective March 16, 1997, J. Russell Denson entered into an employment
agreement with the Company, pursuant to which he will be employed as Executive
Vice President and Chief Financial Officer until March 15, 2000. He will be
paid an annual salary of $90,000 through May 31, 1997 and $180,000 thereafter
(which salary is subject to increase at the discretion of the Board of
Directors). Prior to May 31, 1997, Mr. Denson is permitted to spend a
reasonable amount of time, not in excess of one-half, during normal business
hours on transition matters for Medarex, Inc. Mr. Denson is entitled to a
performance bonus based upon the Company's total pre-tax income for fiscal
1997 and increases in earnings per share for subsequent fiscal years. Upon
completion of this Offering, the Company will grant Mr. Denson options under
the Stock Option Plan for the purchase of 90,000 shares of Common Stock
expiring 10 years from date of grant with an exercise price equal to the
initial public offering price. These options will vest as follows: 25% upon
completion of this Offering and 25% on each of March 16, 1999, March 16, 2000
and March 16, 2001, so long as Mr. Denson is still employed by the Company.
Also effective December 11, 1995, Dale Y. Chen and Thomas V. Yarnell entered
into employment agreements with the Company for terms of one year, which terms
were extended for one year on December 11, 1996. Mr. Chen's employment
agreement provides that he will serve as Controller and will receive an annual
salary of at least $100,000. Mr. Yarnell's employment agreement provides that
he will serve as Administrative Vice President and General Counsel and will
receive an annual salary of at least $70,000.
1997 STOCK OPTION PLAN
On May 1, 1997, the Board of Directors and the shareholders of the Company
approved the DSI Toys, Inc. 1997 Stock Option Plan (the "Stock Option Plan")
which permits the Company to grant incentive and non-qualified stock options
to purchase an aggregate of up to 600,000 shares of Common Stock. The purpose
of the Stock Option Plan is to foster and promote the financial success of the
Company by, among other things, enabling key employees to participate in the
long-term growth and financial success of the Company. The Stock
36
<PAGE>
Option Plan is administered by the Company's compensation committee, which is
composed of three non-employee directors. Any employee or director of the
Company is eligible to receive grants of stock options under the Stock Option
Plan.
All stock options granted under the Stock Option Plan will have an exercise
price per share to be determined by the compensation committee, provided that
the exercise price per share under each stock option shall not be less than
the fair market value of the Common Stock at the time the stock option is
granted (110% of such fair market value in the case of incentive stock options
granted to a shareholder who owns 10% or more of the Company's Common Stock).
The maximum term for all stock options granted under the Stock Option Plan is
10 years (5 years in the case of an incentive stock option granted to a
shareholder who owns 10% or more of the Company's Common Stock). Stock options
granted to the non-employee directors are not intended to qualify as
"incentive stock options" within the meaning of Section 422A of the Internal
Revenue Code of 1986, as amended.
The Board of Directors may at any time terminate, amend or modify the Stock
Option Plan; provided, however, that no such action of the Board of Directors,
without the approval of the shareholders of the Company, may increase the
total number of shares of Common Stock which may be issued under the Stock
Option Plan, decrease the minimum incentive stock option exercise price,
extend the period during which options may be granted pursuant to the Stock
Option Plan, or change the class of individuals eligible to be granted
options. No amendment to the Stock Option Plan shall, without the consent of
an optionee, affect such optionee's rights under an option previously granted.
BONUSES
Prior to the Recapitalization, a significant part of the Company's profits
was distributed as a bonus to the Company's former sole shareholder. The
Company will not distribute profits in this manner in the future. The Company
has entered into employment agreements with three executive officers, pursuant
to which the Company will pay performance bonuses based on the Company's
profitability if the Company's operations generate a specified level of
income. See "--Employment Agreements." Management of the Company may from time
to time in the future grant discretionary bonuses based in part on the
Company's profitability, subject to compensation committee approval.
401(K) PLAN
Effective May 1, 1994, the Company adopted its 401(k) plan (the "401(k)
Plan") that covers all employees of the Company in the United States. Under
the 401(k) plan, an employee may elect to defer, in the form of pre-tax
contributions to the 401(k) Plan, up to 15% of the total compensation that
would otherwise be paid to the employee, currently not to exceed $9,500.00 per
calendar year (adjusted for cost-of-living increases). Participants are
entitled to direct the investment of their accounts among various investment
funds. The 401(k) Plan is intended to qualify under Sections 401(a) and 401(k)
of the Internal Revenue Code so that salary deferral contributions are not
currently taxable to participants until distributed from the 401(k) Plan upon
termination of employment, and contributions to the 401(k) Plan are currently
deductible by the Company. The contributions made by employees are fully
vested and nonforfeitable at all times. The Company may, in its discretion,
provide matching funds to the 401(k) Plan.
INDEMNIFICATION ARRANGEMENTS
The Company's Articles of Incorporation and Bylaws provide that the Company
shall indemnify all directors and officers of the Company to the fullest
extent permitted by the Texas Business Corporation Act. Under such provisions,
any director or officer, who in his capacity as such, is made or threatened to
be made, a party to any suit or proceeding, shall be indemnified if it is
determined that such director or officer acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Company.
37
<PAGE>
CERTAIN TRANSACTIONS
RECAPITALIZATION TRANSACTIONS
In connection with the Recapitalization, the Company entered into a
consulting agreement with Mr. Moss, pursuant to which Mr. Moss was to serve as
a consultant to the Company for three years, and was to be compensated in the
amount of $300,000 per year. The consulting agreement also required the
Company to maintain health and disability insurance policies for the benefit
of Mr. Moss for the term of his life. Pursuant to the consulting agreement,
the Company agreed to maintain Mr. Moss's office space for his use for the
term of the consulting agreement and to provide to Mr. Moss for 180 days the
services of certain Company employees for his outside business, provided that
such services did not exceed 30% of the time of each of such employees. This
agreement terminated upon Mr. Moss's death on November 19, 1996.
In connection with services rendered by Mr. Matlock in connection with the
Recapitalization, the Company agreed to pay Mr. Matlock the sum of $240,000 in
three equal payments due on January 1, 1996, 1997 and 1998. Mr. Matlock is a
director of the Company.
FORMER SOLE SHAREHOLDER BONUS
In fiscal 1995, the Company agreed to pay Mr. Moss a $1.0 million bonus
pursuant to the Moss Bonus Note.
OFFICE/WAREHOUSE LEASE
The Company currently leases its office/warehouse space in Houston from the
Tommy Moss Family Partnership, Ltd. The aggregate amount of lease payments
made by the Company under this lease was approximately $193,200 for fiscal
1995 and $193,200 for fiscal 1996. Management believes that the terms of lease
represent a fair market rate. See "Business--Facilities."
MOSS LIFE INSURANCE
Prior to the Recapitalization, the Company entered into split-dollar life
insurance arrangements with the Tommy Moss Family Trusts (the "Family Trusts")
and with the Tommy and JoBeth Moss Joint Life Insurance Trusts (the "Life
Insurance Trusts") which obligated the Company to pay premiums on life
insurance policies owned by the Family Trusts and the Life Insurance Trusts.
The Family Trusts own policies payable on the death of Mr. Moss and the Life
Insurance Trusts own policies payable on the last to die of Mr. Moss and Mrs.
Moss. The trusts were obligated to pay to the Company a specified portion of
the premiums for the underlying policies. At the death of Mr. Moss, the
Company was entitled to be reimbursed its premium payments out of insurance
proceeds payable to the Family Trusts. Under the Recapitalization agreements,
Mr. Moss agreed to cause the underlying trust agreements to be amended to
provide that the Company would receive interest, at a 7% rate, on the premiums
paid by the Company.
Subsequent to the death of Mr. Moss, the trustees of the Family Trusts and
the Company disagreed over the amount of premiums owed by the Family Trusts to
the Company and the amount of and liability for the interest payable with
respect to unpaid premiums and prior premium payments. The trustees and the
Company subsequently agreed the Company will receive an amount from the life
insurance proceeds equal to the total premiums paid by the Company with
respect to policies held by the Family Trusts plus an amount representing a
compromise settlement for interest and unpaid premiums. These amounts will be
recognized as income or credited against the insurance receivable from the
Family Trusts which will not have a material effect on the results of
operations of the Company. The Company has continued to make premium payments
on the policies held by the Life Insurance Trusts. During fiscal 1996, the
Company paid approximately $62,000 and $265,000 of premiums on the policies
held by the Family Trusts and the Life Insurance Trusts, respectively.
FINANCIAL ADVISORY FEE
The Company has agreed to pay MBG a fee of $100,000 upon the consummation of
this Offering as compensation for financial advisory services rendered by MBG
to the Company. The general partner of MBG is Conrad/Collins, Inc., a Texas
corporation of which Mr. Conrad is an officer and director and in which
Mr. Conrad owns a controlling interest. Mr. Conrad is a director of the
Company.
38
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information as of January 31, 1997
and after giving effect to the Offering made hereby regarding the beneficial
ownership of Common Stock by (i) each of the directors and each Named Officer
individually, (ii) all directors and executive officers of the Company as a
group, (iii) each person known by the Company to be the beneficial owner of 5%
or more of the Common Stock and (iv) the Selling Shareholder. Additionally,
this table reflects the number of shares of Common Stock to be sold by the
Selling Shareholder in this Offering.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING(2)(3) COMMON OFFERING(2)(5)
----------------------- STOCK -----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER (1) NUMBER PERCENT OFFERED(4) NUMBER PERCENT
- ---------------------------------------- ------------ ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Directors and Named Offi-
cers
M. D. Davis.............. 456,845 13.1% -- 456,845 7.6%
Richard R. Neitz......... 170,000 4.9% -- 170,000 2.8%
Tommy Yau................ 80,000 2.3% -- 80,000 1.3%
Dale Y. Chen (6)......... 21,622 * -- 21,622 *
Thomas V. Yarnell (7).... 18,920 * -- 18,920 *
Barry B. Conrad (8)...... 253,581 7.2% -- 253,581 4.2%
North Tower, Suite 1910
Plaza of the Americas
700 North Pearl Street,
LB-321
Dallas, Texas 75201
Jack R. Crosby (9)....... 427,115 12.2% -- 427,115 7.1%
327 Congress Avenue
Suite 200
Austin, Texas 78701
Joseph N. Matlock (10)... 481,250 13.8% -- 481,250 8.0%
515 Congress Avenue
Suite 2626
Austin, Texas 78701
Douglas A. Smith......... 262,173 7.5% -- 262,173 4.4%
750 North St. Paul,
Suite 1200
Dallas, Texas 75201
All directors and execu-
tive officers as a
group................... 2,171,506 62.0% -- 2,171,506 36.2%
(9 persons)
Beneficial owners of 5%
or more
(excluding persons named
above)
The Tommy Moss Living
Trust................... 781,000 22.3% 500,000 281,000 4.7%
1001 Fannin
Suite 3700
Houston, Texas 77002-
6797
Attn: M. M. Sheinfeld,
Trustee
Hibernia Corporation
(11).................... 388,888 10.0% -- 388,888 6.1%
313 Carondelet Street
New Orleans, Louisiana
70130
Conrad/Collins Merchant
Banking Group Ltd. (8)... 224,376 6.4% -- 224,376 3.7%
North Tower, Suite 1910
Plaza of the Americas
700 North Pearl Street,
LB-321
Dallas, Texas 75201
Rust Capital, Ltd. (9)... 427,115 12.2% -- 427,115 7.1%
327 Congress Avenue,
Suite 200
Austin, Texas 78701
</TABLE>
- --------
* Less than 1%.
(footnotes on following page)
39
<PAGE>
(1) Unless otherwise indicated, the business address of all officers and
directors is 1100 West Sam Houston Parkway (North), Suite A, Houston,
Texas 77043.
(2) Assumes that RAC has been dissolved and that the Common Stock held by it
has been distributed to the members thereof.
(3) Excludes 388,888 shares of Common Stock issuable upon exercise of
currently exercisable warrants, except with respect to Hibernia
Corporation.
(4) In the event that the Underwriters' over-allotment option is exercised in
full, The Tommy Moss Living Trust and Hibernia Corporation will sell an
aggregate of 781,000 and 150,000 shares, respectively, in this Offering.
See "Underwriting."
(5) Excludes 388,888 shares of Common Stock issuable upon exercise of
currently exercisable warrants, except with respect to Hibernia
Corporation. In the event that the Underwriters' over-allotment option is
exercised in full, The Tommy Moss Living Trust and Hibernia Corporation
will beneficially own no shares and 238,000 shares (3.7%), respectively,
after the Offering.
(6) Includes 1,760 shares held in an Individual Retirement Account ("IRA") in
the name of Mr. Chen's wife and 5,081 shares held in an IRA in Mr. Chen's
name.
(7) Includes 8,110 shares held in an IRA in Mr. Yarnell's name.
(8) Includes 129,730 shares owned of record by Conrad/Collins Merchant Banking
Fund, Ltd., a Texas limited partnership, of which MBG is the general
partner. The general partner of MBG is Conrad/Collins, Inc., a Texas
corporation of which Mr. Conrad is an officer and director and owns a
controlling interest. Also includes 94,646 shares owned of record by MBG.
(9) Consists of 427,115 shares owned of record by Rust Capital, Ltd., as to
which Mr. Crosby is founder and Chairman.
(10) Includes 106,000 shares owned of record by the M.H. Partnership, a
general partnership of which Mr. Matlock is the managing partner and
213,000 shares owned of record by the M.D. Partnership, a general
partnership of which Mr. Matlock is the managing partner.
(11) Consists of 388,888 shares issuable upon exercise of warrants issued to
Hibernia Corporation, all of which are currently exercisable. In the
event that the Underwriters' over-allotment option is exercised in full,
Hibernia Corporation will exercise warrants for 150,000 shares, which
shares will be sold by Hibernia Corporation in the Offering. See
"Underwriting."
40
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 20,000,000 shares of Common Stock, par
value $0.01 per share, and 5,000,000 shares of Preferred Stock, par value
$0.01 per share ("Preferred Stock"). As of January 31, 1997, there were
outstanding 3,500,000 shares of Common Stock, held of record by two
shareholders (72 shareholders assuming dissolution of RAC and distribution of
the shares of Common Stock held by RAC), and no shares of Preferred Stock. In
addition, as of such date there was an outstanding warrant entitling the
holder thereof to purchase an aggregate of 388,888 shares of Common Stock.
The following summary description of the Company's capital stock is
qualified in its entirety by reference to the Company's Amended and Restated
Articles of Incorporation (the "Articles of Incorporation") and the Company's
Amended and Restated Bylaws, as amended (the "Bylaws"), copies of which are
included as exhibits to the Registration Statement of which this Prospectus is
a part.
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote for each
share held of record on all matters to be voted on by shareholders. There is
no cumulative voting with respect to the election of directors. Accordingly,
the holders of a majority of the shares of Common Stock entitled to vote in
any election of directors may elect all of the directors. The holders of
shares of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available therefor.
See "Dividend Policy." In the event of a liquidation, dissolution or winding
up of the Company, the holders of shares of Common Stock are entitled to share
ratably in all assets remaining available for distribution to them after
payment of liabilities and after provision has been made for each class of
stock, if any, having preference over the shares of Common Stock. Holders of
shares of Common Stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
shares of Common Stock. All of the outstanding shares of Common Stock are, and
the shares of Common Stock to be issued in this Offering will be when issued
and paid for, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without shareholder approval, to
issue Preferred Stock with dividend, liquidation, conversion, voting or other
rights that could adversely affect the voting power or other rights of the
holders of shares of Common Stock. The Preferred Stock could be utilized,
under certain circumstances, as a method of discouraging, delaying or
preventing a change in control or an acquisition of the Company. Although the
Company has no plans as of the date of this Prospectus to issue any shares of
Preferred Stock, there can be no assurance that the Company will not do so in
the future.
The issuance of shares of Preferred Stock, or the issuance of rights to
purchase such shares, could adversely affect the voting power of the Common
Stock, discourage an unsolicited acquisition proposal or make it more
difficult for a third party to gain control of the Company. For instance, the
issuance of a series of Preferred Stock might impede a business combination by
including class voting rights that would enable the holder to block such a
transaction, or facilitate a business combination by including voting rights
that would provide a required percentage vote of the shareholders. In
addition, under certain circumstances, the issuance of Preferred Stock could
adversely affect the voting power of the holders of the Common Stock. Although
the Board of Directors is required to make any determination to issue such
stock based on its judgment as to the best interests of the shareholders of
the Company, the Board of Directors could act in a manner that would
discourage an acquisition attempt or other transaction that some, or a
majority, of the shareholders might believe to be in their best interests or
in which shareholders might receive a premium for their stock over the then
market price of such stock. The Board of Directors does not at present intend
to seek shareholder approval prior to any issuance of currently authorized
stock, unless otherwise required by law.
41
<PAGE>
WARRANTS
In connection with the Recapitalization, the Company issued to Hibernia
Corporation a warrant (the "Hibernia Warrant") to purchase 388,888 shares of
Common Stock exercisable at a price of $2.00 per share. The Hibernia Warrant
is exercisable at any time during the ten-year period beginning December 11,
1995. At Hibernia's option, the exercise price may be paid by off-setting an
equivalent amount of principal payments owed by the Company under the Hibernia
Loan. The Hibernia Warrant contains anti-dilution provisions providing for
adjustment of the exercise price and/or the number of shares of Common Stock
issuable upon exercise of the Hibernia Warrant upon the occurrence of certain
events, including the issuance of shares of Common Stock (or other securities
convertible into or exercisable for shares of Common Stock) at a price per
share less than the exercise price of the Hibernia Warrant, or less than the
market price of the shares of Common Stock, or in the event of any
recapitalization, reorganization, reclassification, stock dividend, stock
split, stock combination or similar transaction. Pursuant to an Option to Sell
Agreement between the Company and Hibernia, Hibernia has the right to sell the
Hibernia Warrant or the underlying shares of Common Stock to the Company after
January 31, 2001, under certain circumstances.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As authorized by the Texas Business Corporation Act ("TBCA"), the Company's
Articles of Incorporation provide that to the fullest extent permitted by
Texas law, as the same exists or may hereafter be amended, directors of the
Company shall not be liable to the Company or its shareholders for monetary
damages for an act or omission that breaches a director's fiduciary duty.
Texas law does not currently authorize the elimination or limitation of the
liability of a director to the extent the director is found liable for (i) any
breach of the director's duty of loyalty to the Company or its shareholders,
(ii) acts or omissions not in good faith that constitute a breach of duty of
the director of the Company or that involve intentional misconduct or a
knowing violation of law, (iii) transactions from which the director received
an improper benefit, whether or not the benefit resulted from action taken
within the scope of the director's office, or (iv) acts or omissions for which
the liability of a director is expressly provided by law. If the TBCA is
amended to authorize further elimination or limitation of directors'
liability, then the liability of directors of the Company shall automatically
be limited to the fullest extent provided by law. The Bylaws of the Company
also contain provisions to indemnify the directors, officers, employees or
other agents to the fullest extent permitted by the TBCA. These provisions may
have the practical effect in certain cases of eliminating the ability of
shareholders to collect monetary damages from directors.
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
Subject to any additional voting rights that may be granted to holders of
future classes or series of stock, the Company's Articles of Incorporation
require the affirmative vote of holders of a majority of the outstanding
shares entitled to vote thereon to approve any merger, consolidation or share
exchange, sale of all or substantially all of the assets of the Company,
dissolution of the Company or amendment to the Articles of Incorporation for
which a vote is required by the TBCA.
Approval of any matter not described above that is submitted to the
shareholders also requires the affirmative vote of the holders of a majority
of the shares of Common Stock represented at the meeting. The holders of a
majority of the shares entitled to vote will constitute a quorum at meetings
of shareholders. Only the Chairman of the Board of Directors, the President,
the Board of Directors or holders of not less than 50% of the outstanding
shares of stock entitled to vote at a proposed special meeting of shareholders
of the Company may call such a meeting.
The Company's Bylaws provide that the Board of Directors can increase the
number of directors and fill (but only until the next annual meeting of
shareholders) vacancies on the Board of Directors resulting from an increase
in the number of directors constituting the entire Board. Further, any vacancy
on the Board of Directors resulting from the death, resignation or removal of
a director, or other cause, may be filled (for the remainder of
42
<PAGE>
the full term) only by the affirmative vote of a majority of the remaining
director(s) then in office. Additionally, no decrease in the number of
directors constituting the Board of Directors may shorten the term of any
incumbent director. Unless otherwise stated in an amendment to the Company's
Articles of Incorporation, both the Board of Directors and the shareholders
have the authority to alter, amend, adopt or repeal the Bylaws of the Company.
The Company's Bylaws also provide that the directors of the Company are to be
divided into three classes of directors of as equal size as possible, with the
term of each class expiring in consecutive years so that only one class is
elected in any given year. This results in directors serving staggered three-
year terms, except that the terms of the current directors of the Company will
expire at the 1998, 1999 or 2000 annual meeting of shareholders, depending
upon the particular class in which each such director is placed. These
provisions could increase the likelihood that, in the event of a change in
control of the Company, incumbent directors would retain their positions and,
consequently, could have the effect of discouraging, delaying or preventing
such a change in control.
REGISTRATION RIGHTS
The Company has agreed that, upon the request of Hibernia Corporation, on up
to two occasions, the Company will register under the Securities Act and
applicable state securities laws the sale of the 388,888 shares of Common
Stock underlying the Hibernia Warrant. If the Underwriters' over-allotment
option is exercised in full, Hibernia Corporation will sell 150,000 of such
shares in this Offering. See "Underwriting." The Company is also obligated to
offer to the holder of the Hibernia Warrant the opportunity to include shares
of Common Stock underlying the Hibernia Warrant in certain registration
statements filed by the Company. Hibernia Corporation has agreed to waive its
registration rights in connection with this Offering (except as otherwise
provided in this Prospectus). The Company's obligations are subject to certain
limitations regarding the timing of registrations and certain other matters.
The Company has agreed to bear certain expenses associated with such
registrations.
The Company has granted to Mr. Moss, and his successors, certain demand and
piggyback registration rights with respect to the 781,000 shares of Common
Stock held by him or his successors. The Company is registering, and The Tommy
Moss Living Trust (successor to Mr. Moss) is selling, 500,000 of the shares of
Common Stock held by The Tommy Moss Living Trust in this Offering. If the
Underwriters' over-allotment option is exercised in full, The Tommy Moss
Living Trust will sell, its remaining 281,000 shares in this Offering. See
"Underwriting." The Company has agreed to bear certain expenses associated
with the registration of shares of Common Stock held by The Tommy Moss Living
Trust.
MARKET INFORMATION
Prior to this Offering, there has been no established public trading market
for the Common Stock. The Common Stock has been approved for listing in the
Nasdaq National Market under the symbol "DSIT," subject to official notice of
issuance.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the shares of Common Stock is American
Stock Transfer & Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, there has been no market for the Common Stock.
Therefore, future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time.
Furthermore, because only a limited number of shares will be available for
sale shortly after this offering due to certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.
Upon completion of this Offering, the Company will have a total of 6,000,000
shares of Common Stock outstanding (6,169,000 shares if the Underwriters'
over-allotment option is exercised in full). Of such shares, the 3,000,000
shares sold in the Offering will be freely tradeable without restriction or
registration under the
43
<PAGE>
Securities Act, except for any shares purchased by an "affiliate" (as defined
in the Securities Act) of the Company. The remaining 3,000,000 shares (the
"Restricted Shares") are deemed to be "restricted securities" within the
meaning of the Securities Act and may be publicly sold only if registered
under the Securities Act or sold in accordance with an available exemption
from registration, such as that provided by Rule 144 promulgated under the
Securities Act. Upon the completion of this Offering and subject to compliance
with any lock-up agreements between certain shareholders and the Underwriters,
all of such shares will be freely tradeable in the public market upon
compliance with Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) is entitled to sell Restricted Shares if at least
one year has passed since the later of the time such shares were acquired from
the Company or an affiliate of the Company. Rule 144 provides, however, that
within any three-month period such person may only sell up to the greater of
(i) one percent of the then outstanding shares of Common Stock (60,000 shares
upon completion of this Offering) or (ii) the average weekly trading volume in
the Common Stock during the four calendar weeks immediately preceding the date
on which notice of the sale is filed with the Securities and Exchange
Commission (the "Commission"). Under Rule 144(k), any person who has not been
an affiliate of the Company for a period of three months preceding a sale of
Restricted Shares is entitled to sell such shares without regard to such
volume limitations if at least two years have passed since the later of the
time such shares were acquired from the Company or an affiliate of the
Company. Shares held by persons who are deemed to be affiliates of the Company
are subject to such volume limitations regardless of how long they have been
owned or how they were acquired. The Company is unable to estimate the number
of Restricted Shares that may be sold from time to time under Rule 144, since
such number will depend on the market price and trading volume for the Common
Stock, the personal circumstances of the sellers and other factors.
The Company and its officers, directors and certain shareholders (including
the Selling Shareholder), who in the aggregate will hold approximately
2,822,803 shares upon the completion of the Offering, have agreed that they
will not, directly or indirectly, offer, sell, offer to sell, contract to
sell, grant any option to purchase or otherwise sell or dispose (or announce
any offer, sale, offer of sale, contract of sale, grant of any option to
purchase or other sale or disposition) of any shares of Common Stock or any
securities convertible into, or exercisable or exchangeable for, any shares of
Common Stock without the prior written consent of Tucker Anthony Incorporated,
on behalf of the Underwriters, for a period of 180 days from the date of this
Prospectus, with certain limited exceptions for the grant of options and other
rights by the Company pursuant to the Stock Option Plan. In addition, the
Selling Shareholder has agreed to sell no more than 2,000 shares per day, up
to a maximum of 20,000 shares per month, for an additional 180 days.
Upon completion of this Offering, the Company will have outstanding warrants
entitling the holders thereof to acquire an aggregate of 638,888 shares of
Common Stock, of which warrants covering 388,888 shares currently are
exercisable. The holder of the Hibernia Warrant has entered into a lock-up
agreement similar to that entered into by the Company, except with respect to
any shares that may be sold upon exercise of the Underwriters' over-allotment
option. See "Underwriting".
An aggregate of 600,000 shares of Common Stock are reserved for issuance
upon the exercise of options that may be granted under the Stock Option Plan,
of which options to purchase 90,000 shares will be granted or are outstanding
following this Offering. See "Capitalization." The Company anticipates filing
a registration statement on Form S-8 under the Securities Act to register all
of the shares of Common Stock reserved for future issuance under the Stock
Option Plan. Shares purchased upon exercise of the options granted pursuant to
the Stock Option Plan generally will be available for resale in the public
market to the extent the stock transfer restriction agreements with the
Underwriters have expired, except that any such shares issued to affiliates
will be subject to the volume limitations and certain other restrictions of
Rule 144. It is contemplated that, upon completion of the Offering, the Board
of Directors will consider the granting of additional stock options to various
employees of the Company, the amount, terms and timing of which have not yet
been determined.
44
<PAGE>
Various holders of Common Stock and warrants have certain "piggyback" and
demand registration rights to register such Common Stock and shares issuable
upon exercise of such warrants for public sale under the Securities Act. See
"Description of Capital Stock--Registration Rights." The Company is
contractually prohibited, without the prior written consent of Tucker Anthony
Incorporated, on behalf of the Underwriters, from filing such registration
statement for a period of 180 days from the date of this Prospectus. The
preparation and filing of any registration statements filed in connection with
the exercise of such registration rights will be at the expense of the
Company.
The Company can make no prediction as to the effect, if any, that sales of
shares of Common Stock or the availability of shares for sale will have on the
market price of Common Stock. Nevertheless, sales of significant amounts of
Common Stock could adversely affect the prevailing market price of Common
Stock, as well as impair the ability of the Company to raise capital through
the issuance of additional equity securities. Prior to this Offering, there
has been no established public trading market for the Common Stock. The
Company anticipates that the trading market in the Common Stock, if any, will
be very limited based upon the number of shares currently outstanding and
anticipated to be sold in this Offering.
45
<PAGE>
UNDERWRITING
The Underwriters named below, acting through Tucker Anthony Incorporated and
Sutro & Co. Incorporated, as Representatives, have severally agreed, subject
to the terms and conditions of the Underwriting Agreement, to purchase from
the Company and the Selling Shareholder, and the Company and the Selling
Shareholder has agreed to sell to the Underwriters, the number of shares of
Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Tucker Anthony Incorporated........................................
Sutro & Co. Incorporated...........................................
---------
Total............................................................ 3,000,000
=========
</TABLE>
The Underwriters will purchase all shares of Common Stock offered hereby,
other than over-allotment shares, if any of such shares are purchased. The
Underwriting Agreement provides that the obligations of the several
Underwriters are subject to conditions precedent specified therein. In the
event of a default by an Underwriter, the commitment set forth above of the
non-defaulting Underwriters may be increased or the Underwriting Agreement may
be terminated.
The Company and the Selling Shareholder have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public at the offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. Such dealers may reallow a concession of not in
excess of $ per share to certain other dealers. After the public offering,
the offering price, concession and reallowance to dealers may be changed by
the Underwriters.
The Company, the Selling Shareholder and Hibernia Corporation have granted
to the Underwriters an option, exercisable by the Underwriters not later than
45 days after the effective date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the public offering price, less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriters may exercise such option, in whole or in part, only to cover
over-allotments made in connection with the sale of the shares of Common Stock
offered hereby. To the extent that the Underwriters exercise such option, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares of Common
Stock to be purchased by it shown in the above table bears to the total shown,
first from the Selling Shareholder (up to 281,000 shares) and Hibernia
Corporation (up to 150,000 shares) on a pro rata basis in proportion to the
number of shares subject to such option, and then from the Company (up to
19,000 shares). The Selling Shareholder, Hibernia Corporation and the Company
will be obligated, pursuant to the option, to sell such shares to the
Underwriters.
In connection with the Offering made hereby, the Company has agreed to sell
to the Representatives, for nominal consideration, warrants to purchase
250,000 shares of Common Stock from the Company (10% of the number of shares
issued by the Company in the Offering) (the "Representatives' Warrants"). The
Representatives' Warrants are exercisable, in whole or in part, at an exercise
price of 120% of the price to public set forth on the cover page of this
Prospectus at any time during the four-year period commencing one year after
the effective date of the Registration Statement of which this Prospectus is a
part. The warrant agreement pursuant to which the Representatives' Warrants
will be issued will contain provisions providing for adjustment of the
exercise price and the number and type of securities issuable upon exercise of
the Representatives' Warrants should any one or more of certain specified
events occur. The Representatives' Warrants grant to the holders thereof
certain rights of registration for the securities issuable upon exercise of
the Representatives' Warrants. In addition, the Company has agreed to pay to
MBG a $100,000 fee for financial advisory services in connection with the
Offering.
46
<PAGE>
The Company, the Selling Shareholder and Hibernia Corporation have agreed to
indemnify the Underwriters against certain liabilities, including liabilities
under the Securities Act, and to contribute to certain payments that the
Underwriters may be required to make.
Without the prior written consent of Tucker Anthony Incorporated, the
Company has agreed that it will not for a period of 180 days from the date of
this Prospectus, offer, sell or otherwise dispose of any of the Company's
equity securities (except that the Company may grant options to purchase
shares of Common Stock under the Stock Option Plan). The Company's directors,
officers and existing shareholders and the holder of the Hibernia Warrant have
agreed that they will not, for a period of 180 days (subject to certain
further restrictions with respect to the Selling Shareholder for an additional
180 days) from the date of this Prospectus, offer, sell or otherwise dispose
of any of the Company's equity securities that they beneficially own or
control.
Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price for the Common Stock has been
determined by negotiations between the Company and by the Representatives.
Factors considered in determining such price were prevailing market
conditions, the state of the Company's development, recent financial results
of the Company, the future prospects of the Company and its industry, market
valuations of the securities of companies engaged in activities deemed by the
Representatives to be similar to those of the Company and other factors deemed
relevant.
The Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
The Representatives, on behalf of the Underwriters, may engage in over-
allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short
position. Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specific maximum.
Syndicate covering transactions involve purchases of Common Stock in the open
market after the distribution has been completed in order to cover syndicate
short positions. Penalty bids permit the Representatives to reclaim a selling
concession from a syndicate member when the shares of Common Stock originally
sold by such syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. Such stabilizing transactions,
syndicate covering transactions and penalty bids may cause the price of the
Common Stock to be higher than it would otherwise be in the absence of such
transactions. These transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Thompson & Knight, P.C., Dallas, Texas. Certain matters will be
passed upon for the Underwriters by Stroock & Stroock & Lavan LLP, Los
Angeles, California.
EXPERTS
The financial statements as of January 31, 1996 and January 31, 1997 and for
each of the three years in the period ended January 31, 1997 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (as amended and together with all exhibits thereto, the "Registration
Statement") under the Securities Act, with respect to the
47
<PAGE>
shares of Common Stock offered hereby. This Prospectus constitutes a part of
the Registration Statement and does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted from
this Prospectus as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other document referred to herein are not necessarily complete
and, where such agreement or other document is an exhibit to the Registration
Statement, each such statement is qualified in all respects by the provisions
of such exhibit, to which reference is hereby made for a full statement of the
provisions thereof. For further information with respect to the Company and
the Common Stock, reference is hereby made to the Registration Statement and
to the schedules and exhibits thereto.
The Registration Statement may by inspected, without charge, and copies may
be obtained, at prescribed rates, at the public reference facilities of the
Commission maintained at Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. Copies of the Registration Statement may
also be inspected, without charge, at the Commission's regional offices at 7
World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. In addition, copies of the
Registration Statement may be obtained by mail at prescribed rates, from the
Public Reference Branch of the Commission at 450 Fifth Street, N.W.,
Washington D.C. 20549.
As a result of this Offering, the Company will become subject to the
information and periodic reporting requirements of the Exchange Act and, in
accordance therewith, will file periodic reports, proxy statements and other
information with the Commission. Such periodic reports, proxy statements and
other information will be available for inspection and copying at the public
reference facilities and regional offices referred to above. The Commission
maintains a Web site that contains reports, proxy statements and other
information regarding registrants that file electronically with the
Commission. The address of such Web site is http://www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements certified by its independent
auditors and with quarterly reports for each of the first three quarters of
each fiscal year containing unaudited financial information.
48
<PAGE>
DSI TOYS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheet at January 31, 1996 and 1997.................. F-3
Consolidated Statement of Income for fiscal years 1994, 1995 and 1996.... F-4
Consolidated Statement of Cash Flows for fiscal years 1994, 1995 and
1996.................................................................... F-5
Consolidated Statement of Shareholders' Equity (Deficit) for fiscal years
1994, 1995 and 1996..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of DSI Toys, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, cash flows and shareholders' equity
(deficit) present fairly, in all material respects, the financial position of
DSI Toys, Inc. and its subsidiary at January 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended January 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Houston, Texas
March 21, 1997, except as to
Note 12 which is as of
May 1, 1997.
F-2
<PAGE>
DSI TOYS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash............................................. $ 2,660,455 $ 1,501,992
Restricted cash.................................. 150,000 150,000
Accounts receivable, net of allowance for
doubtful accounts of $68,477 and $104,781....... 5,223,446 4,219,942
Due from shareholder............................. 819,283 151,667
Shareholder insurance proceeds receivable........ 511,765
Inventories...................................... 3,409,962 4,615,087
Prepaid expenses................................. 1,130,006 1,462,189
Deferred income taxes............................ 351,000 362,000
------------ ------------
Total current assets........................... 13,744,152 12,974,642
Property and equipment, net........................ 1,514,096 1,190,498
Shareholder insurance proceeds receivable.......... 1,143,076 920,987
Deferred debt issuance costs....................... 842,963 679,906
Other assets....................................... 145,316 537,868
------------ ------------
$ 17,389,603 $ 16,303,901
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued liabilities......... $ 6,480,485 $ 7,247,254
Current portion of long-term debt ............... 3,359,210 2,755,789
Income taxes payable............................. 314,874 193,211
Deferred income taxes............................ 79,408 158,000
------------ ------------
Total current liabilities...................... 10,233,977 10,354,254
Long-term debt..................................... 11,187,702 8,203,108
Notes payable--shareholder......................... 7,000,000 6,000,000
Deferred income taxes.............................. 549,987 1,169,000
------------ ------------
Total liabilities.............................. 28,971,666 25,726,362
------------ ------------
Shareholders' equity (deficit):
Preferred stock, $0.01 par value, 5,000,000
shares authorized, none issued or outstanding...
Common stock, $0.0001 and $0.01 par value,
respectively, 20,000,00 shares authorized,
6,219,000 shares issued......................... 622 62,190
Additional paid-in capital....................... 3,504,661 3,443,093
Common stock warrants............................ 100,000 100,000
Retained earnings................................ 7,472,077 9,623,350
Cumulative translation adjustment................ 1,169 9,498
------------ ------------
11,078,529 13,238,131
Less-treasury stock, 2,719,000 shares, at cost... (22,660,592) (22,660,592)
------------ ------------
(11,582,063) (9,422,461)
------------ ------------
Commitments and contingencies (Note 9)
------------ ------------
$ 17,389,603 $ 16,303,901
============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
DSI TOYS, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net sales.............................. $45,219,277 $63,146,080 $63,219,212
Costs of goods sold.................... 33,614,394 43,428,075 42,023,044
----------- ----------- -----------
Gross profit........................... 11,604,883 19,718,005 21,196,168
Selling, general and administrative
expenses.............................. 7,910,192 14,624,519 15,569,422
Former sole shareholder bonus.......... 2,000,000 1,000,000 --
----------- ----------- -----------
Operating income....................... 1,694,691 4,093,486 5,626,746
Interest expense....................... 332,660 700,986 2,599,942
Other income........................... (110,651) (383,801) (344,469)
----------- ----------- -----------
Income before income taxes............. 1,472,682 3,776,301 3,371,273
Provision for income taxes............. 504,011 1,449,677 1,220,000
----------- ----------- -----------
Net income............................. $ 968,671 $ 2,326,624 $ 2,151,273
=========== =========== ===========
Earnings per share..................... $ 0.28 $ 0.66 $ 0.58
=========== =========== ===========
Weighted average shares outstanding.... 3,500,000 3,500,000 3,739,146
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
DSI TOYS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------
1994 1995 1996
----------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................... $ 968,671 $ 2,326,624 $ 2,151,273
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization...... 734,947 830,667 596,332
Amortization of debt discount and
issuance costs.................... 38,998 163,057
Provision for doubtful accounts.... 45,927 88,012 62,160
Gain on sale of equipment.......... (12,511)
Deferred income taxes.............. (36,880) 162,275 686,605
Changes in assets and liabilities:
Accounts receivable.............. (1,764,514) (2,196,971) 941,344
Due from shareholder............. 674,184 (613,367) 667,616
Inventories...................... (885,052) (1,544,972) (1,205,125)
Prepaid expenses................. (259,900) (208,762) (332,183)
Accounts payable and accrued
liabilities..................... 1,517,127 3,176,595 766,769
Income taxes payable............. 148,071 (96,722) (121,663)
----------- ------------ -----------
Net cash provided by operating
activities.................... 1,142,581 1,962,377 4,363,674
----------- ------------ -----------
Cash flows from investing activities:
Capital expenditures................. (801,685) (383,446) (284,260)
Proceeds from sale of equipment...... 24,037
Increase in insurance receivable from
shareholder......................... (348,459) (369,441) (289,676)
(Increase) decrease in other assets.. (2,944) 10,065 (392,552)
----------- ------------ -----------
Net cash used by investing
activities.................... (1,153,088) (742,822) (942,451)
----------- ------------ -----------
Cash flows from financing activities:
Net borrowings (repayments) under
revolving lines of credit........... 409,805 5,183,399 (2,088,225)
Proceeds from long-term debt......... 950,000 10,000,000
Payments on long-term debt........... (1,293,186) (522,280) (2,499,790)
Net proceeds from issuance of common
stock............................... 3,502,783
Purchase of treasury shares.......... (16,208,742)
Debt and stock issue costs........... (879,259)
----------- ------------ -----------
Net cash provided (used) by
financing activities.......... 66,619 1,075,901 (4,588,015)
----------- ------------ -----------
Effect of exchange rate changes on
cash.................................. (577) 1,746 8,329
----------- ------------ -----------
Net increase (decrease) in cash........ 55,535 2,297,202 (1,158,463)
Cash and cash equivalents:
Beginning of year.................... 307,718 363,253 2,660,455
----------- ------------ -----------
End of year.......................... $ 363,253 $ 2,660,455 $ 1,501,992
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
DSI TOYS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
------------------ PAID-IN RETAINED TRANSLATION TREASURY
SHARES AMOUNT CAPITAL WARRANTS EARNINGS ADJUSTMENT STOCK TOTAL
--------- -------- ---------- -------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, February 1,
1994................... 3,500,000 $ 350 $ 2,150 $4,176,782 $ 4,179,282
Net income............. 968,671 968,671
Change in cumulative
translation
adjustment............ $ (577) (577)
--------- -------- ---------- ---------- ------ -----------
Balance, January 31,
1995................... 3,500,000 350 2,150 5,145,453 (577) 5,147,376
Purchase of 2,719,000
shares of treasury
stock................. $(22,151,850) (22,151,850)
Stock purchase costs... (508,742) (508,742)
Issuance of common
stock................. 2,719,000 272 3,799,728 3,800,000
Stock issuance costs... (297,217) (297,217)
Warrants issued........ $100,000 100,000
Net income............. 2,326,624 2,326,624
Change in cumulative
translation
adjustment............ 1,746 1,746
--------- -------- ---------- -------- ---------- ------ ------------ -----------
Balance, January 31,
1996................... 6,219,000 622 3,504,661 100,000 7,472,077 1,169 (22,660,592) (11,582,063)
Net income............. 2,151,273 2,151,273
Change in cumulative
translation
adjustment............ 8,329 8,329
Change in par value of
common stock (Note
12)................... 61,568 (61,568) --
--------- -------- ---------- -------- ---------- ------ ------------ -----------
Balance, January 31,
1997................... 6,219,000 $ 62,190 $3,443,093 $100,000 $9,623,350 $9,498 $(22,660,592) $(9,422,461)
========= ======== ========== ======== ========== ====== ============ ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
DSI TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION:
DSI Toys, Inc. (formerly Diversified Specialists, Inc.) was incorporated
under the laws of the state of Texas in November 1970. The Company markets and
distributes a variety of toys and children's consumer electronics both within
the United States and internationally, primarily to retailers. The Company's
products are manufactured in China and various other Asian countries.
In December 1995, the Company sold newly issued common stock representing
77.7% of its common stock to a group of new investors through Rosie
Acquisition, L.L.C. ("RAC") pursuant to a recapitalization transaction (the
"Recapitalization"). In connection with the Recapitalization, the Company
issued 2,719,000 new shares of common stock to RAC in exchange for $3.8
million in cash. Also in connection therewith, the Company purchased 2,719,000
shares of the common stock of the Company from the previous sole shareholder
for approximately $22.2 million. The previous sole shareholder died on
November 19, 1996. Any references to the previous sole shareholder includes
references to his estate. The purchase price was funded through (a) cash paid
from borrowing of $10.6 million from banks pursuant to a five-year bank note,
a six-year subordinated note and a bank revolving line of credit; (b) the
issuance to the previous sole shareholder of a $6 million subordinated note
and a $1.3 million promissory note, including the grant of a warrant to
purchase 700,000,000 shares of common stock of the Company at $0.001 per share
exercisable in the event of default (see Note 9); (c) the transfer of land to
the previous sole shareholder with a cost of approximately $452,000; and (d)
approximately $3.8 million in cash obtained from the sale of common stock to
RAC. The subordinated bank note carries warrants to purchase 388,888 shares of
common stock of the Company at an exercise price of $2.00 per share. In
connection with the purchase of treasury stock, the Company incurred
approximately $509,000 in costs and fees, which were included as the cost of
the stock, and approximately $879,000 in debt issuance costs. The Company also
incurred approximately $297,000 in costs related to the sale of shares to RAC.
The Company has agreed to bear certain expenses of a public offering of the
781,000 shares retained by the former sole shareholder.
In January 1996, the Company received a note from the previous sole
shareholder of approximately $1.3 million in satisfaction of the balance
receivable from the previous sole shareholder. Such note was offset against
the aforementioned $1.3 million note issued to the previous sole shareholder
in connection with the Recapitalization.
The Company has agreed to keep life insurance policies in place for the
previous sole shareholder and has issued him a three-year consulting contract.
The Company has also granted a $1 million bonus to the previous sole
shareholder, payable in a $1 million subordinated note issued in January 1996.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of presentation
The accompanying consolidated financial statements include the accounts of
DSI (HK) Ltd., a wholly-owned subsidiary formed in February 1992. All
significant intercompany transactions have been eliminated in consolidation.
These financial statements reflect the historical basis of the Company's
assets and liabilities. No adjustments have been made to reflect an allocation
of the purchase price paid by RAC for its 77.7% interest in the Company.
Fiscal Year
The terms "fiscal year" and "fiscal" refer to the Company's fiscal year
which is the year ending January 31 of the following calendar year mentioned
(e.g., a reference to fiscal 1996 is a reference to the fiscal year ended
January 31, 1997).
F-7
<PAGE>
DSI TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. Restricted cash held as a
compensating balance under the revolving loan supported by letters of credit
is not considered a cash equivalent.
Revenue recognition
Revenues are recognized upon shipment of product by the Company or, in the
case of FOB Asia sales, by the manufacturer, and, at that point, legal
responsibility and title pass to the buyer. The Company provides an allowance
for doubtful accounts and accrues for returns and discounts using a percentage
of gross sales based on historical experience. Provision is made currently for
estimated returns of defective and slow-moving merchandise, price protection
and customer allowances.
Inventories
Inventories consist of finished goods and supplies and are stated at the
lower of cost or market, with cost determined on a first-in, first-out basis.
Property and equipment
Property and equipment are recorded at cost. Depreciation is recorded over
the estimated useful lives of the related assets using the straight-line
method for molds and leasehold improvements and an accelerated method for all
other assets.
Debt issuance costs and debt discount
Debt issuance costs of $879,000 and debt discount of $100,000 incurred in
connection with the Recapitalization are amortized over the terms of the
related debt.
Advertising
The cost of producing media advertising is capitalized as incurred and
expensed in the period in which the advertisement is first shown. During
interim periods, media communication costs are accrued in relation to sales
when the advertising is clearly implicit in the related sales arrangement. In
any event, all media communication costs are expensed in the fiscal year
incurred. All other advertising costs are expensed in the period incurred.
Television advertising expense totaled $3.1 million and $6.0 million during
fiscal 1995 and 1996 and was not significant prior to that time. At January
31, 1996 and 1997, prepaid television advertising production costs of $119,000
and $451,000 are included in prepaid expenses.
Income taxes
The Company accounts for deferred income taxes using the liability method
which provides for the recognition of deferred tax assets and liabilities
based upon temporary differences between the tax basis of assets and
liabilities and their carrying value for financial reporting purposes.
Deferred tax expense or benefit is the result of changes in deferred tax
assets and liabilities during the period. In estimating future tax
consequences, all expected future events are considered other than enactments
of changes in the tax law or rates.
Deferred income taxes are provided on the undistributed earnings of DSI (HK)
Ltd.
Foreign currency translations
During fiscal 1994, the Company changed the functional currency for its
foreign subsidiary from the U.S. dollar to the local currency, as cash flows
and financing activities of this entity were increasingly denominated in the
local currency. The impact of this change was not material to the Company's
financial statements. As a result of this change, assets and liabilities at
the balance sheet date are translated into U.S. dollars at the exchange
F-8
<PAGE>
DSI TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
rate in effect on the balance sheet date and translation adjustments are
accumulated as a separate component of shareholders' equity. Revenue and
expense accounts are translated at prevailing rates throughout the year.
Recent accounting pronouncement
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS 121), was issued by the Financial Accounting Standards Board in March
1995. SFAS 121 establishes accounting standards for the impairment of long-
lived assets, certain identifiable intangibles, and goodwill related to those
assets to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. Adoption of the provisions of SFAS 121 at the
beginning of fiscal 1995 did not have a material impact on the Company's
financial statements. The Company reviews the carrying value of its long-lived
and identifiable assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable.
Concentration of credit risk and export sales
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables. The
Company sells its products principally to retail discount stores and toy
stores. Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's customer
base and their geographic dispersion. The Company performs ongoing credit
evaluations of its customers to minimize credit risk, and for the majority of
its FOB Asia sales, the Company obtains letters of credit from its customers
supporting the accounts receivable.
Sales to major customers that exceeded 10% of total net sales consist of the
following:
<TABLE>
<CAPTION>
FISCAL YEAR
----------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Customer A................................................... 17% 19%
Customer B................................................... 11% 13% 14%
Customer C................................................... 12%
Customer D................................................... 10%
</TABLE>
Approximately 19%, 17% and 19% of the Company's sales were exports to
foreign countries during fiscal 1994, 1995 and 1996, respectively. Such sales
were made principally in Canada, the U.K. and Australia.
Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
period. Because of the inherent uncertainties in their process, actual
results could differ from such estimates. Management believes that the
estimates are reasonable.
Earnings per share
Earnings per share is computed based on the weighted average number of
common and dilutive common equivalent shares outstanding. Earnings per share
during fiscal 1995 does not include the assumed exercise of common stock
equivalents, as such inclusion would be anti-dilutive.
F-9
<PAGE>
DSI TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
---------------------
ESTIMATED USEFUL LIVES 1996 1997
---------------------- ---------- ----------
<S> <C> <C> <C>
Molds......................... 3 years $1,688,104 $1,749,229
Equipment, furniture and
fixtures..................... 5-7 years 1,206,600 1,350,189
Leasehold improvements........ 10 years or lease term 790,102 848,079
Automobiles................... 3-5 years 84,258 84,258
---------- ----------
3,769,064 4,031,755
Less-accumulated depreciation
and amortization............. 2,254,968 2,841,257
---------- ----------
$1,514,096 $1,190,498
========== ==========
</TABLE>
NOTE 4--ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
---------------------
1996 1997
---------- ----------
<S> <C> <C>
Trade payables........................................ $3,231,035 $3,221,563
Accrued royalties..................................... 438,435 301,442
Accrued compensation and commissions.................. 984,665 765,277
Accrued returns and discounts......................... 987,781 988,153
Accrued television advertising........................ 375,000 1,345,087
Other................................................. 463,569 625,732
---------- ----------
$6,480,485 $7,247,254
========== ==========
</TABLE>
F-10
<PAGE>
DSI TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--NOTES PAYABLE:
Indebtedness consists of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Bank revolving line of credit for $6 million se-
cured by all of the Company's U.S. accounts re-
ceivable, inventory, intangibles, equipment, fix-
tures and 65% of the common stock of DSI (HK)
Ltd.; guaranteed by RAC; principal due on May 31,
1998; interest at prime plus 0.75%............... $ 4,785,000 $ 3,055,000
Subordinated bank note due January 31, 2002, se-
cured by all of the Company's U.S. accounts re-
ceivable, inventory, intangibles, equipment, fix-
tures, and 65% of the common stock of DSI (HK)
Ltd.; guaranteed by RAC; interest at 13%; princi-
pal of $75,000 payable quarterly; net of related
unamortized debt discount of $97,298 and
$81,082.......................................... 2,902,702 1,418,918
Bank note, secured by all of the Company's U.S.
accounts receivable, inventory, intangibles,
equipment, fixtures and 65% of the common stock
of DSI (HK) Ltd. and 2,719,000 shares of the
Company's common stock; guaranteed by RAC;
interest at prime plus 1% not to exceed 18%;
principal due in quarterly installments of
$250,000......................................... 6,000,000 5,000,000
Subordinated note payable to shareholder; interest
at 10% until March 31, 1996, thereafter, interest
at 12%, payable in full no later than the third
business day following the completion and closing
of an initial public offering of the Company; if
the closing does not occur, unpaid principal due
in $1,000,000 annual installments beginning March
31, 1998 through March 31, 2001 with additional
$1,000,000 installments due December 31, 2000 and
March 31, 2001; secured by 2,719,000 shares of
common stock of the Company; guaranteed by RAC;
and subordinated to all senior debt.............. 6,000,000 6,000,000
Subordinated note payable to shareholder, interest
at 10% until March 31, 1996, thereafter, interest
at 12%, payable in full no later than the third
business day following the completion and closing
of an initial public offering of the Company; if
the closing does not occur, unpaid principal and
interest due May 31, 1997, secured by 2,719,000
shares of common stock of the Company, guaranteed
by RAC and subordinated to all senior debt....... 1,000,000 1,000,000
Revolving bank loan, drawn against a line of
credit, secured by a customer's letter of credit
and $150,000 cash, interest at prime............. 843,204 484,979
Other............................................. 16,006
----------- -----------
21,546,912 16,958,897
Less-current portion.............................. 3,359,210 2,755,789
----------- -----------
$18,187,702 $14,203,108
=========== ===========
</TABLE>
F-11
<PAGE>
DSI TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has a $5 million revolving bank loan available for negotiating
and collecting export sales and for opening back-to-back letters of credit
secured by letters of credit from its customers. Amounts of $843,204 and
$484,979 were borrowed against this line of credit as of January 31, 1996 and
1997. The Company has pledged $150,000 in cash as security for the credit
facility at January 31, 1996 and 1997.
Certain of the Company's loan agreements require the maintenance of
financial covenants, including minimum current ratio, net worth and debt
service coverage and restrict the payment of dividends.
The aggregate amount of maturities for all indebtedness for each of the next
five years are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- ----------
<S> <C>
1997.............................................................. $2,755,789
1998.............................................................. 5,332,297
1999.............................................................. 2,283,784
2000.............................................................. 3,290,270
2001.............................................................. 3,296,757
</TABLE>
Based on borrowing rates currently available, management believes the
carrying amounts of notes payable at January 31, 1996 and January 31, 1997
approximate fair values.
NOTE 6--INCOME TAXES:
The components of income before provision for income taxes were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------
1994 1995 1996
----------- ---------- ----------
<S> <C> <C> <C>
Domestic................................. $(1,172,783) $ 613,724 $ (898,344)
Foreign.................................. 2,645,465 3,162,577 4,269,617
----------- ---------- ----------
$ 1,472,682 $3,776,301 $3,371,273
=========== ========== ==========
</TABLE>
F-12
<PAGE>
DSI TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------
1994 1995 1996
-------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.................................. $ 86,923 $ 630,000 $ (185,605)
State.................................... (12,000) 72,000 (14,000)
Foreign.................................. 465,968 585,402 733,000
-------- ---------- ----------
540,891 1,287,402 533,395
-------- ---------- ----------
Deferred:
Federal.................................. (30,000) 208,000 657,605
State.................................... (11,000)
Foreign.................................. (6,880) (45,725) 40,000
-------- ---------- ----------
(36,880) 162,275 686,605
-------- ---------- ----------
$504,011 $1,449,677 $1,220,000
======== ========== ==========
</TABLE>
The difference between taxes at the statutory federal and the effective
income tax rates is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
1994 1995 1996
-------- ---------- ----------
<S> <C> <C> <C>
Taxes computed at
statutory rate......... $500,711 $1,283,942 $1,146,000
State income taxes net
of federal benefit..... (8,000) 47,000 (16,000)
Nondeductible items..... 21,000 54,000 13,000
Other, net.............. (9,700) 64,735 77,000
-------- ---------- ----------
$504,011 $1,449,677 $1,220,000
======== ========== ==========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
JANUARY 31,
----------------------
1996 1997
--------- -----------
<S> <C> <C>
Allowance for doubtful accounts..................... $ 23,000 $ 37,000
Inventory valuation adjustments..................... 28,000 20,000
Depreciation........................................ 19,000 63,000
Reserve for lease cancellation...................... 51,000 52,000
Accrued liabilities................................. 311,000 97,000
Accruals for inventory returns and markdowns........ 132,000 92,000
Foreign and alternative minimum tax credits......... 45,000
Net operating loss carryforward..................... 4,000
Other............................................... 19,000 19,000
--------- -----------
Gross deferred tax assets......................... 587,000 425,000
--------- -----------
Unremitted earnings of foreign subsidiary........... (740,000) (1,225,000)
Prepaid expenses.................................... (79,408) (158,000)
Depreciation........................................ (45,987) (7,000)
--------- -----------
Gross deferred tax liabilities.................... (865,395) (1,390,000)
--------- -----------
Net deferred tax liabilities........................ $(278,395) $ (965,000)
========= ===========
</TABLE>
The Company has approximately $24,000 in alternative minimum tax credits and
approximately $50,000 in foreign tax credits. These credits do not expire.
NOTE 7--EMPLOYEE BENEFIT PLAN:
The Company maintains a 401(k) Plan (the Plan) for the benefit of its
employees. The Company may, at its discretion, provide funds to match employee
contributions to the Plan. The Company matched employee contributions of
$105,000 in fiscal 1996. There were no such matching contributions to the Plan
for fiscal 1994 and fiscal 1995.
F-13
<PAGE>
DSI TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--RELATED PARTY TRANSACTIONS:
Prior to the Recapitalization, the Company periodically advanced cash and
made payments on behalf of the shareholder of the Company and related
entities. At January 31, 1996 and 1997, the outstanding balance receivable
from the shareholder was $819,283 and $151,667, respectively. The Company
recorded interest income of $43,000, $114,000 and $12,000 for fiscal 1994,
1995 and 1996, respectively, related to such receivable.
The Company recorded bonuses to the former sole shareholder of $2,000,000
and $1,000,000 for fiscal 1994 and 1995, respectively.
The Company entered into a consulting agreement with the shareholder to
serve as a consultant to the Company for three years for annual compensation
of $300,000. The consulting agreement also requires the Company to maintain
health and disability insurance policies for the benefit of the shareholder
for the term of his life. Pursuant to the agreement, the Company agreed to
maintain the shareholder's office space for his use for the term of the
agreement and to provide for 180 days the services of certain Company
employees for his outside business, provided that such services shall not
exceed 30% of the time of each of such employees. This agreement terminated
upon the shareholder's death on November 19, 1996.
As compensation for consulting services rendered in connection with the
Recapitalization, the Company agreed to pay the Vice Chairman of the Board the
sum of $240,000, payable January 1, 1996, 1997 and 1998.
The Company paid a fee and out-of-pocket expenses aggregating $415,000 to a
consulting firm for services related to the Recapitalization. A Director of
the Company is the co-founder and managing partner of the consulting firm.
The Company has agreed to pay a fee of $100,000 upon completion of a public
offering to a partnership controlled by a director of the Company.
The Company leases its office and warehouse from an entity owned by the
previous sole shareholder of the Company. Rent expense on these leases was
$217,000 each year for fiscal 1994, 1995 and 1996. Management believes that
the rental rates approximate fair market value.
The Company pays insurance premiums for certain single life and last to die
life insurance policies owned by the previous sole shareholder and his wife
and is a beneficiary on these policies to the extent of premiums paid. The
receivables related to these policies as of January 31, 1996 and 1997 amounted
to $1,143,076 and $1,432,752, respectively, and are collateralized by the
related insurance policies. The shareholder is restricted from borrowing
against the policies until the receivable is satisfied in full. The balance of
shareholder insurance proceeds receivable bears interest at 7%.
The Company purchased office furniture from the previous sole shareholder of
the Company for $300,000 during fiscal 1994. Management of the Company
believes that such purchase price represents the approximate fair market value
of the furniture purchased.
Additional related party transactions are described in Notes 1, 5 and 9.
NOTE 9--COMMITMENTS AND CONTINGENCIES:
In the normal course of business, the Company is involved in product and
intellectual property issues which sometimes result in litigation. It is the
opinion of management that the ultimate resolution of such matters will not
have a material adverse effect on the Company's financial position or results
of operations taken as a whole.
F-14
<PAGE>
DSI TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has granted its previous sole shareholder a warrant to purchase
700,000,000 shares of common stock of the Company at $0.001 per share, subject
to adjustment. Such warrant is exercisable only upon default of the notes
issued by the Company to such shareholder or RAC's guaranty thereof. The
warrant expires upon the fulfillment in the entirety of the Company's and
RAC's obligations with respect to such notes. The Company does not expect such
warrant to be exercised and, accordingly, has not included the shares issuable
upon exercise of the warrant in the calculation of earnings per share.
The Company has reserved 388,888 common shares for issuance upon exercise of
warrants issued to a bank. Such warrants are exercisable immediately at an
initial purchase price of $2 per share (subject to adjustment) and expire upon
the earlier of December 11, 2005 or simultaneously with the exercise of the
warrants held by the previous sole shareholder. The Company is obligated to
bear certain expenses associated with the public registration of the common
stock underlying the warrants. The Company has granted the warrantholder a
right to sell the warrant shares to the Company under certain terms and
conditions if the Company's common stock is not publicly traded by January 31,
2001. The bank warrants were valued by the Company at $100,000.
Upon completion of a public offering of its common shares, the Company has
agreed to grant options to purchase 90,000 shares of its common shares
expiring ten years from date of grant at an exercise price equal to the
initial public offering price to a new officer of the Company.
The Company leases its facilities under various operating leases which
expire from 1998 to 2003. Rent expense, including amounts paid to a related
party for fiscal 1994, 1995 and 1996, amounted to $483,000, $695,000 and
$687,000, respectively. Aggregate minimum rental commitments under
noncancelable leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1997.............................................................. $ 675,463
1998.............................................................. 361,792
1999.............................................................. 301,680
2000.............................................................. 312,743
2001.............................................................. 332,945
Thereafter........................................................ 248,457
----------
$2,233,080
==========
</TABLE>
Royalty expense under licensing agreements aggregated $729,000, $1,439,000
and $1,578,000 in fiscal 1994, 1995 and 1996, respectively. At January 31,
1997, minimum guaranteed royalties payable under these agreements in fiscal
1997 and thereafter of $52,000 and $180,000 are included in accrued royalties
payable and prepaid expenses.
F-15
<PAGE>
DSI TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--SEGMENT INFORMATION:
Financial information for fiscal 1996, 1995 and 1994 by geographic area is as
follows:
<TABLE>
<CAPTION>
ADJUSTMENTS
AND
UNITED STATES HONG KONG ELIMINATIONS CONSOLIDATED
------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
FISCAL 1994
Sales to customers...... $ 11,088,585 $34,130,692 $45,219,277
Intercompany transfers.. 2,466,097 762,049 $(3,228,146)
------------ ----------- ----------- ------------
Net sales............... 13,554,682 34,892,741 (3,228,146) 45,219,277
Gross profit............ 4,934,699 9,258,714 (2,588,530) 11,604,883
Selling, general and
administrative
expenses............... (6,100,751) (6,225,275) 2,415,834 (9,910,192)
Interest expense........ (61,304) (271,356) (332,660)
Other income............ 1,347,314 56,078 (1,292,741) 110,651
Income before income
taxes.................. 119,958 2,818,161 (1,465,437) 1,472,682
Identifiable assets at
fiscal year end........ 6,822,717 3,802,922 (236,566) 10,389,073
FISCAL 1995
Sales to customers...... $ 27,724,986 $35,421,094 $63,146,080
Intercompany transfers.. 2,561,937 2,006,794 $(4,568,731)
------------ ----------- ----------- ------------
Net sales............... 30,286,923 37,427,888 (4,568,731) 63,146,080
Gross profit............ 12,463,968 9,716,928 (2,462,891) 19,718,005
Selling, general and
administrative
expenses............... (11,814,995) (6,433,503) 2,623,979 (15,624,519)
Interest expense........ (398,649) (302,337) (700,986)
Other income............ 363,400 15,425 4,976 383,801
Income before income
taxes.................. 613,724 2,996,513 166,064 3,776,301
Identifiable assets at
fiscal year end........ 10,016,623 7,443,482 (70,502) 17,389,603
FISCAL 1996
Sales to customers...... $ 27,970,378 $35,248,834 $ 63,219,212
Intercompany transfers.. 2,543,768 1,998,736 $(4,542,504)
------------ ----------- ----------- ------------
Net sales............... 30,514,146 37,247,570 (4,542,504) 63,219,212
Gross profit............ 12,857,158 10,907,350 (2,568,340) 21,196,168
Selling, general and
administrative
expenses............... (11,791,909) (6,315,544) 2,538,031 (15,569,422)
Interest expense........ (2,251,709) (348,233) (2,599,942)
Other income............ 288,116 50,616 5,737 344,469
Income (loss) before
income taxes........... (898,344) 4,294,189 (24,572) 3,371,273
Identifiable assets at
fiscal year end........ 6,455,459 9,943,516 (95,074) 16,303,901
</TABLE>
F-16
<PAGE>
DSI TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------
1994 1995 1996
-------- ---------- ----------
<S> <C> <C> <C>
Cash paid for:
Interest.................................. $328,911 $ 656,117 $2,360,538
Income taxes.............................. 393,000 1,851,890 655,058
Noncash activities included the following:
Accounts receivable write-off............. $ 5,588 $ 145,995 $ 31,188
Purchase of treasury stock from former
sole shareholder in exchange for land.... 451,850
Purchase of treasury stock from former
sole shareholder in exchange for notes
payable.................................. 7,300,000
Cancellation of note payable and note
receivable from former sole shareholder.. 1,300,000
</TABLE>
NOTE 12--SUBSEQUENT EVENTS:
Effective May 1, 1997, the Company's Articles of Incorporation were amended
to (i) authorize the issuance of 5,000,000 shares of $0.01 par value preferred
stock, (ii) change the par value of common stock to $0.01, and (iii) reduce
the authorized shares of common stock to 20,000,000 shares.
On May 1, 1997, the Board of Directors (i) authorized the issuance of
warrants to purchase 250,000 shares of common stock for an exercise price
equal to 120% of the price of common stock sold by the Company in an initial
public offering of common stock, (ii) adopted the 1997 Stock Option Plan and
(iii) reserved 600,000 shares of common stock for issuance under such plan and
250,000 shares of common stock issuable upon exercise of such warrants. No
options have been issued under the plan.
F-17
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
The Recapitalization..................................................... 11
Use of Proceeds.......................................................... 12
Dividend Policy.......................................................... 13
Dilution................................................................. 14
Capitalization........................................................... 15
Selected Consolidated Financial Data..................................... 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 23
Management............................................................... 33
Certain Transactions..................................................... 38
Principal and Selling Shareholders....................................... 39
Description of Capital Stock............................................. 41
Shares Eligible for Future Sale.......................................... 43
Underwriting............................................................. 46
Legal Matters............................................................ 47
Experts.................................................................. 47
Additional Information................................................... 47
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR THE UNDERWRITERS. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
BUY, COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIRE-
MENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENT OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,000,000 Shares
LOGO
[LOGO OF DSI TOYS, INC. APPEARS HERE]
Common Stock
---------------
PROSPECTUS
---------------
, 1997
Tucker Anthony
Incorporated
Sutro & Co. Incorporated
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, incurred or to be incurred in
connection with the sale of the Common Stock being registered (all amounts are
estimated except the SEC Registration Fee, the NASD Filing Fee and the Nasdaq
Listing Fees), all of which will be paid by the Registrant:
<TABLE>
<S> <C>
SEC Registration Fee........................................... $ 12,500.72
NASD Filing Fee................................................ 4,625.25
Nasdaq National Market Listing Fees............................ 32,500.00
Blue Sky Fees and Expenses..................................... 5,000.00
Accounting Fees and Expenses................................... 100,000.00
Legal Fees and Expenses........................................ 180,000.00
Transfer Agent and Registrar Fees.............................. 2,000.00
Printing and Engraving Expenses................................ 125,000.00
Financial Advisory Fees........................................ 145,000.00
Miscellaneous.................................................. 13,374.03
------------
Total........................................................ $ 620,000.00
============
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
DSI Toys, Inc. (the "Registrant") is incorporated in Texas. Under Section
2.02 of the Business Corporation Act of the State of Texas ("TBCA"), a Texas
corporation has the power, under specified circumstances, to indemnify its
directors, officers, employees and agents in connection with actions, suits or
proceedings brought against them by a third party or in the right of the
corporation, by reason of the fact that they were or are such directors,
officers, employees or agents, against expenses incurred in any action, suit
or proceedings. The Bylaws of the Registrant provide for indemnification of
directors and officers to the fullest extent permitted by the TBCA. Reference
is made to the Bylaws, as amended, of the Registrant, filed as Exhibits 3.2
and 3.3 hereto.
The Registrant currently does not have directors' and officers' liability
insurance covering certain liabilities incurred by the Registrant's directors
and officers in connection with the performance of their duties and does not
anticipate obtaining such liability insurance coverage.
The Underwriting Agreement filed as Exhibit 1 contains provisions by which
the Underwriter agrees to indemnify the Registrant, any person controlling the
Registrant within the meaning of Section 15 of the Securities Act of 1933 (the
"Act") or Section 20 of the Securities Exchange Act of 1934, each director of
the Registrant, and each officer of the Registrant who signs this Registration
Statement with respect to information relating to such Underwriter furnished
in writing to the Company by or on behalf of such Underwriter expressly for
use in the Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The securities sold by the Registrant within the past three years have not
been registered under the Act pursuant to an exemption from registration under
Section 4(2) of the Act. All securities sold within the past three years were
shares of Common Stock or warrants to purchase shares thereof. There were no
underwriters employed in connection with any of these transactions. The
recipients of such securities in each such transaction represents their
intention to acquire the securities for investment only and not with a view
to, or for sale in
II-1
<PAGE>
connection with, any distribution thereof. Appropriate legends were affixed to
the share certificates and other instruments issued in such transactions. All
recipients either received adequate information about the Registrant or had
access through employment or other relationships, to such information. The
following sets forth the original terms of such sales of securities by the
Registrant within the past three years:
On December 11, 1995, the Registrant sold 2,719,000 newly-issued shares of
Common Stock to Rosie Acquisition, L.L.C., a Texas limited liability company
("RAC"), in connection with the recapitalization of the Registrant. In
consideration of these shares, RAC paid the Registrant $3.8 million.
On December 11, 1995, in connection with the recapitalization of the
Registrant, the Registrant issued to Hibernia Corporation warrants to purchase
388,888 shares of Common Stock at a price of $2.00 per share. These warrants
are exercisable at any time during the ten year period beginning December 11,
1995.
On December 11, 1995, in connection with the recapitalization of the
Registrant, the Registrant issued to Tommy Moss, the former sole shareholder
of the Registrant, a warrant to purchase 700,000,000 shares of Common Stock in
the event of default by the Registrant on certain indebtedness to Mr. Moss.
Such warrant will terminate upon repayment of the indebtedness, which will
occur upon application of the net proceeds of the Offering contemplated by
this Registration Statement.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1 Form of Underwriting Agreement.**
3.1 Amended and Restated Articles of Incorporation.***
3.2 Amended and Restated Bylaws.***
3.3 Amendment to Bylaws.***
4.1 Form of Common Stock Certificate.**
4.2 Form of Warrant Agreement among the Company and the Representatives to
purchase 250,000 shares of Common Stock.**
4.3 Common Stock Purchase Warrant No. A-1 dated December 11, 1995, issued
to Hibernia Corporation to purchase 388,888 shares of Common
Stock.***
4.4 Registration Rights Agreement by and between the Company and Hibernia
Corporation.***
4.5 Registration Rights Agreement by and between the Registrant and Tommy
Moss.***
5 Opinion of Thompson & Knight, P.C.***
10.1 1997 Stock Option Plan.**+
10.2 Agreement for Sale of Stock between Rosie Acquisition, L.L.C. and DSI
Acquisition, Inc. and Diversified Specialists, Inc. and Tommy Moss,
dated December 11, 1995.***
10.3 Employment Agreement dated December 11, 1995 by and between the
Company and M.D. Davis.***
10.4 Employment Agreement dated December 11, 1995 by and between the
Company and Richard R. Neitz.***
10.5 Employment Agreement dated December 11, 1995 by and between the
Company and Yau Wing Kong.***
10.6 Employment Agreement dated December 11, 1995 by and between the
Company and Dale Y. Chen.***
10.7 Employment Agreement dated December 11, 1995 by and between the
Company and Thomas V. Yarnell.***
10.8 Employment Agreement dated March 16, 1997 by and between the Company
and J. Russell Denson.***
10.9 Letter Loan Agreement between the Company and Bank One, Texas, N.A.,
dated December 11, 1995, evidencing a revolving line of credit and a
term note (the "Bank One Letter Loan Agreement").***
10.10 First Amendment to Bank One Letter Loan Agreement, dated January 31,
1996.***
10.11 Second Amendment to Bank One Letter Loan Agreement, dated August 1,
1996.***
10.12 Third Amendment to Bank One Letter Loan Agreement, dated November 14,
1996.***
10.13 Fourth Amendment to Bank One Letter Loan Agreement, dated January 31,
1997.***
10.14 Fifth Amendment to Bank One Letter Loan Agreement, dated January 31,
1997.***
10.15 Line of Credit Facility with State Street Bank and Trust Company, Hong
Kong Branch, dated April 1, 1997, evidencing a $5,000,000 line of
credit.***
11 Calculation of Earnings Per Share.***
21 Subsidiaries.***
23.1 Consent of Thompson & Knight, P.C. (included in its opinion filed as
Exhibit 5 hereto).***
23.2 Consent of Price Waterhouse LLP.**
24 Powers of Attorney.***
27 Financial Data Schedule.***
</TABLE>
II-3
<PAGE>
- --------
+ Management contract or compensatory plan.
** Filed herewith.
*** Previously filed.
(b) Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts for fiscal years 1994, 1995
and 1996
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(c) The undersigned registrant also hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF HOUSTON, STATE OF TEXAS, ON MAY 21, 1997.
DSI Toys, Inc.
By: /s/ M. D. Davis
-----------------------------------
M. D. DAVIS CHAIRMAN OF THE BOARD
OF DIRECTORS AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
Chairman of the
/s/ M. D. Davis Board,and Chief
- ------------------------------------- Executive Officer May 21, 1997
M. D. DAVIS (principal
executive officer)
* President, Chief
- ------------------------------------- Operating Officer May 21, 1997
RICHARD R. NEITZ and Director
* Executive Vice
- ------------------------------------- Presidentand Chief May 21, 1997
J. RUSSELL DENSON Financial Officer
(principal
financial officer)
* Vice President and
- ------------------------------------- Controller May 21, 1997
DALE YUNG CHEN (principal
accounting officer)
* Director
- ------------------------------------- May 21, 1997
BARRY B. CONRAD
* Director
- ------------------------------------- May 21, 1997
JACK R. CROSBY
* Director
- ------------------------------------- May 21, 1997
J. N. MATLOCK
* Director
- ------------------------------------- May 21, 1997
DOUGLAS A. SMITH
*By: /s/ M. D. Davis
---------------------------
M. D. DAVIS
ATTORNEY-IN-FACT
II-5
<PAGE>
DSI TOYS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS RECOVERY OF
BALANCE CHARGED TO AMOUNTS BALANCE
AT BEGINNING COSTS AND PREVIOUSLY AT END
OF PERIOD EXPENSES WRITTEN OFF DEDUCTIONS OF PERIOD
------------ ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Fiscal year 1994...... $ 90,000 $45,927 $3,283 $ (11,490) $ 127,720
Fiscal year 1995...... 127,720 88,012 -- (147,255) 68,477
Fiscal year 1996...... 68,477 62,160 5,332 (31,188) 104,781
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------- ----------- -------------
<C> <S> <C>
1 Form of Underwriting Agreement.**
3.1 Amended and Restated Articles of Incorporation.***
3.2 Amended and Restated Bylaws.***
3.3 Amendment to Bylaws.***
4.1 Form of Common Stock Certificate.**
4.2 Form of Warrant Agreement among the Company and the
Representatives to purchase 250,000 shares of Common
Stock.**
4.3 Common Stock Purchase Warrant No. A-1 dated December
11, 1995, issued to Hibernia Corporation to purchase
388,888 shares of Common Stock.***
4.4 Registration Rights Agreement by and between the
Company and Hibernia Corporation.***
4.5 Registration Rights Agreement by and between the
Registrant and Tommy Moss.***
5 Opinion of Thompson & Knight, P.C.***
10.1 1997 Stock Option Plan.**+
10.2 Agreement for Sale of Stock between Rosie Acquisition,
L.L.C. and DSI Acquisition, Inc. and Diversified
Specialists, Inc. and Tommy Moss, dated December 11,
1995.***
10.3 Employment Agreement dated December 11, 1995 by and
between the Company and M.D. Davis.***
10.4 Employment Agreement dated December 11, 1995 by and
between the Company and Richard R. Neitz.***
10.5 Employment Agreement dated December 11, 1995 by and
between the Company and Yau Wing Kong.***
10.6 Employment Agreement dated December 11, 1995 by and
between the Company and Dale Y. Chen.***
10.7 Employment Agreement dated December 11, 1995 by and
between the Company and Thomas V. Yarnell.***
10.8 Employment Agreement dated March 16, 1997 by and
between the Company and J. Russell Denson.***
10.9 Letter Loan Agreement between the Company and Bank
One, Texas, N.A., dated December 11, 1995, evidencing
a revolving line of credit and a term note (the "Bank
One Letter Loan Agreement").***
10.10 First Amendment to Bank One Letter Loan Agreement,
dated January 31, 1996.***
10.11 Second Amendment to Bank One Letter Loan Agreement,
dated August 1, 1996.***
10.12 Third Amendment to Bank One Letter Loan Agreement,
dated November 14, 1996.***
10.13 Fourth Amendment to Bank One Letter Loan Agreement,
dated January 31, 1997.***
10.14 Fifth Amendment to Bank One Letter Loan Agreement,
dated January 31, 1997.***
10.15 Line of Credit Facility with State Street Bank and
Trust Company, Hong Kong Branch, dated April 1, 1997,
evidencing a $5,000,000 line of credit.***
11 Calculation of Earnings Per Share.***
21 Subsidiaries.***
23.1 Consent of Thompson & Knight, P.C. (included in its
opinion filed as Exhibit 5 hereto).***
23.2 Consent of Price Waterhouse LLP.**
24 Powers of Attorney.***
27 Financial Data Schedule.***
</TABLE>
- --------
+ Management contract or compensatory plan.
** Filed herewith.
*** Previously filed.
<PAGE>
EXHIBIT 1
DSI TOYS, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
UNDERWRITING AGREEMENT
Boston, Massachusetts
May __, 1997
TUCKER ANTHONY INCORPORATED
SUTRO & CO. INCORPORATED
As Representatives of the
Several Underwriters
c/o Tucker Anthony Incorporated
One Beacon Street
Boston, Massachusetts 02108
Ladies and Gentlemen:
DSI Toys, Inc., a Texas corporation (the "Company"), and The Tommy
Moss Living Trust (the "Firm Selling Stockholder") confirm their agreement with
Tucker Anthony Incorporated ("Tucker Anthony") and Sutro & Co. Incorporated
("Sutro"), and each of the other underwriters, if any, named in Schedule A
hereto (collectively, the "Underwriters," which term shall also include any
underwriter substituted as hereinafter provided in Section 11), for whom Tucker
Anthony and Sutro are acting as representatives (in such capacity, Tucker
Anthony and Sutro are herein called the "Representatives"), with respect to the
sale by the Company and the Firm Selling Stockholder and the purchase by the
Underwriters, acting severally and not jointly, of an aggregate of 3,000,000
shares of the common stock, $0.01 par value per share, of the Company ("Common
Stock"), of which 2,500,000 shares are to be sold by the Company and 500,000
shares are to be sold by the Firm Selling Stockholder (collectively, the "Firm
Shares"), and with respect to the grant by the Company, the Firm Selling
Stockholder, and Hibernia Corporation (the "Option Selling Stockholder" and,
together with the Firm Selling Stockholder, the "Selling Stockholders") to the
Underwriters, acting severally and not jointly, of the option described in
Section 2(b) hereof to purchase therefrom all or any part of 450,000 additional
shares of Common Stock for the purpose of covering over-allotments, if any. The
Firm Shares and all or any part of the shares of Common Stock subject to the
option described in Section 2(b) hereof (the "Option Shares") are hereinafter
collectively referred to as the "Shares." The Company has also agreed to issue
to the Representatives "Representatives' Warrants" (defined below) to purchase
up to 250,000 shares of Common Stock. The words "you" and "your" refer to the
Representatives of the Underwriters.
-1-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING STOCKHOLDERS.
I. The Company represents and warrants to, and agrees with, each of the
Underwriters as of the date hereof, and as of the Closing Date, as defined in
Section 2(c) hereof, and the Option Closing Date, as defined in Section 2(b)
hereof, if any, as follows:
(a) A registration statement on Form S-1 (File No. 333-23961) with respect
to the Shares, the Representatives' Warrants, and the shares issuable upon
exercise of the Representatives' Warrants (the "Underwriters' Warrant Shares")
including a prospectus subject to completion, has been prepared by the Company
in conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the applicable Rules and Regulations (as defined below) of the
Securities and Exchange Commission (the "Commission") and has been filed with
the Commission; such amendments to such registration statement, and such amended
prospectuses subject to completion, as may have been required prior to the date
hereof have been similarly prepared and filed with the Commission; and the
Company will file such additional amendments to such registration statement, and
such amended prospectuses subject to completion, as may hereafter be required.
Copies of such registration statement and each such amendment, each such related
prospectus subject to completion (collectively, the "Preliminary Prospectuses"
and individually, a "Preliminary Prospectus"), each document incorporated by
reference therein and each exhibit thereto have been delivered to you. For
purposes hereof, "Rules and Regulations" means the rules and regulations adopted
by the Commission under either the Act or the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), as applicable.
If the registration statement has been declared effective under the Act by
the Commission, the Company will prepare and promptly file with the Commission,
pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations
under the Act or as part of a post-effective amendment to the registration
statement (including a final form of prospectus), the information omitted from
the registration statement pursuant to Rule 430A(a) of the Rules and Regulations
under the Act. If the registration statement has not been declared effective
under the Act by the Commission, the Company will prepare and promptly file a
further amendment to the registration statement, including a final form of
prospectus. The term "Registration Statement" as hereinafter used in this
Agreement shall mean such registration statement, including financial
statements, schedules and exhibits in the form in which it became or becomes,
effective (including, if the Company omitted information from the registration
statement pursuant to Rule
-2-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
430A(a) of the Rules and Regulations under the Act, the information deemed to be
a part of the registration statement at the time it became effective pursuant to
Rule 430A(b) of the Rules and Regulations under the Act) and, in the event of
any amendment thereto after the effective date of such registration statement,
shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended, together with any registration statement
filed by the Company pursuant to Rule 462(b) under the Act. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Shares as included in such registration statement at the time it became or
becomes effective, except that if any revised prospectus shall be provided to
the Underwriters by the Company for use in connection with the offering of the
Shares that differs from the Prospectus on file with the Commission at the time
the registration statement became or becomes effective (whether or not such
revised prospectus is required to be filed with the Commission pursuant to Rule
424(b)(3) of the Rules and Regulations under the Act), the term "Prospectus"
shall refer to such revised prospectus from and after the time it is first
provided to the Underwriters for such use, together with the term sheet or
abbreviated term sheet filed with the Commission pursuant to Rule 424(b)(7)
under the Act. Any reference herein to the Registration Statement, the
Prospectus, any amendment or supplement thereto or any Preliminary Prospectus
shall be deemed to refer to and include the documents incorporated by reference
therein, and any reference herein to the terms "amend," "amendment" or
"supplement" with respect to the Registration Statement or Prospectus shall be
deemed to refer to and include the filing of any document with the Commission
deemed to be incorporated by reference therein.
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
at the time of filing thereof, or instituted proceedings for that purpose, and
each such Preliminary Prospectus, at the time of filing thereof, has conformed
in all material respects to the requirements of the Act and the Rules and
Regulations and, at the time of filing thereof, has not included any untrue
statement of a material fact or omitted to state any material fact necessary to
make the statements therein not misleading and at the time the Registration
Statement became or becomes effective and at all times subsequent thereto up to
and including the Closing Date (as hereinafter defined) and any Option Closing
Date (as hereinafter defined), and during such longer period as the Prospectus
may be required to be delivered in connection with sales by an Underwriter or a
dealer, (i) the Registration Statement and Prospectus, and any amendments or
supplements thereto, contained and will contain all material information
required to be included therein by the Act and the
-3-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
Rules and Regulations are conformed and will conform in all material respects to
the requirements of the Act and the Rules and Regulations, and (ii) neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto included or will include any untrue statement of a material fact or
omitted or will omit to state any material fact required to be stated therein or
necessary to make the statements therein in light of the circumstances under
which they were made not misleading. The documents incorporated by reference in
the Registration Statement, the Prospectus, any amendment or supplement thereto
or any Preliminary Prospectus, when they became or become effective under the
Act or were or are filed with the Commission under the Exchange Act conformed or
will conform in all material respects with the requirements of the Act or the
Exchange Act, as applicable, and the Rules and Regulations, and as of the date
any such document was or is filed with the Commission under the Exchange Act
such document did not, and on the Closing Date and on any Option Closing Date
will not, omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
(c) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Texas. Each of the
subsidiaries of the Company (collectively, the "Subsidiaries" and individually,
a "Subsidiary") has been duly organized and is validly existing in good standing
under the laws of its jurisdiction of organization. The Company and each of the
Subsidiaries are duly qualified and licensed as a foreign corporation and in
good standing in each jurisdiction in which their respective operations requires
such qualification or licensing, except where the failure to be so qualified
would not have a material adverse effect on the condition, financial or
otherwise, or on the business affairs, position, prospects, value, operation,
properties, business or results of operation of the Company and the Subsidiaries
taken as a whole whether or not arising in the ordinary course of business (a
"Material Adverse Effect"). The Company and each of the Subsidiaries have all
requisite power and authority, and have obtained any and all necessary
authorizations, approvals, orders, licenses, certificates, franchises and
permits of and from all governmental or regulatory officials and bodies
(including, without limitation, the United States Environmental Protection
Agency and those other officials and bodies having jurisdiction over similar
matters), to own or lease their respective properties and conduct their
respective businesses as described in the Prospectus (collectively, "Government
Approvals"), except where the failure to so obtain any such Government Approval
would not have a Material Adverse Effect; the Company and each of the
Subsidiaries are and have been doing business in compliance with all such
Government Approvals, except where the failure to so comply would not have a
Material Adverse
-4-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
Effect; and neither the Company nor any of the Subsidiaries has received any
notice of proceedings relating to the revocation or modification of any such
Government Approvals. All of the outstanding shares of capital stock of each of
the Subsidiaries have been duly authorized and validly issued, are fully paid
and non-assessable and, except as set forth on Exhibit 1 are owned by the
Company free and clear of all liens, encumbrances and security interests, and no
options, warrants or other rights to purchase, agreements or other obligations
to issue or other rights to convert any obligations into, or exchange any
securities for, shares of capital stock of or ownership interests in any of the
Subsidiaries are outstanding.
(d) The Company has the duly authorized, issued and outstanding
capitalization set forth in the Prospectus under "Capitalization" based upon the
assumptions set forth therein and would have had the as adjusted capitalization
set forth therein based upon the assumptions set forth therein, and the Company
is not a party to or bound by any instrument, agreement or other arrangement
(except as disclosed in the Prospectus) providing for it to issue any capital
stock, rights, warrants, options or other securities, except for this Agreement
and the warrant agreement executed simultaneously with this Agreement between
the Company, Tucker Anthony and Sutro setting forth the terms of the
Representatives' Warrants (the "Warrant Agreement"). The Shares, the
Representatives' Warrants and all other securities issued or issuable by the
Company conform in all material respects to all statements with respect thereto
contained in the Registration Statement and the Prospectus. All issued and
outstanding shares of capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable and were not issued in
violation of any preemptive rights or other rights to subscribe for or purchase
securities. The Shares have been duly authorized and, when issued, paid for and
delivered in accordance with the terms hereof, will be validly issued, fully
paid and non-assessable and are not and will not be subject to any preemptive or
other rights to subscribe for or purchase securities; the holders thereof will
not be subject to any liability solely as such holders; and the certificates
representing the Shares will be in due and proper form as previously authorized
by the Company. The Representatives' Warrant Shares have been validly authorized
and reserved for issuance upon exercise of the Representatives' Warrants and,
when issued in accordance with the Warrant Agreement, will be validly issued,
fully paid and non-assessable and free of preemptive rights.
(e) The audited and unaudited consolidated financial statements of the
Company, together with the notes and schedules thereto, included in the
Registration Statement, each Preliminary
-5-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
Prospectus and the Prospectus fairly present the financial position and the
results of operations, changes in cash flows and changes in stockholders' equity
of the Company at the respective dates and for the respective periods to which
they apply; and each of such audited consolidated financial statements has been
prepared in conformity with generally accepted accounting principles and the
Rules and Regulations, consistently applied throughout the periods involved, all
adjustments necessary for a fair presentation of results for such periods have
been made and such unaudited consolidated financial statements have been
prepared on a basis substantially consistent with that of such audited
consolidated financial statements. Except as described in the Prospectus, there
has been no change or development involving a Material Adverse Effect since the
date of the consolidated financial statements included in any of the Preliminary
Prospectuses, the Prospectus and the Registration Statement, and the outstanding
debt, the property, both tangible and intangible, and the business of the
Company and each of the Subsidiaries conform in all material respects to the
descriptions thereof contained in the Registration Statement and the Prospectus.
The summary and selected consolidated financial and statistical data included in
the Registration Statement and the Prospectus present fairly the or incorporated
by reference information shown therein and have been compiled on a basis
consistent with the unaudited and audited consolidated financial statements
included therein. The Company's internal accounting controls are sufficient to
cause the Company to comply with the Foreign Corrupt Practices Act of 1977, as
amended. Neither the Company nor any of the Subsidiaries has any material
contingent obligation which is not disclosed in the Registration Statement.
(f) Price Waterhouse LLP ("Price Waterhouse"), whose reports are filed
with the Commission as a part of the Registration Statement, are independent
certified public accountants as required by the Act and the Rules and
Regulations.
(g) (i) The Company and each of the Subsidiaries has paid all material
federal, state, local and foreign taxes for which they are respectively liable
and which are due and payable, including, but not limited to, withholding taxes
and amounts payable under Chapters 21 through 24 of the Internal Revenue Code of
1986, as amended, and (ii) none of the Company or any Subsidiary has any tax
deficiency or claims outstanding, assessed or, to their knowledge, proposed
against it.
(h) No transfer tax, stamp duty or other similar tax is payable by or
on behalf of the Underwriters in connection with (i) the issuance by the Company
of the Shares, (ii) the purchase by the Underwriters of the Shares, or (iii) the
consummation by the
-6-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
Company and the Selling Stockholders of any of their respective obligations
under this Agreement.
(i) The Company and each of the Subsidiaries maintain insurance of the
types and in the amounts which the Company reasonably believes to be adequate
for their respective businesses, all of which insurance is in full force and
effect.
(j) Except as disclosed in the Prospectus, there is no action, suit,
proceeding, inquiry, investigation, litigation or governmental proceeding,
domestic or foreign, pending or, to the Company's knowledge, threatened against
(or currently existing or previously occurring facts or circumstances that
provide a basis for the same), or involving the properties or business of the
Company or any of the Subsidiaries, that (i) questions the validity of the
capital stock of the Company or this Agreement or of any action taken or to be
taken by the Company pursuant to or in connection with this Agreement, (ii) is
required to be disclosed in the Registration Statement that is not so disclosed
(and such proceedings, if any, as are summarized in the Registration Statement
are accurately summarized in all material respects), (iii) would have a Material
Adverse Effect or (iv) relates to or affects the Company or processes or
products which the Company designed, developed, licenses, uses, manufactures or
markets which, if adversely determined, would have a Material Adverse Effect.
(k) The Company has full legal right, power and authority to enter
into this Agreement and the Warrant Agreement and to consummate the transactions
provided for herein and therein; and this Agreement and the Warrant Agreement
have been duly authorized, executed and delivered by the Company. This
Agreement, assuming it has been duly authorized, executed and delivered by the
Underwriters, constitutes a legal, valid and binding agreement of the Company
enforceable against the Company in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable law), and none of the Company's
execution or delivery of this Agreement, its performance hereunder, its
consummation of the transactions contemplated herein or the conduct of its
business and that of each of the Subsidiaries as described in the Registration
Statement, the Prospectus and any amendments or supplements thereto conflicts
with or will conflict with in any material respect or results, or will result,
in any breach or violation of any of the material terms or provisions of, or
constitutes, or will constitute, a default under, or result in the creation or
imposition of any lien, charge, claim, encumbrance,
-7-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
pledge, security interest, defect or other restriction on equity of any kind
whatsoever upon, any property or assets (tangible or intangible) of the Company
or any of the Subsidiaries, pursuant to the terms of (i) the corporate charter,
operating agreement or by-laws of the Company or any of the Subsidiaries, (ii)
any license, contract, indenture, mortgage, deed of trust, voting trust
agreement, stockholders agreement, note, loan or credit agreement or any other
agreement or instrument to which the Company or any of the Subsidiaries is a
party or by which any of them is or may be bound or to which any of their
respective properties or assets (tangible or intangible) is or may be subject or
(iii) any statute, judgment, decree, order, rule or regulation applicable to the
Company or any of the Subsidiaries of any arbitrator, court, regulatory body or
administrative agency or other governmental agency or body, domestic or foreign,
having jurisdiction over the Company or any of the Subsidiaries or any of their
respective activities or properties. The Representatives' Warrants, when issued
and sold to you in accordance with the Warrant Agreement will have been
authorized and validly issued and will constitute the legal, valid, and binding
obligations of the Company, entitled to the benefits of the Warrant Agreement.
(l) No consent, approval, authorization or order of, and no filing
with, any court, regulatory body, government agency or other body, domestic or
foreign, is required for the issuance of the Shares pursuant to the Prospectus
and the Registration Statement, or the performance of this Agreement and the
transactions contemplated hereby, except such as have been or may be obtained
under the Act, the Exchange Act or the Rules and Regulations or may be required
under state securities or Blue Sky laws in connection with the Underwriters'
purchase and distribution of the Shares.
(m) All executed agreements or copies of executed agreements filed as
exhibits to the Registration Statement to which the Company or any of the
Subsidiaries is a party or by which any of them may be bound or to which any of
their respective assets, properties or businesses may be subject have been duly
and validly authorized, executed and delivered by the Company or such
Subsidiaries, and, assuming due authorization, execution and delivery by the
other parties thereto, constitute the legal, valid and binding agreements of the
Company and such Subsidiaries enforceable against the Company and such
Subsidiaries in accordance with their respective terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application relating to or
affecting enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to indemnity
or contribution may be limited by applicable
-8-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
law). The descriptions in the Registration Statement of contracts and other
documents are accurate in all material respects and fairly present the
information required to be shown with respect thereto by Form S-1, and there are
no contracts or other documents that are required by the Act to be described in
the Registration Statement or filed as exhibits to the Registration Statement
that are not described or filed as required, and the exhibits that have been
filed are complete and correct copies of the documents of which they purport to
be copies.
(n) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and Prospectus, and except as may otherwise
be indicated or contemplated herein or therein, neither the Company nor any of
the Subsidiaries has (i) issued any securities or incurred any liability or
obligation, direct or contingent, for borrowed money (except for borrowings made
pursuant to the Company's and the Subsidiaries' existing credit agreements),
(ii) entered into any transaction which could reasonably be expected to have a
Material Adverse Effect or (iii) declared or paid any dividend or made any other
distribution on or in respect of its capital stock.
(o) Except as disclosed in the Registration Statement, no material
default exists in the due performance and observance of any term, covenant or
condition of any license, contract, indenture, mortgage, installment sale
agreement, lease, deed of trust, voting trust agreement, stockholders agreement,
note, loan or credit agreement or any other agreement or instrument evidencing
an obligation for borrowed money, or any other agreement or instrument to which
the Company or any of the Subsidiaries is a party or by which the Company or any
of the Subsidiaries may be bound or to which any of the property or assets
(tangible or intangible) of the Company or any of the Subsidiaries is subject or
affected.
(p) The Company and each of the Subsidiaries have a generally
satisfactory employer-employee relationship with their respective employees and
are in compliance with all federal, state, local, and, where applicable,
foreign, laws and regulations respecting employment and employment practices,
terms and conditions of employment and wages and hours, except where the failure
to so comply would not have a Material Adverse Effect. To the Company's
knowledge, there are no pending investigations involving the Company or any of
the Subsidiaries by the United States Department of Labor or any other
governmental agency responsible for the enforcement of such federal, state,
local or foreign laws and regulations. To the Company's knowledge, there is no
unfair labor practice charge or complaint against the Company or any of the
Subsidiaries pending before the National Labor Relations
-9-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
Board or any strike, picketing, boycott, dispute, slowdown or stoppage pending
or threatened against or involving the Company or any of the Subsidiaries, and
no such strike, picketing, boycott, dispute, slowdown or stoppage has ever
occurred. No representation question exists respecting the employees of the
Company or any of the Subsidiaries, and no collective bargaining agreement or
modification thereof is currently being negotiated by the Company or any of the
Subsidiaries. There are no expired or existing collective bargaining agreements
of the Company or any of the Subsidiaries.
(q) Neither the Company nor any of the Subsidiaries has incurred any
liability arising under or as a result of the application of the provisions of
the Act.
(r) Except as disclosed in the Prospectus or Exhibit 2 hereto, neither
the Company nor any of the Subsidiaries maintains, sponsors or contributes to
any program or arrangement that is an "employee pension benefit plan," an
"employee welfare benefit plan," or a "multiemployer plan" (collectively, the
"ERISA Plans") as such terms are defined in Sections 3(2), 3(1) and 3(37),
respectively, of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). With respect to any "defined benefit plan," as defined in Section
3(35) of ERISA, that the Company or any of the Subsidiaries, now or at any time
previously, maintains or contributes to, all applicable federal laws and
regulations have been complied with, except for such instances of noncompliance
which, either singly or in the aggregate, would not have a Material Adverse
Effect. Neither the Company nor any of the Subsidiaries has ever completely or
partially withdrawn from a "multiemployer plan."
(s) The Company and its Subsidiaries are in compliance with all
applicable existing federal, state, local and foreign laws and regulations
relating to the protection of human health or the environment or imposing
liability or requiring standards of conduct concerning any Hazardous Materials
("Environmental Laws"), except for such instances of noncompliance which, either
singly or in the aggregate, would not have a Material Adverse Effect. The term
"Hazardous Material" means (i) any "hazardous substance" as defined by the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, (ii) any "hazardous waste" as defined by the Resource Conservation and
Recovery Act, as amended, (iii) any petroleum or petroleum product, (iv) any
polychlorinated biphenyl and (v) any pollutant or contaminant or hazardous,
dangerous or toxic chemical, material, waste or substance regulated under or
within the meaning of any other Environmental Law.
-10-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
(t) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(u) The Company has not distributed and will not distribute (within
the meaning of Rule 140 of the Rules and Regulations under the Act) any offering
material in connection with the offering and sale of the Shares, other than the
Prospectus, any Preliminary Prospectus, the Registration Statement and other
materials permitted by the Act.
(v) No holders of any securities of the Company or of any options,
warrants or other convertible or exchangeable securities of the Company
exercisable for or convertible or exchangeable for securities of the Company
have the right, except as may have been waived, to include any securities issued
by the Company in the Registration Statement or any registration statement to be
filed by the Company within 180 days of the date hereof or to require the
Company to file a registration statement under the Act during such 180 day
period.
(w) The Company has not taken and will not take, directly or
indirectly (except for any action that may be taken by the Underwriters), any
action designed to or which has constituted or which might reasonably be
expected to cause or result in, under the Exchange Act or otherwise,
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares or otherwise.
(x) Except to the extent disclosed in the Prospectus, (i) the Company
and each of the Subsidiaries own or possess, or have a license or other right to
use, the patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), technology, trademarks,
service marks and trade names, together with all applications for any of the
foregoing, currently used or held for use by them in connection with their
respective businesses, except where the failure to own or possess, alone or in
aggregate, would not have a Material Adverse Effect on the Company, (ii) neither
the Company nor any of the Subsidiaries has received any notice of
-11-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
infringement of or conflict with asserted rights of others with respect to any
of the foregoing which has not been finally resolved and (iii) except as set
forth in the Registration Statement, neither the Company nor any of the
Subsidiaries is obligated or under any liability whatsoever to make any material
payments by way of royalties, fees or otherwise to any owner or licensee of, or
other claimant to, any patent, patent right, license, invention, trademark,
service mark, trade name, copyright, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures), technology or other intangible asset, with respect to the use
thereof or in connection with the conduct of its business or otherwise.
(y) The Company and each of the Subsidiaries have good and marketable
title to, or valid and enforceable leasehold estates in, all items of real and
personal property stated in the Prospectus (including the financial statements
included or incorporated by reference therein) to be owned or leased by them,
free and clear of all liens, charges, claims, encumbrances, pledges, security
interests, defects or other restrictions on equity of any kind whatsoever, other
than (i) those referred to in the Prospectus (including such financial
statements), (ii) liens for taxes not yet due and payable and (iii) mechanics,
materialmen, warehouse and other statutory liens arising in the ordinary course
of business which, either individually or in the aggregate, do not have a
Material Adverse Effect.
(z) Except as described in the Prospectus under "Underwriting" and on
the cover page thereof, there are no claims, payments, issuances, arrangements
or understandings for services in the nature of a finder's or origination fee
with respect to the sale of the Shares hereunder or any other arrangements,
agreements, understandings, payments or issuance with respect to the Company or
any of the Subsidiaries or any of their respective officers, directors,
employees or affiliates that may affect the Underwriters' compensation, as
determined by the National Association of Securities Dealers, Inc. ("NASD").
(aa) Quotations and last sale data with respect to the Company's
Common Stock will be reported on the National Association of Securities Dealers
Automated Quotation National Market (the "NASDAQ-NM") under the symbol "DSIT"
and the Company knows of no currently existing reason or set of facts which is
likely to result in the inability or refusal to so quote the Common Stock or the
Shares.
(ab) The Company is not an "investment company" or an "affiliated
person" or "promoter" of, or "principal underwriter" for, an "investment
company", as such terms are defined in the
-12-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
Investment Company Act of 1940, as amended (the "1940 Act"), or subject to
regulation under the 1940 Act.
(ac) Any certificate signed by any officer of the Company and
delivered to the Underwriters or to the Underwriters' Counsel (as hereinafter
defined) shall be deemed a representation and warranty by the Company to the
Underwriters as to the matters covered thereby.
(ad) The Company has delivered to the Representatives written
agreements, in form and substance satisfactory to the Representatives, with each
of its directors and executive officers who own Common Stock, the Selling
Stockholders, and certain other holders of the Company's securities (each such
person is named in Schedule C hereto), to the effect that, among other things,
such person will not, for a period ending 180 days after the date of the
Prospectus, directly or indirectly, offer, sell, assign, transfer, encumber,
contract to sell, grant an option to purchase or otherwise sell or dispose of
shares of Common Stock or other capital stock of the Company, any options,
rights or warrants to purchase shares of Common Stock or other capital stock of
the Company or any securities convertible into or exchangeable or exercisable
for shares of Common Stock or other capital stock of the Company now owned by
such person or subsequently acquired (or as to which such person now or
hereafter has the right to direct the disposition of) otherwise than hereunder
or with the prior written consent of Tucker Anthony; provided, however, that
such agreements may contain an exception providing that such persons during such
period may, without such consent, convey shares of Common Stock (i) by gift to
immediate family members or (ii) by will or intestacy to immediate family
members provided in both cases that such transferees enter into agreements for
the benefit of the Underwriters containing all of the restrictions set forth in
this Section 1.I.(ad) with respect to such shares of Common Stock.
II. Each Selling Stockholder represents and warrants to, and agrees with,
each of the Underwriters and the Company as of the date hereof and as of the
Closing Date, as defined in Section 2(c) hereof, and the Option Closing Date, as
defined in Section 2(b) hereof, if any, that:
(a) Such Selling Stockholder as of the Closing Date and the Option
Closing Date, as applicable, will have valid marketable title to such of the
Shares as are to be sold by such Selling Stockholder, free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable interest other
than pursuant to this Agreement; such Selling Stockholder has full right, power
and authority to sell, assign, transfer and deliver the Shares to be sold by
such Selling Stockholder hereunder; and upon delivery of
-13-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
such Shares and payment of the purchase price as herein contemplated, each of
the Underwriters will obtain valid marketable title to the Shares purchased by
it from such Selling Stockholder, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest.
(b) Such Selling Stockholder has duly authorized, executed and
delivered, in the form heretofore furnished to the Representatives, a Power of
Attorney (the "Power of Attorney") appointing M.D. Davis, _____________________
and _________________ as attorneys-in-fact (collectively, the "Attorneys" and
individually, an "Attorney") and a Custody Agreement (the "Custody Agreement")
with American Stock Transfer & Trust Company named therein, as custodian (the
"Custodian"); each of the Power of Attorney and such Custody Agreement
constitutes a valid and binding agreement of the Selling Stockholder,
enforceable in accordance with its terms, except as the enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application relating to or affecting enforcement of
creditors' rights and the application of equitable principles in any action,
legal or equitable, and except as rights to indemnity or contribution may be
limited by applicable law; and each of such Attorneys approved by such Selling
Stockholder, acting alone, is authorized to execute and deliver this Agreement
and the certificate referred to in Section 6(j) hereof on behalf of such Selling
Stockholder, to determine the purchase price to be paid by the several
Underwriters to such Selling Stockholder as provided in Section 2 hereof, to
authorize the delivery of the Shares as are to be sold by such Selling
Stockholder under this Agreement and to duly endorse (in blank or otherwise) the
certificate or certificates representing such Shares or a stock power or powers
with respect thereto, to accept payment therefor and otherwise to act on behalf
of such Selling Stockholder in connection with this Agreement and to pay all
expenses in connection therewith.
(c) All authorizations, approvals, consents and orders necessary for
the execution and delivery on behalf of the Selling Stockholder of the Power of
Attorney and the Custody Agreement, the execution and delivery on behalf of such
Selling Stockholder of this Agreement, and the sale and delivery of the Shares
as are to be sold by such Selling Stockholder under this Agreement (other than,
at the time of the execution hereof (if the Registration Statement has not yet
been declared effective by the Commission), the issuance of the order of the
Commission declaring the Registration Statement effective and such
authorizations, approvals or consents as may be necessary under state or other
securities or Blue Sky laws) have been obtained and are in full force and
effect; and the Selling Stockholder has full right, power and authority to enter
into and perform its obligations under the Power of Attorney
-14-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
and the Custody Agreement and this Agreement, to sell, assign, transfer and
deliver the Shares to be sold by such Selling Stockholder under this Agreement.
(d) Such Selling Stockholder will not, for a period ending 180 days
after the effective date of the Registration Statement, offer, sell, assign,
transfer, encumber, contract to sell, grant an option to purchase, or otherwise
sell or dispose of any shares of Common Stock, any options or warrants to
purchase any shares of Common Stock, or any securities convertible into or
exchangeable for shares of Common Stock, owned directly by such Selling
Stockholder or with respect to which such Selling Stockholder has the power of
disposition, otherwise than hereunder or with the prior written consent of
Tucker Anthony. In addition, for a period beginning 181 days after the
commencement of the Offering and ending 360 days thereafter, the Firm Selling
Stockholder may only sell up to 2,000 shares of Common Stock per day (but in no
event more than 20,000 shares of Common Stock during any calendar month) in
transactions that comply with sections (f) and (g) of Rule 144 under the
Securities Act of 1933, as amended. Such Selling Stockholder agrees and consents
to the entry of stop transfer instruction with the Company's transfer agent
against the transfer of shares of Common Stock held by such Selling Stockholder
except in compliance with the foregoing restrictions.
(e) Certificates in negotiable form for all Shares to be sold by such
Selling Stockholder under this Agreement, together with a stock power or powers
duly endorsed in blank by such Selling Stockholder, have been placed in custody
with the Custodian for the purpose of effecting delivery of such Shares
hereunder.
(f) This Agreement has been duly executed and delivered by or on
behalf of such Selling Stockholder and is a valid and binding agreement of such
Selling Stockholder, enforceable in accordance with its terms, except as the
indemnification and contribution provisions hereunder may be limited by
applicable law and except as the enforcement hereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights and the
application of equitable principles in any action, legal or equitable; and the
performance of this Agreement and the consummation of the transactions herein
contemplated will not result in a breach of or default under any bond,
debenture, note or other evidence of indebtedness, or any contract, indenture,
mortgage, deed of trust, loan agreement, lease or other agreement or instrument
to which such Selling Stockholder is a party or by which such Selling
Stockholder or any Shares as are to be sold by such Selling Stockholder
hereunder may be bound or result in any violation of any law, order, rule,
regulation,
-15-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
writ, injunction or decree of any court or governmental agency or body.
(g) Such Selling Stockholder has not taken and will not take, directly
or indirectly, any action designed to, or which might reasonably be expected to,
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(h) Such Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(i) All information furnished by or on behalf of such Selling
Stockholder relating to such Selling Stockholder and the Shares as are to be
sold by such Selling Stockholder that is contained in such representations and
warranties of such Selling Stockholder, in the Selling Stockholder's Power of
Attorney or set forth in the Registration Statement and the Prospectus is, and
on the Closing Date and on the Option Closing Date, as applicable, will be,
true, correct and complete, and does not, and on the Closing Date and on the
Option Closing Date, as applicable, will not, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
(j) Such Selling Stockholder will review the Prospectus and will
comply with all agreements and satisfy all conditions on its part to be complied
with or satisfied pursuant to this Agreement on or prior to the Closing Date or
the Option Closing Date, as applicable, and will advise one of its Attorneys
prior to the Closing Date or Option Closing Date, as applicable, if any
statement to be made on behalf of the Selling Stockholder in the certificate
contemplated by Section 6.I.(j) would be inaccurate if made of the Closing Date
or the Option Closing Date, as applicable.
(k) The Selling Stockholder does not have any preemptive right, co-
sale right or right of first refusal or other similar right to purchase any of
the Shares that are to be sold by the Company to the Underwriters pursuant to
this Agreement.
2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) On the basis of the representations, warranties, covenants and agreements
herein contained, and subject to the terms and conditions herein set forth, the
Company agrees to sell 2,500,000 Firm Shares and the Representatives' Warrants
to the several Underwriters, the Firm Selling Stockholder agrees to sell to the
several Underwriters the number of Firm Shares set forth on
-16-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
Schedule B opposite the name of Firm Selling Stockholder, and each Underwriter,
severally and not jointly, agrees to purchase that number of Firm Shares set
forth in Schedule A opposite its name plus any additional number of Firm Shares
that such Underwriter may become obligated to purchase pursuant to the
provisions of Section 11 hereof.
As of the Closing Date, certificates in negotiable form for the total
number of Shares (or securities exercisable for such Shares in negotiable form
together with the exercise price thereon in cash) to be sold hereunder by the
Selling Stockholders will have been placed in custody with the Custodian
pursuant to the Custody Agreements executed by the Selling Stockholders for
delivery of all Shares to be sold hereunder by the Selling Stockholders. The
Selling Stockholders specifically agree that the Shares represented by the
certificates held and to be held in custody for the Selling Stockholders under
the Custody Agreements are subject to the interests of the Underwriters
hereunder, and that the obligations of the Selling Stockholders hereunder shall
not be terminable by any act or deed of such Selling Stockholders (or by any
other person, firm or corporation including the Company, the Custodian or the
Underwriters) or by operation of law (including without limitation, the
bankruptcy, insolvency, dissolution, liquidation or termination of the Selling
Stockholders) or by the occurrence of any other event or events, except as set
forth in the Custody Agreements. If any such event should occur prior to the
delivery to the Underwriters of the Shares hereunder, certificates for the
Shares shall be delivered by the Custodian in accordance with the terms and
conditions of this Agreement as if such event has not occurred, regardless of
whether or not the Custodian shall have received notice of such event.
(b) In addition, on the basis of the representations, warranties, covenants
and agreements herein contained and upon not less than two business days' notice
from the Representatives of the Underwriters, for a period of forty-five days
from the effective date of this Agreement, the Company and the Selling
Stockholders grant to the Underwriters an option to purchase up to 450,000
Option Shares (such Option Shares, if less than the aggregate amount, to be
apportioned first between the Selling Stockholders on a pro rate basis based on
the maximum amount of Option Shares which the Selling Stockholders are obligated
to sell to the Underwriters pursuant to this Section 2(b) and then from the
Company, adjusted by the Representatives in such manner as they deem advisable
to avoid fractional shares). Such option is granted solely for the purpose of
covering over-allotments in the sale of Firm Shares and is exercisable as
provided in Section 4 hereof. Option Shares shall be purchased severally for the
account of the Underwriters in proportion to the number of Firm Shares set forth
opposite the name
-17-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
of such Underwriters in Schedule A hereto. (The time and date of delivery of any
of the Option Shares is herein called the "Option Closing Date.") The respective
purchase obligations of each Underwriter with respect to the Option Shares may
be adjusted by the Representatives so that no Underwriter shall be obligated to
purchase Option Shares other than in 100 share increments. The price of both the
Firm Shares and any Option Shares shall be $____ per share.
(c) Payment of the purchase price for, and delivery of certificates for,
the Firm Shares and the Option Shares shall be made on each of the Closing Date
and the Option Closing Date, respectively, by wire transfer of immediately
available funds, payable to the order of the Company and the Custodian, as
applicable, at the offices of Tucker Anthony at One Beacon Street, Boston,
Massachusetts, or at such other place as shall be agreed upon by the
Representatives, the Company and the Selling Stockholders or, if mutually agreed
to by the Company and the Representatives, by wire transfer, upon delivery of
certificates (in form and substance satisfactory to the Representatives)
representing such securities to the Representatives. Delivery and payment for
the Firm Shares shall be made at 10:00 a.m. (Eastern Time) on the third business
day following the public offering, or at such other time and date as shall be
agreed upon by the Representatives and the Company. The time and date of payment
for and delivery of the Firm Shares is herein called the "Closing Date." In the
event that any or all of the Option Shares are purchased by the Underwriters,
the date and time at which certificates for Option Shares are to be delivered
shall be determined by the Representatives and the Company but shall not be
earlier than three nor later than ten full business days after the exercise of
such option, nor in any event prior to the Closing Date. Certificates for the
Firm Shares and the Option Shares, if any, shall be in definitive, fully
registered form, shall bear no restrictive legends and shall be in such
denominations and registered in such names as the Representatives may request in
writing at least two (2) business days prior to the Closing Date or the Option
Closing Date, as applicable. The certificates for the Firm Shares and the Option
Shares, if any, shall be made available to the Representatives at such office or
such other place as the Representatives may designate for inspection and
packaging not later than 9:30 a.m. (Eastern Time) on the last business day prior
to the Closing Date or the Option Closing Date, as applicable.
(d) As of the Closing Date, the Company will issue and sell to you or, at
your direction, to your bona fide officers, for a total purchase price of
$2,500, warrants entitling the holders to purchase 250,000 shares of Common
Stock (equal to 10% of the Firm Shares being sold by the Company) at $_____ per
Share (120% of the
-18-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
public offering price on the Effective Date) (the "Representatives' Warrants")
for a period of four years commencing one year after the effective date of the
Registration Statement. The Representatives' Warrants include the terms set
forth in the Warrant Agreement. You may designate that the Representatives'
Warrants be issued to your bona fide officers only if you determine that such
issuances would not violate the interpretations of the NASD relating to the
review of corporate financing arrangements. No sale, transfer, assignment, or
hypothecation of the Underwriter's Warrants shall be made for a period of five
(5) years from the effective date of the Registration Statement except to bona
fide officers of the Underwriter and officers or partners of selected dealers.
The holders of the Representatives' Warrants will be entitled to the
registration rights set forth in the Warrant Agreement.
3. PUBLIC OFFERING OF THE SHARES.
As soon after the Registration Statement becomes effective as the
Representatives deem advisable, the Underwriters shall make a public offering of
the Shares at the price and upon the other terms set forth in the Prospectus.
4. COVENANTS OF THE COMPANY AND THE SELLING STOCKHOLDER.
I. The Company agrees with each of the Underwriters as follows:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; it will notify the Representatives, promptly
after it shall receive notice thereof, of the time when the Registration
Statement or any subsequent amendment to the Registration Statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a), the Company will
provide evidence satisfactory to the Representatives that the Prospectus
contains such information and has been filed, within the time period prescribed,
with the Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the
Rules and Regulations under the Act or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission; if for any reason the filing of the final form of
Prospectus is required under Rule 424(b)(3) of the Rules and Regulations under
the Act, it will provide evidence satisfactory to the Representatives that the
Prospectus contains such information and has been filed with the Commission
within the time period
-19-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
prescribed; it will notify the Representatives promptly of any request by the
Commission for the amending or supplementing of the Registration Statement or
the Prospectus or for additional information; promptly upon the Representatives'
request, it will prepare and file with the Commission any amendments or
supplements to the Registration Statement or Prospectus which, in the opinion of
counsel for the several Underwriters ("Underwriters' Counsel"), may be necessary
or advisable so as to comply with all applicable laws and regulations
(including, without limitation, Section 11 under the Act and Rule 10b-5 under
the Exchange Act) in connection with the distribution of the Shares by the
Underwriters; it will promptly prepare and file with the Commission, and
promptly notify the Representatives of the filing of, any amendments or
supplements to the Registration Statement or Prospectus which may be necessary
to correct any statements or omissions, if, at any time when a prospectus
relating to the Shares is required to be delivered under the Act, any event
shall have occurred as a result of which the Prospectus or any other prospectus
relating to the Shares as then in effect would include an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; in case any Underwriter is required so as to comply with all
applicable laws and regulations (including, without limitation, Section 11 under
the Act and Rule 10b-5 under the Exchange Act) to deliver a prospectus nine
months or more after the effective date of the Registration Statement in
connection with the sale of the Shares, it will prepare promptly upon request,
but at the expense of such Underwriter, such amendment or amendments to the
Registration Statement and such prospectus or prospectuses as may be necessary
to permit compliance with the requirements of Section 10(a)(3) of the Act; and
it will file no amendment or supplement to the Registration Statement or
Prospectus (other than any document required to be filed under the Exchange Act
that upon filing is deemed incorporated therein by reference) which shall not
previously have been submitted to the Representatives a reasonable time prior to
the proposed filing thereof or to which you shall reasonably object in writing
or which is not in compliance with the Act and the Rules and Regulations under
the Act. The Company will furnish to the Representatives at or prior to the
filing thereof a copy of any document that upon filing is deemed to be
incorporated by reference in the Registration Statement or Prospectus.
(b) The Company will advise the Representatives, promptly after it
shall receive notice or obtain knowledge thereof, of the issuance of any stop
order by the Commission suspending the effectiveness of the Registration
Statement or of the initiation or threat of any proceeding for that purpose; and
it will promptly use its best efforts to prevent the issuance of any stop order
or to
-20-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
obtain its withdrawal at the earliest possible moment if such stop order should
be issued.
(c) The Company will use its best efforts to qualify the Shares for
offering and sale under the securities laws of such jurisdictions as the
Representatives may designate and to continue such qualifications in effect for
so long as may be required for purposes of the distribution of the Shares,
except that the Company shall not be required in connection therewith or as a
condition thereof to qualify as a foreign corporation or to execute a general
consent to service of process in any jurisdiction. In each jurisdiction in which
the Shares shall have been qualified as above provided, the Company will make
and file such statements and reports in each year as are or may be reasonably
required by the laws of such jurisdiction.
(d) The Company will furnish to each of the Underwriters, as soon as
available, copies of the Registration Statement (three of which, to be delivered
to the Representatives, will be manually signed and which will include all
exhibits), each Preliminary Prospectus, the Prospectus and any amendment or
supplements to such documents, including any prospectus prepared to permit
compliance with Section 10(a)(3) of the Act, all in such quantities as you may
from time to time reasonably request.
(e) The Company will make generally available to its stockholders as
soon as practicable, but in any event not later than the 45th day following the
end of the fiscal quarter first occurring after the first anniversary of the
effective date of the Registration Statement, an earnings statement (which will
be in reasonable detail but need not be audited) complying with the provisions
of Section 11(a) of the Act and covering a twelve-month period beginning after
the effective date of the Registration Statement.
(f) The Company will file Form SR in conformity with the requirements
of the Act and the Rules and Regulations.
(g) During a period of five years after the date hereof, the Company
will furnish to its stockholders, to the extent required by applicable laws or
the Rules and Regulations, as soon as practicable after the end of each
respective period, annual reports (including financial statements audited by
independent certified public accountants) and unaudited quarterly reports of
operations for each of the first three quarters of the fiscal year, and will
furnish to you and each of the Underwriters, upon written request (i)
concurrently with furnishing to its stockholders, statements of operations of
the Company for each of the first three quarters in the form furnished to the
Company's stockholders;
-21-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
(ii) concurrently with furnishing to its stockholders, a balance sheet of the
Company as of the end of such fiscal year, together with statements of
operations, cash flows and stockholders' equity of the Company for such fiscal
year, accompanied by a copy of the certificate or report thereon of independent
certified public accountants; (iii) as soon as they are available, copies of all
reports (financial or other) mailed to stockholders; (iv) as soon as they are
available, copies of all reports and financial statements furnished to or filed
with the Commission, any securities exchange or the NASD; (v) every material
press release and every material news item or article in respect of the Company
or its affairs which was released or prepared by the Company or any of the
Subsidiaries; and (vi) any additional information of a public nature concerning
the Company or any of the Subsidiaries, or their respective businesses, which
you may reasonably request. During such five year period the foregoing financial
statements shall be on a consolidated basis to the extent that the accounts of
the Company and the Subsidiaries are consolidated, and shall be accompanied by
similar financial statements for any Subsidiary which is not so consolidated.
(h) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(i) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock.
(j) The Company will cause the transfer agent for the Common Stock to
register the transfer of the Shares upon their presentation in proper form for
transfer by the Selling Stockholder and to have certificates representing the
Shares available to you as required hereunder; provided, that the Company shall
not be required to take any action unless the Registration Statement is then
effective under the Act.
(k) If the transactions contemplated hereby are not consummated by
reason of any failure, refusal or inability on the part of the Company or the
Selling Stockholders to perform any agreement on its part to be performed
hereunder or to fulfill any condition of the Underwriters' obligations
hereunder, or if the Company shall terminate this Agreement under Section 10(a)
, the Company will reimburse the several Underwriters for all reasonable out-of-
pocket expenses up to $50,000 plus reasonable fees and disbursements of
Underwriters' Counsel up to $125,000) incurred by the Underwriters in
investigating, preparing to market and marketing the Shares.
-22-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
(l) If at any time during the 90-day period after the Registration
Statement becomes effective, any publication or event relating to or affecting
the Company shall occur as a result of which in your opinion the market price of
the Common Stock has been or is likely to be materially affected (regardless of
whether such publication or event necessitates a supplement to or amendment of
the Prospectus), the Company will, after written notice from the Representatives
advising the Company to the effect set forth above, forthwith prepare, consult
with the Representatives concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to the
Representatives, responding to or commenting on such publication or event.
(m) For a period ending 180 days from the date of the Prospectus, the
Company will not, without your prior written consent, issue, sell, offer or
agree to sell, or otherwise dispose of, directly or indirectly, any Common
Stock, any options, rights or warrants with respect to any shares of Common
Stock or any securities convertible into, exercisable for or exchangeable for
Common Stock other than the sale of the Shares and the Option Shares to be sold
by the Company hereunder, and the Company's issuance of shares of Common Stock
pursuant to the exercise of currently outstanding stock options and warrants or
grants of options under the Company's 1997 Stock Option Plan.
II. The Selling Stockholders agree with each of the Underwriters and the
Company that in order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal Responsibility
Act of 1982 and the Interest and Dividend Tax Compliance Act of 1983 with
respect to the transactions herein contemplated, the Selling Stockholders shall
deliver to you prior to or on the Closing Date or the Option Closing Date, as
applicable, a properly completed and executed United States Treasury Department
Form W-9 or Form W-8 (or other applicable form or statement specified by
Treasury Department regulations in lieu thereof).
5. PAYMENT OF EXPENSES.
(a) The Company and the Selling Stockholders hereby agree to pay on each of
the Closing Date and the Option Closing Date (to the extent not paid on the
Closing Date) all expenses and fees (other than fees of Underwriters' Counsel,
except as provided in (iii), (v) and (vii) below) incident to the performance of
the obligations of the Company and the Selling Stockholders under this Agreement
(provided that as between the Company and the Selling Stockholders their
relative obligations to pay shall be in such a manner as the Company and the
Selling Stockholders have agreed or shall agree), including, without limitation,
(i) the fees and expenses of
-23-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
accountants and counsel for the Company and the Selling Stockholder, (ii) all
costs and expenses incurred in connection with the preparation, duplication,
printing, filing (including the filing fees of the Commission), mailing
(including postage with respect thereto) and delivery of the Registration
Statement, the Preliminary Prospectuses and the Prospectus and any amendments
and supplements thereto, including the cost of all copies thereof supplied to
the Underwriters in quantities as hereinabove stated, (iii) all costs and
expenses incurred in connection with the printing, mailing and delivery of this
Agreement, the Selected Dealer Agreements, the Agreement Among Underwriters,
Underwriters' Questionnaires, Underwriters' Powers of Attorney, the Selling
Stockholders' Powers of Attorney and Custody Agreements and related documents,
including the cost of all copies thereof supplied to the Underwriters in
quantities as hereinabove stated, (iv) the printing, engraving, issuance and
delivery of the Shares, including any transfer or other taxes payable thereon,
(v) the qualification of the Shares under state or foreign securities or Blue
Sky laws, including the costs of printing and mailing a Blue Sky Memorandum and
any supplements or amendments thereto and disbursements and fees of
Underwriters' Counsel, in connection therewith, (vi) fees and expenses of the
Company's transfer agent, (vii) fees and expenses incurred in connection with
the review by the NASD of certain of the matters set forth in this Agreement,
and (viii) the fees and expenses incurred in connection with the listing of the
Shares on the NASDAQ-NM and any other exchange.
(b) If this Agreement is terminated by the Representatives in accordance
with the provisions of Section 6, Section 10(b) or Section 12, unless the basis
upon which the Representatives terminate this Agreement results from the default
or omission of any Underwriter, the Company shall reimburse and indemnify the
Underwriters for all of their reasonable out-of-pocket expenses (provided that
as between the Company and the Selling Stockholders their relative obligations
to pay shall be in such a manner as the Company and the Selling Stockholders
have agreed or shall agree), including the fees and disbursements of
Underwriters' Counsel, and the Blue Sky fees and expenses identified in Section
5(a)(v) above.
6. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS.
I. The obligations of the Underwriters hereunder shall be subject to the
continuing accuracy of the representations and warranties of the Company and the
Selling Stockholders herein as of the date hereof and as of the Closing Date and
the Option Closing Date, if any, as if they had been made on and as of the
Closing Date or the Option Closing Date, as the case may be; the accuracy on and
as of the Closing Date or Option Closing Date, if any, of the statements of
officers of the Company made pursuant to the
-24-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
provisions hereof; and the performance by the Company and the Selling
Stockholders on and as of the Closing Date and the Option Closing Date, if any,
of its respective covenants and obligations hereunder and to the following
further conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 p.m., Eastern Time, on the date of this Agreement or such later date
and time as shall be consented to in writing by the Representatives, and, at the
Closing Date and the Option Closing Date, if any, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the satisfaction of
Underwriters' Counsel. If the Company has elected to rely upon Rule 430A of the
Rules and Regulations under the Act, the price of the Shares and any other
information previously omitted from the effective Registration Statement
pursuant to such Rule 430A shall have been transmitted to the Commission for
filing pursuant to Rule 424(b) of the Rules and Regulations under the Act within
the prescribed time period, and, prior to the Closing Date, the Company shall
have provided evidence satisfactory to the Representatives of such timely
filing, or a post-effective amendment providing such information shall have been
promptly filed and declared effective in accordance with the requirements of
Rule 430A of the Rules and Regulations under the Act.
(b) The Representatives shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact that, in the Representatives' opinion or in the opinion of Underwriters'
Counsel, is material, or omits to state a fact that, in the Representatives'
opinion or in the opinion of Underwriters' Counsel, is material and is required
to be stated therein or is necessary to make the statements therein not
misleading, or that the Prospectus, or any supplement thereto, contains an
untrue statement of fact that, in the Representatives' opinion or in the opinion
of Underwriters' Counsel, is material, or omits to state a fact that, in the
Representatives' opinion or in the opinion of Underwriters' Counsel, is material
and is required to be stated therein or is necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(c) On the Closing Date and the Option Closing Date, if any, the
Representatives shall have received from Representatives' Counsel the favorable
opinion to the effect that:
-25-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
(i) the capital stock of the Company, including, without limitation,
the Common Stock, conforms in all material respects to the description
thereof contained in the Prospectus;
(ii) the Registration Statement is effective under the Act, and if
applicable, the filing of all pricing and other information has been timely
made in the appropriate form under Rule 430A of the Rules and Regulations,
and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued, and no
proceedings for that purpose have been instituted or threatened by the
Commission. Such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company, counsel
for the Company, representatives of the independent certified public
accountants for the Company and the Representatives, at which conferences
the contents of the Registration Statement and the Prospectus and related
matters were discussed, and, although such counsel is not passing upon and
does not assume any responsibility for, nor has such counsel independently
verified, the accuracy, completeness or fairness of the statements
contained in the Registration Statement and Prospectus (except as to
matters referred to in subparagraph (i) above of this Section 6(c)), no
facts have come to the attention of such counsel (relying as to materiality
to a large extent upon the opinions of officers and other representatives
of the Company) that lead them to believe that either the Registration
Statement or any amendment thereto, at the time such Registration Statement
or amendment became effective or any Preliminary Prospectus (other than
information omitted pursuant to Rule 430A) or the Prospectus or any
amendment or supplement thereto as of the date of such opinion contained or
contains any untrue statement of a material fact or omitted or omits to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading (it being understood that such
counsel need express no view with respect to the financial statements and
schedules and other financial and statistical data included in any
Preliminary Prospectus, the Registration Statement (including any exhibit
thereto) or the Prospectus or any amendment or supplement thereto);
(iii) each of the Preliminary Prospectuses, the Registration Statement
and the Prospectus and any amendments or supplements thereto (other than
the financial statements and schedules and other financial and statistical
data included therein, as to which no opinion need be rendered)
-26-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
comply as to form in all material respects with the requirements of the Act
and the Rules and Regulations; and
(iv) this Agreement has been duly authorized, executed and delivered
by the Company.
The opinion of Underwriters' Counsel to be dated the Option Closing Date,
if any, may confirm as of the Option Closing Date the statements made by such
counsel in their opinion delivered on the Closing Date.
(d) On the Closing Date and the Option Closing Date, if any, the
Underwriters shall have received the favorable opinion of Thompson & Knight,
P.C., counsel to the Company, dated the Closing Date and the Option Closing
Date, if any, addressed to the Underwriters and in form and substance reasonably
satisfactory to Underwriters' Counsel, to the effect that:
(i) (A) the Company and each of the Subsidiaries are duly organized
and validly existing as corporations in good standing under the laws of the
jurisdiction of their organization, and (B) the Company is duly qualified
as a foreign corporation and in good standing in New York; all of the
outstanding shares of capital stock of each of the Subsidiaries have been
duly authorized and validly issued and are fully-paid and non-assessable,
and are owned of record by the Company; the outstanding shares of capital
stock of the Subsidiaries are owned by the Company free and clear of all
liens, encumbrances and security interests (except as described in the
Prospectus), and, to such counsel's knowledge, no options, warrants or
other rights to purchase, agreements or other obligations to issue or other
rights to convert any obligations into, or exchange any securities for, any
shares of capital stock of or ownership interests in any of the
Subsidiaries are outstanding;
(ii) the Company and each of the Subsidiaries have the corporate power
to own, lease and operate their respective properties and to conduct their
respective businesses as described in the Prospectus;
(iii) the authorized and outstanding capital stock of the Company is
as set forth in the Prospectus under the heading "Capitalization," subject
to the assumptions set forth therein, and, except as provided for in this
Agreement and as described in the Prospectus, to such counsel's knowledge,
the Company is not a party to or bound by any instrument, agreement or
other arrangement providing for it to issue any capital stock, rights,
warrants, options or other securities.
-27-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
All shares of Common Stock of the Company issued and outstanding on the
date hereof prior to the issuance of the Shares have been duly authorized
and validly issued and are fully paid and non-assessable; and to such
counsel's knowledge, none of such shares were issued in violation of any
preemptive rights under the Texas Business Corporation Act, or similar
statutory rights; and the capital stock of the Company, including, without
limitation, the Common Stock, conforms in all material respects to the
description thereof contained in the Prospectus. To such counsel's
knowledge, the Firm Shares and the Option Shares are not and will not be
subject to any preemptive rights under the Texas Business Corporation Act
or similar statutory rights. The Firm Shares and the Option Shares being
sold by the Company have been duly authorized and (with respect to the
Shares being sold by the Company), when issued, paid for and delivered in
accordance with the terms hereof, will be validly issued, fully paid and
non-assessable; and the certificates representing the Shares are in due and
proper form. To such counsel's knowledge, no holders of any securities of
the Company or of any options, warrants or other convertible or
exchangeable securities of the Company exercisable for or convertible or
exchangeable for securities of the Company have the right, except as have
been waived, to include any securities issued by the Company in the
Registration Statement or any registration statement to be filed by the
Company within 180 days of the date hereof or to require the Company to
file a registration statement under the Act during such 180 day period;
(iv) the Registration Statement is effective under the Act, and, if
applicable, the filing of all pricing and other information has been timely
made in the appropriate form under Rule 430A of the Rules and Regulations
under the Act, and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been issued,
and no proceedings for that purpose have been instituted or, to such
counsel's knowledge, threatened by the Commission;
(v) the Registration Statement and the Prospectus and any amendment or
supplement thereto (other than the financial statements and schedules,
related notes and other financial and statistical data included therein, as
to which no opinion need be rendered) comply as to form in all material
respects with the requirements of the Act and the Rules and Regulations
under the Act;
-28-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
(vi) (A) to such counsel's knowledge, there is not pending or
threatened against the Company or any of the Subsidiaries, or involving any
of their respective properties or businesses, any action, suit, proceeding,
inquiry, investigation, litigation or governmental proceeding, domestic or
foreign, that (y) is required to be disclosed in the Registration Statement
and is not so disclosed (and such proceedings as are summarized in the
Registration Statement are accurately summarized in all material respects),
or (z) questions the validity of the capital stock of the Company, this
Agreement, the Warrant Agreement, or any action taken or to be taken by the
Company pursuant to or in connection with this Agreement and (B) no statute
or regulation or legal or, to such counsel's knowledge, governmental
proceeding required to be described in the Prospectus is not described as
required;
(vii) the Company has the corporate power and authority to enter into
this Agreement and the Warrant Agreement and to consummate the transactions
provided for herein and therein; and this Agreement and the Warrant
Agreement have been duly authorized, executed and delivered by the Company.
None of the Company's execution or delivery of this Agreement and the
Warrant Agreement, its performance hereunder or its consummation of the
transactions contemplated herein or therein or results or will result in
any breach or violation of any of the material terms or provisions of, or
constitutes or will constitute a default under, or result in the creation
or imposition of any lien, charge, claim, pledge, security interest, or
other encumbrance upon, any property or assets (tangible or intangible) of
the Company or any of the Subsidiaries pursuant to the terms of (A) the
corporate charter, operating agreement or by-laws or other governing
instrument of the Company or any of the Subsidiaries, (B) to such counsel's
knowledge, any voting trust agreement or any stockholders agreement, or any
indenture, mortgage, deed of trust, note, loan or credit agreement or
other agreement or instrument known to such counsel to which the Company or
any of the Subsidiaries is a party or by which any of them is or may be
bound or to which any of their respective properties or assets (tangible or
intangible) is or may be subject, or (C) any statute, rule or regulation
or, to such counsel's knowledge, any judgment, decree or order applicable
to the Company or any of the Subsidiaries of any arbitrator, court,
regulatory body or administrative agency or other governmental agency or
body having jurisdiction over the Company or any of the Subsidiaries or
any of their respective activities or properties, the violation of which
would have a Material Adverse Effect;
-29-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
(viii) no consent, approval, authorization or order, and no filing
with, any federal or state court, regulatory body, government agency or
other body (other than such as have been effected under the Act and the
Exchange Act and such as may be required under Blue Sky or state securities
laws or the rules of the NASD in connection with the purchase and
distribution of the Shares by the Underwriters, as to which no opinion need
be rendered) is required in connection with the issuance of the Shares
pursuant to the Prospectus and the Registration Statement, the performance
of this Agreement and the transactions contemplated hereby;
(ix) to such counsel's knowledge neither the Company nor any of the
Subsidiaries is in violation of any term or provision of its corporate
charter, operating agreement, or by-laws or other governing instrument;
(x) the statements in the Prospectus under the captions "THE
RECAPITALIZATION," "DIVIDEND POLICY," "-GOVERNMENT AND INDUSTRY
REGULATION," "-TARIFFS AND DUTIES," "MANAGEMENT-EMPLOYMENT AGREEMENTS," "-
1997 STOCK OPTION PLAN," "-BONUS PLAN," "401(K) PLAN," "-INDEMNIFICATION
ARRANGEMENTS," "CERTAIN TRANSACTIONS," "SHARES ELIGIBLE FOR FUTURE SALE,"
and "DESCRIPTION OF CAPITAL STOCK" have been reviewed by such counsel, and
insofar as they refer to statements of law, descriptions of statutes,
written contracts, or rules or regulations are correct in all material
respects;
(xi) the Company is not an "investment company" or an "affiliated
person" or "promoter" of, or "principal underwriter" for, an "investment
company," as defined in the 1940 Act or subject to regulation under such
Act; and
(xii) The Representatives' Warrants will conform to their description
in the Registration Statement and Prospectus and have been authorized, and,
when issued and sold in accordance with the Warrant Agreement, will
constitute the legal, valid, and binding obligations of the Company
entitled to the rights and benefits of the Warrant Agreement, subject as to
enforceability of the application of bankruptcy law or general principles
of equity. The Underwriter's Warrant Shares have been validly authorized
and reserved for issuance upon exercise of the Representatives' Warrants
and, when issued in accordance with the Warrant Agreement, will be validly
issued, fully paid and nonassessable and free of preemptive rights under
the Texas Business Corporation Act.
Such counsel shall state that such counsel has participated in conferences
with officers and other representatives of the Company
-30-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
and representatives of the independent certified public accountants for the
Company, at which conferences the contents of the Registration Statement and the
Prospectus and related matters were discussed, and, although such counsel is not
passing upon and does not assume any responsibility for, nor has such counsel
independently verified, the accuracy, completeness or fairness of the statements
contained in the Registration Statement and Prospectus no facts have come to the
attention of such counsel that lead them to believe that either the Registration
Statement or any amendment thereto, at the time such Registration Statement or
amendment became effective or any Preliminary Prospectus circulated by the
Underwriters (other than information omitted pursuant to Rule 430A) or the
Prospectus or any amendment or supplement thereto as of the date of such opinion
contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; (it being understood that such
counsel need express no view with respect to the financial statements and
schedules, related notes, and other financial and statistical data included or
incorporated by reference in any Preliminary Prospectus circulated by the
Underwriters, the Registration Statement (including any exhibit thereto) or the
Prospectus or any amendment or supplement thereto). In addition, such counsel
shall state that they know of no contracts, leases or other documents of a
character required to be described in the Registration Statement or Prospectus
or to be filed or incorporated by reference as exhibits to the Registration
Statement which are not described or filed or incorporated by reference as
required.
The foregoing opinions may be limited to the laws of the State of Texas,
the laws of Hong Kong and applicable United States federal law. In rendering
the foregoing opinions, counsel may rely, to the extent they deem such reliance
proper, on the opinions of other counsel as to matters governed by the laws of
jurisdictions other than the United States and the State of Texas. In rendering
such opinions, such counsel may rely as to matters of fact, to the extent they
deem proper, on certificates and written statements of responsible officers of
the Company and the Subsidiaries and certificates or other written statements of
officers of departments of various jurisdictions having custody of documents
respecting the corporate existence or good standing of the Company and the
Subsidiaries, provided that copies of any such statements or certificates shall
be delivered to Underwriters' Counsel if requested.
For purposes of any of the opinions to be rendered by such counsel pursuant
to this subsection d of Section 6, the term "to such counsel's knowledge" shall
mean, to the extent that such opinion relates to a factual issue or to a mixed
question of law
-31-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
and fact, that after examination of documents in such counsel's files and
considering the actual knowledge of the individual attorneys in such counsel's
firm who have given substantive attention to matters on behalf of the Company,
such counsel finds no reason to believe that any of such opinions is factually
incorrect.
The opinion of counsel to the Company, to be dated the Option Closing Date,
if any, may confirm as of the Option Closing Date the statements made by such
counsel in their opinion delivered on the Closing Date.
(e) The Underwriters shall have received, on the Closing Date the favorable
opinion of counsel to the Firm Selling Stockholder, dated the Closing Date, and
on the Option Closing Date, if any, the favorable opinion of counsel to each of
the Selling Stockholders addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) the Power of Attorney and the Custody Agreement of such Selling
Stockholder have been duly authorized, executed and delivered on behalf of
such Selling Stockholder and are valid instruments legally sufficient for
the purposes intended;
(ii) such Selling Stockholder has full right, power and authority to
enter into and to perform its obligations under this Agreement and to sell,
transfer, assign and deliver the Shares to be sold by such Selling
Stockholder hereunder;
(iii) this Agreement has been duly authorized, executed and delivered
on behalf of the Selling Stockholder;
(iv) upon the delivery of and payment for the Shares as contemplated
in this Agreement, and upon registration of the Shares in the names of the
Underwriters, the Underwriters will have acquired good and valid title to
the Shares being sold by such Selling Stockholder free of any pledge, lien,
security interest, encumbrance, claim or equitable interest, including any
lien in favor of the Company or any restriction on transfer imposed by the
Company; and the owner of the Shares being sold by such Selling Stockholder
hereunder, if other than the Selling Stockholder, is precluded from
asserting against such Underwriters the ineffectiveness of any unauthorized
endorsement.
(f) On the Closing Date and the Option Closing Date, if any, the
Underwriters shall have received the favorable opinion of patent counsel to the
Company, dated the Closing Date and the
-32-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
Option Closing Date, if any, addressed to the Underwriters and in form and
substance satisfactory to Underwriters' Counsel, to the effect that:
(i) such counsel is not aware that any of the Company's patents is
invalid or that any patent issued in respect of any of the Company's patent
applications would be invalid;
(ii) such counsel is not aware that any valid patent is infringed by
the activities of the Company described in the Prospectus;
(iii) such counsel is not aware of any material defects or form in
the preparation or filing of patent applications on behalf of the Company.
Such patent applications have been diligently pursued by the Company;
(iv) such counsel is not aware of any pending or threatened action,
suit, proceeding or claim by others that the Company is infringing or
otherwise violating any patents, trademarks, trade secrets, know-how or
other proprietary rights;
(v) except as specifically disclosed in the Prospectus, such counsel
is not aware of any pending or threatened action, suit, proceeding, or
claim by others challenging the validity or scope of the patent
applications or the patents held by or licensed to the Company;
(vi) according to such counsel's records, the Company is listed or is
in the process of being listed in the records of the appropriate foreign
office as the sole holder of record of the foreign patents and foreign
patent applications set forth in a schedule of such opinion. Such counsel
knows of no claims of third parties to any ownership interest or lien with
respect to any of such patents or patent applications.
Such counsel shall also state that since at least ____ it has represented
the Company in the prosecution of all of its patents and that such counsel has
participated in conferences with employees of the Company at which the Company's
patents, patent applications and the contents of the Intellectual Property
portion of the Registration Statement were discussed, and, although such counsel
is not passing upon and does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement (except as to matters referred to in subparagraph (vi) of this Section
6(f)), on the basis of such conferences and such representation of the Company,
nothing has come to the attention of such counsel which leads them
-33-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
to believe that the Intellectual Property portion of the Registration Statement
or any amendment thereto, at the time such Registration Statement or amendment
became effective, and such portion of the Prospectus or any amendment or
supplement thereto, on the date such Prospectus or amendment or supplement
thereto was filed pursuant to Rule 424(b), and such portion of the Registration
Statement and the Prospectus, or any amendment or supplement thereto, as of the
date of such opinion contained or contains any untrue statement of a material
fact or omitted or omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading.
For purposes of any of the opinions to be rendered by such counsel pursuant
to this subsection (f) of Section 6, the term "to the best of such counsel's
knowledge" shall mean, to the extent that such opinion relates to a factual
issue or to a mixed question of law and fact, that after examination of
documents in such counsel's files and considering the actual knowledge of the
individual attorneys in such counsel's firm who have given substantive attention
to matters on behalf of the Company, such counsel finds no reason to believe
that any of such opinions is factually incorrect.
The favorable opinion of patent counsel to the Company, to be dated the
Option Closing Date, if any, may confirm as of the Option Closing Date the
statements made in their opinion delivered on the Closing Date.
(g) On or prior to each of the Closing Date and the Option Closing Date, if
any, Underwriters' Counsel shall have been furnished such customary documents,
certificates and opinions as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in subsection (c)
of this Section 6, or in order to evidence the accuracy, completeness or
satisfaction of any of the representations, warranties or conditions of the
Company, the Selling Stockholders or herein contained.
(h) Prior to each of the Closing Date and the Option Closing Date, if any,
(i) from the respective dates as of which information is set forth in the
Registration Statement and Prospectus, there shall have been no developments
that, individually or in the aggregate, have had a Material Adverse Effect; (ii)
there shall have been no transaction, not in the ordinary course of business,
entered into by the Company or any of the Subsidiaries, from the latest date as
of which the financial condition of the Company and the Subsidiaries is set
forth in the Registration Statement and Prospectus, that, individually or in the
aggregate, has had a Material Adverse Effect; (iii) neither the Company nor any
of the
-34-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
Subsidiaries shall be in default under any provision of any instrument relating
to any of their respective outstanding indebtedness; (iv) no material amount of
the assets of the Company or any of the Subsidiaries shall have been pledged or
mortgaged, except as set forth in the Registration Statement and Prospectus
(including the exhibits to the Registration Statement); (v) no action, suit or
proceeding, at law or in equity, shall have been pending or, to the knowledge of
the Company, threatened against the Company or any of the Subsidiaries, or
affecting any of their respective properties or businesses before or by any
court or federal, state or foreign commission, board or other administrative
agency wherein an unfavorable decision, ruling or finding would have a Material
Adverse Effect; and (vi) no stop order shall have been issued under the Act and
no proceedings therefor shall have been initiated, or, to the Company's
knowledge, threatened or contemplated by the Commission.
(i) At each of the Closing Date and the Option Closing Date, if any, the
Underwriters shall have received a certificate of the Company signed by the
principal executive officer and by the chief financial officer of the Company,
dated the Closing Date or Option Closing Date, as the case may be, to the effect
that each of such persons has carefully examined the Registration Statement, the
Prospectus and this Agreement and that:
(i) the representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or
the Option Closing Date, as the case may be, and the Company has complied
with all agreements and covenants and satisfied all conditions contained in
this Agreement on its part to be performed or satisfied at or prior to such
Closing Date or Option Closing Date, as the case may be;
(ii) no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for that purpose have been
instituted or are pending or, to the knowledge of such officer, are
threatened under the Act;
(iii) none of the Registration Statement, the Prospectus nor any
amendment or supplement thereto includes any untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading and neither the
Preliminary Prospectus nor any supplement thereto included any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading; and
-35-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
(iv) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, neither the Company
nor any of the Subsidiaries have incurred up to and including the Closing
Date or the Option Closing Date, as the case may be, other than in the
ordinary course of their respective businesses, any material liabilities or
obligations, direct or contingent; the Company has not paid or declared any
dividends or other distributions on its capital stock; neither the Company
nor any of the Subsidiaries has entered into any transactions not in the
ordinary course of business; and there has not been any material change in
the capital stock or long-term debt or any material increase in the short-
term borrowings of the Company or any of the Subsidiaries; neither the
Company nor any of the Subsidiaries has sustained any material loss or
damage to its property or assets, whether or not insured; there is no
litigation that is pending or, to the knowledge of such officers,
threatened against the Company or any of the Subsidiaries that is required
to be set forth in an amended or supplemented Prospectus that has not been
set forth; and there has occurred no event required to be set forth in an
amended or supplemented Prospectus that has not been set forth.
References to the Registration Statement and the Prospectus in this
subsection (i) are to such documents as amended and supplemented at the date of
such certificate.
(j) At the Closing Date, the Underwriters shall have received a certificate
of the Firm Selling Stockholder dated the Closing Date or, of each Selling
Stockholder, dated the Option Closing Date, as applicable, to the effect that
the representations and warranties of such Selling Stockholder in this Agreement
are true and correct, as if made on and as of the Closing Date or the Option
Closing Date, as applicable, and such Selling Stockholder has complied with all
agreements and covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior to the Closing
Date or the Option Closing Date, as applicable.
(k) On the date of this Agreement, the Representatives shall have received
a letter in form and substance satisfactory to the Underwriters and the
Underwriters' Counsel addressed to the Underwriters and dated the date of this
Agreement from Price Waterhouse and signed by such firm with respect to such
matters as shall have been specified to such firm by the Representatives prior
to the date hereof. At the Closing Date and the Option Closing Date, if any,
the Underwriters shall have received from Price Waterhouse a letter, dated as of
the Closing Date or the Option Closing Date, as the case may be, reaffirming the
statements made
-36-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
in the letter furnished by Price Waterhouse to the Underwriters concurrently
with the execution of this Agreement, each such reaffirming letter to be in form
and substance satisfactory to the Underwriters and the Underwriters' Counsel.
(l) On each of the Closing Date and the Option Closing Date, if any, there
shall have been duly tendered to the Representatives for the several
Underwriters' accounts the appropriate number of Shares.
(m) No order suspending the sale of the Shares in any jurisdiction
designated by the Representatives pursuant to subsection I(c) of Section 4
hereof shall have been issued on either the Closing Date or the Option Closing
Date, if any, and no proceedings for that purpose shall have been instituted or
to the knowledge of the Representatives or the Company shall be contemplated.
(n) The Underwriters shall have received the written agreements of the
persons referred to in Section 1.I(ad) hereof.
(o) The Shares delivered on the Closing Date or the Option Closing Date
shall have been duly listed, subject to notice of official issuance, on the
NASDAQ-NM.
(p) The Company shall have executed the Warrant Agreement and shall have
delivered properly executed Underwriter's Warrants to you simultaneously with
the closing of the sale of the Firm Shares.
If any condition to the Underwriters' obligations thereunder to be
fulfilled prior to or at the Closing Date or the relevant Option Closing Date,
as the case may be, is not so fulfilled, the Representatives may terminate this
Agreement or, if the Representatives so elect, they may waive any such
conditions that have not been fulfilled or extend the time for their
fulfillment.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, specifically
including but not limited to losses, claims, damages or liabilities related to
negligence on the part of any Underwriter, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any breach of any representation, warranty, agreement or covenant of the
Company herein contained or any untrue statement or alleged untrue statement of
any material fact contained in the Registration Statement, any Preliminary
-37-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading;
and agrees to reimburse each Underwriter for any legal or other expenses
reasonably incurred by it in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the Company
shall not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the Prospectus, or any
such amendment or supplement, in reliance upon and in strict conformity with
written information furnished with respect to any Underwriter by such
Underwriter expressly for use in the Registration Statement, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, provided
that such written information or omissions only pertain to disclosures in the
Registration Statement, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto directly relating to the transactions effected
by the Underwriters in connection with this offering, and provided further that
the foregoing indemnity with respect to any Preliminary Prospectus shall not
inure to the benefit of any Underwriter (or to the benefit of any person
controlling such Underwriter) if such untrue statement or omission or alleged
untrue statement or omission made in any Preliminary Prospectus is eliminated or
remedied in the Prospectus and a copy of the Prospectus has not been furnished
to the person asserting any such loss, claim, damage or liability at or prior to
the written confirmation of the sale of such Shares to such person.
The indemnity agreement in this Section 7(a) shall extend upon the same
terms and conditions to, and shall inure to the benefit of each person, if any,
who controls any Underwriter within the meaning of the Act. This indemnity
agreement shall be in addition to any liabilities which the Company or the
Selling Stockholder may otherwise have.
-38-
<PAGE>
(b) Each Selling Stockholder agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any breach of any representation, warranty, agreement or
covenant of such Selling Stockholder contained in Section 1.II, or any untrue
statement or alleged untrue statement of any material fact concerning such
Selling Stockholder contained under the captions "The Recapitalization,"
"Certain Transactions" or "Business-Legal Proceedings" in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto or arise out of or are based upon the omission or alleged
omission to state therein a material fact concerning such Selling Stockholder
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading if made
regarding such Selling Stockholder or in reliance upon information supplied to
the Company by such Selling Stockholder; and agrees to reimburse each
Underwriter for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Selling Stockholder shall not
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any such untrue statement or any such
alleged untrue statement or any such omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the Prospectus, or any
such amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by any Underwriter, directly or through
you, specifically for use in the preparation thereof.
The indemnity agreement in this Section 7(b) shall extend upon the same
terms and conditions to, and shall inure to the benefit of each person, if any,
who controls any Underwriter within the meaning of the Act. This indemnity
agreement shall be in addition to any liabilities which the Company or the
Selling Stockholder may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to indemnify and
hold harmless the Company and the Selling Stockholder to the same extent as the
foregoing indemnity from the Company to the Underwriters but only with respect
to statements or omissions, if any, made in the Registration Statement, any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto
made in reliance upon, and in strict conformity with, written information
furnished with respect to any Underwriter by such Underwriter expressly for use
in the Registration Statement, any Preliminary Prospectus or the Prospectus or
any amendment or
-39-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
supplement thereto, provided that such written information or omissions only
pertain to disclosures in the Registration Statement, any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto directly relating to
the transactions effected by the Underwriters in connection with this offering.
The indemnity agreement in this Section 7(c) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each officer and
director of the Company who has signed the Registration Statement, the Selling
Stockholder and each person, if any, who controls the Company or the Selling
Stockholder within the meaning of the Act. This indemnity agreement shall be in
addition to any liabilities which each Underwriter may otherwise have. For
purposes of this Agreement, the Company and the Selling Stockholder acknowledge
that the statements with respect to the public offering of the Shares set forth
under the heading "UNDERWRITING" and the stabilization legend in the Prospectus
and the last paragraph on the outside front cover page of the Prospectus have
been furnished by the Underwriters expressly for use therein and constitute the
only information furnished in writing by or on behalf of the Underwriters for
inclusion in the Prospectus.
(d) Promptly after receipt by an indemnified party under this Section 7 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 7, notify the indemnifying party in writing of the commencement thereof
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party under this Section 7
(except to the extent that the omissions of such notice causes actual prejudice
to the indemnifying party), or otherwise than under this Section 7. In case any
such action is brought against any indemnified party, and it notified the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein, and to the extent that it may elect by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified parties and the
indemnifying party and counsel for the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnified party or parties shall have the right to
select separate counsel reasonably satisfactory to the indemnifying party or
parties to assume such legal defenses and to otherwise participate in the
defense of such action on behalf of
-40-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
such indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of its election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 7 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel approved by the indemnifying
party, representing all the indemnified parties under Section 7(a), 7(b) or 7(c)
hereof who are parties to such action), (ii) the indemnifying party shall not
have employed counsel satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of the
action, or (iii) the indemnifying party has authorized the employment of counsel
for the indemnified party at the expense of the indemnifying party. In no event
shall any indemnifying party be liable in respect of any amounts paid in
settlement of any action unless the indemnifying party shall have approved the
terms of such settlement; provided however that such consent shall not be
unreasonably withheld.
(e) In order to provide for just and equitable contribution in any action
in which a claim for indemnification is made pursuant to this Section 7 but it
is judicially determined (by the entry of a final judgment or decree by a court
of competent jurisdiction and the expiration of time to appeal or the denial of
the last right of appeal) that such indemnification may not be enforced in such
case notwithstanding the fact that this Section 7 provides for indemnification
in such case, all the parties hereto shall contribute to the aggregate loses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportion so that, except as set forth in Section 7(f)
hereof, the Underwriters are responsible pro rata for the portion represented by
the percentage that the underwriting discount bears to the initial public
offering price, and the Company and the Selling Stockholder are responsible for
the remaining portion, provided, however, that (i) no Underwriter shall be
required to contribute any amount in excess of the underwriting discount
applicable to the Shares purchased by such Underwriter, and (ii) no person
guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to a contribution from any person who is not guilty
of such fraudulent misrepresentation. This subsection (e) shall not be
operative as to any Underwriter to the extent that the Company or the Selling
Stockholder has received indemnity payments from such Underwriter
-41-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
under this Section 7 which are not required to be returned pursuant to the order
of any court of competent jurisdiction.
(f) The liability of each Selling Stockholder under the representations and
warranties contained in Section 1 hereof and under the indemnity agreements
contained in the provisions of this Section 7 shall be limited in the aggregate
to an amount equal to the initial public offering price of the Shares sold by
such Selling Stockholder to the Underwriters minus the amount of the
underwriting discount paid thereon to the Underwriters by the Selling
Stockholder. The Company and the Selling Stockholders may agree, as between
themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
(g) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including without limitation the
provisions of this Section 7, and are fully informed regarding such provisions.
They further acknowledge that the provisions of this Section 7 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act. The parties are advised that federal or state public policy, as
interpreted by the courts in certain jurisdictions, may be contrary to certain
of the provisions of this Section 7, and the parties hereto hereby expressly
waive and relinquish any right or ability to assert such public policy as a
defense to a claim under this Section 7 and further agree not to attempt to
assert any such defense.
8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY.
All representations, warranties and agreements contained in this Agreement
or contained in certificates of officers of the Company submitted pursuant
thereto shall be deemed to be representations, warranties and agreements at the
Closing Date and the Option Closing Date, as the case may be, and such
representations, warranties and agreements, and the indemnity and contribution
agreements contained in Section 7 hereof, shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
Underwriter, the Company, the Selling Stockholders or any controlling person,
and shall survive termination of this Agreement or the issuance or sale and
delivery of the Shares to the Underwriters.
-42-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
9. EFFECTIVE DATE.
This Agreement shall become effective at 9:30 a.m., Eastern Time, on the
date hereof, or at such earlier time after the Registration Statement becomes
effective as the Representatives, in their sole discretion, shall release the
Shares for the sale to the public, provided, however that the provisions of
Sections 5, 7 and 9 of this Agreement shall at all times be effective. For
purposes of this Section 9, the Shares to be purchased hereunder shall be deemed
to have been so released upon the earlier of dispatch by the Representatives of
telegrams to securities dealers releasing such Shares for offering or the
release by the Representatives for publication of the first newspaper
advertisement that is subsequently published relating to the Shares.
10. TERMINATION.
(a) Subject to subsection (d) of this Section 10, the Company may at any
time before this Agreement becomes effective in accordance with Section 9,
terminate this Agreement.
(b) Subject to subsection (d) of this Section 10, the Representatives shall
have the right to terminate this Agreement, (i) if any calamitous domestic or
international event or act or occurrence has materially disrupted, or in the
Representatives' opinion will in the immediate future materially disrupt,
general securities markets in the United States; or (ii) if trading on the New
York Stock Exchange, the NASDAQ-NM or in the over-the-counter market shall have
been suspended, or minimum or maximum prices for trading shall have been fixed,
or maximum ranges for prices for securities shall have been required on the
over-the-counter market by the NASD or by order of the Commission or any other
government authority having jurisdiction; or (iii) if the United States shall
have become involved in a war or major hostilities; or (iv) if a banking
moratorium has been declared by the State of Texas, the State of New York, the
Commonwealth of Massachusetts or any federal authority; or (v) if a moratorium
in foreign exchange trading has been declared; or (vi) if the Company shall have
sustained a loss material or substantial to the Company by fire, flood,
accident, hurricane, earthquake, theft, sabotage or other calamity or malicious
act that, whether or not such loss shall have been insured, will, in the
Representatives' reasonable opinion, make it inadvisable to proceed with the
delivery of the Shares; or (vii) if there shall have been a Material Adverse
Effect.
(c) If any party hereto elects to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 10, such
party shall notify, on the same day as such election is made, the other parties
hereto in accordance with the provisions of Section 13 hereof.
-43-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
(d) Notwithstanding any contrary provision contained in this Agreement, any
election hereunder or any termination of this Agreement (including, without
limitation, pursuant to Sections 11 and 12 hereof), and whether or not this
Agreement is otherwise carried out, the provisions of Sections 5, 7 and 9 shall
not be in any way affected by such election or termination or failure to carry
out the terms of this Agreement or any part hereof.
11. SUBSTITUTION OF THE UNDERWRITERS.
If one or more of the Underwriters shall fail (otherwise than for a reason
sufficient to justify the termination of this Agreement under the provisions of
Section 6, Section 10 or Section 12 hereof) to purchase the Shares that it or
they are obligated to purchase on such date under this Agreement (the "Defaulted
Securities"), the Representatives shall use their best efforts within 24 hours
thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms herein set forth; if, however, the Representatives shall not have
completed such arrangements within such 24 hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the total
number of Firm Shares to be purchased on such date, the non-defaulting
Underwriters shall be obligated to purchase the full amount thereof in the
proportions that their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the total number
of Firm Shares and arrangements satisfactory to the Representatives for the
purchase of the Defaulted Securities are not made within 36 hours, this
Agreement shall terminate without liability on the part of any non-defaulting
Underwriters. The Company or the Selling Stockholder may assist the
Representatives in making such arrangements by procuring another party
satisfactory to the Representatives to purchase the Defaulted Securities on the
terms set forth herein.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of any default by such Underwriter under
this Agreement.
In the event of any such default that does not result in a termination of
this Agreement, the Representatives shall have the right to postpone the Closing
Date for a period not exceeding seven days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
arrangements.
-44-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
12. DEFAULT BY THE COMPANY OR THE SELLING STOCKHOLDERS.
If the Company or either of the Selling Stockholders, as applicable, shall
fail at the Closing Date or the Option Closing Date, as applicable, to sell and
deliver the number of Shares that it is obligated to sell hereunder on such
date, then this Agreement shall terminate (or, if such default shall occur with
respect to any Option Shares to be purchased on the Option Closing Date, the
Underwriters may at the Representatives' option, by notice from the
Representatives to the Company, terminate the Underwriters' several obligations
to purchase Shares from the Company on such date) without any liability on the
part of any non-defaulting party other than pursuant to Section 5 and Section 7
hereof. No action taken pursuant to this Section shall relieve the Company or
the Selling Stockholder from liability, if any, in respect of such default.
13. NOTICES.
All notices and communications hereunder may be mailed or transmitted by
any standard form of telecommunication and, except as herein otherwise
specifically provided, shall be in writing and shall be deemed to have been duly
given when delivered to a notice party hereto at the address specified herein or
at the address subsequently communicated in writing to the notice parties.
Notices to the Underwriters shall be directed to the Representatives c/o Tucker
Anthony Incorporated, One Beacon Street, Boston, Massachusetts 02108, Attention:
________________________, with a copy to Glenn D. Smith, Esq., c/o Stroock &
Stroock & Lavan LLP, 2029 Century Park East, Suite 1800, Los Angeles, California
90067-3086. Notices to the Company shall be directed to DSI Toys, Inc., 1100
West Sam Houston Parkway (North), Suite A, Houston, Texas 77243, Attention:
Chairman, with a copy to Michael L. Bengtson, Esq., c/o Thompson & Knight, P.C.,
1700 Pacific Avenue, Suite 3300, Dallas, Texas, 75201. Notices to the Firm
Selling Stockholder shall be directed to The Tommy Moss Living Trust, 1001
Fannin, Suite 3700, Houston, Texas 77002, Attention: Myron M. Sheinfeld,
Trustee, with a copy to Adam P. Schiffer, c/o Vinson & Elkins, L.L.P., 1001
Fannin Street, Suite 2300, Houston, Texas 77002. Notices to the Option Selling
Stockholders shall be directed to Hibernia Corporation, 313 Carondelet Street,
New Orleans, Louisiana 70130, Attention: _____________________, with a copy to
_________________________. In each case a notice party may change its address
for notice hereunder by a written communication to the other notice parties.
14. PARTIES.
This Agreement shall inure solely to the benefit of and shall be binding
upon, the Underwriters, the Selling Stockholders, the
-45-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
Company and the controlling persons, directors and officers referred to in
Section 7 hereof, and their respective successors, legal representatives and
assigns, and no other person shall have or be construed to have any legal or
equitable right, remedy or claim under or in respect of or by virtue of this
Agreement or any provisions herein contained. No purchaser of Shares from any
Underwriter shall be deemed to be a successor by reason merely of such purchase.
15. CONSTRUCTION.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS WITHOUT GIVING
EFFECT TO THE CHOICE OF LAW OR CONFLICT OF LAWS PRINCIPLES.
16. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original, and all of which taken together shall be
deemed to be one and the same instrument.
17. ENTIRE AGREEMENT.
This Agreement and the Schedules hereto contain the entire agreement
between the parties hereto in connection with the subject matter hereof and
supersede all prior agreements, written or oral, with respect to such subject
matter.
18. AMENDMENT.
This Agreement and the Schedules hereto may not be amended, modified or
altered without the written agreement of the Company, the Selling Stockholder
and the Representatives. If the foregoing correctly sets forth the
understanding between the Underwriters and the Company, please so indicate in
the space provided below for that purpose, whereupon this letter shall
constitute a binding agreement among us.
-46-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
Very truly yours,
DSI TOYS, INC.
By:
----------------------------------
NAME:
TITLE: CHAIRMAN
SELLING STOCKHOLDERS LISTED ON
SCHEDULE B HERETO
THE TOMMY MOSS LIVING TRUST
By:
----------------------------------
NAME:
HIBERNIA CORPORATION
By:
----------------------------------
NAME:
TITLE:
CONFIRMED AND ACCEPTED AS OF
THE DATE FIRST ABOVE WRITTEN
TUCKER ANTHONY INCORPORATED
SUTRO & CO. INCORPORATED
By: TUCKER ANTHONY INCORPORATED
By:
-------------------------------------
Title:
For themselves and on behalf of and as the
Representatives of the other Underwriters
named in Schedule A hereto.
-47-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
SCHEDULE A
NUMBER OF
NAME FIRM SHARES
- ---- -----------
Tucker Anthony Incorporated..............................
Sutro & Co. Incorporated.................................
----------
3,000,000
-48-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
SCHEDULE B
NUMBER OF NUMBER OF
NAME FIRM SHARES OPTION SHARES
- ---- ----------- -------------
FIRM SELLING STOCKHOLDER
- ------------------------
The Tommy Moss Living Trust 500,000 281,000
OPTION SELLING STOCKHOLDER
- --------------------------
Hibernia Corporation 150,000
-49-
<PAGE>
Tucker, Anthony Incorporated
Sutro & Co. Incorporated
SCHEDULE C
NAME
- ----
M.D. Davis
Richard R. Neitz
Yau Wing Kong
Dale Y. Chen
Thomas V. Yarnell
Barry B. Conrad
Jack R. Crosby
Joseph N. Matlock
Douglas A. Smith
The Tommy Moss Living Trust
Hibernia Corporation
Conrad/Collins Merchant Banking Group Ltd.
Rust Capital, Ltd.
-50-
<PAGE>
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
NUMBER SHARES
DSI [LOGO OF DSI TOYS APPEARS HERE]
SEE REVERSE FOR CERTAIN
DEFINITIONS AND RESTRICTIONS
CUSIP 232968 10 7
DSI TOYS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK,
PAR VALUE $.01, OF
DSI TOYS, INC.
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this Certificate property endorsed. This Certificate
and the shares evidenced hereby are issued under and shall be subject to the
provisions of the laws of the State of Texas and to the provisions of the
Articles of Incorporation and the Bylaws of the Corporation and any amendments
thereto, to all of which the holder by acceptance hereof, assents. This
Certificate is not valid until countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
[DSI SEAL APPEARS HERE]
/s/ M. D. Davis /s/ Thomas V. Yarnell
CHIEF EXECUTIVE OFFICER SECRETARY
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
DSI TOYS, INC.
Reference is made to the Articles of Incorporation of the Corporation, and all
amendments thereto, now or hereafter on file with the Secretary of State of the
State of Texas, for a statement of the designations, preferences, limitations,
and relative rights of the shares of each class of stock authorized to be issued
by the Corporation, the authority of the Board of Directors to fix and determine
the relative rights and preferences of series of stock, if any, the denial of
preemptive rights of shareholders, and other restrictions on the transfer or
other disposition of shares of stock of the Corporation; and reference is also
made to the resolution or resolutions of the Board of Directors of the
Corporation, now or hereafter on file with the Secretary of State for a
statement of the variations in the relative rights and preferences of the shares
of each series of each preferred or special class of stock which the Corporation
is authorized to issue so far as the same has or shall have been fixed and
determined. The Corporation will provide a copy of the Articles of Incorporation
of the Corporation and the above referenced resolutions of the Board of
Directors of the Corporation, if any, to the record holder of this certificate,
without charge, on written request to the Corporation at its principal place of
business or registered office.
PRE-EMPTIVE RIGHTS. Pre-emptive rights of the shareholders to acquire unissued
or treasury shares of the Corporation are denied in the Articles of
Incorporation, a copy of which is on file in the office of the Secretary of
State of the State of Texas and will be furnished to any shareholder without
charge upon written request to the Corporation at its principal place of
business or registered office.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
------- ----------
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under uniform Gifts to Minors
survivorship and not as tenants Act
in common --------------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, _____________________________________________________
hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
-------------------------------------
| |
| |
----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Shares of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated
---------------------------
X -----------------------------------------
NOTICE: (SIGNATURE)
THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND
WITH THE NAMES AS WRITTEN
UPON THE FACE OF THE
CERTIFICATE IN EVERY
PARTICULAR WITHOUT X -----------------------------------------
ALTERATION OR ENLARGEMENT (SIGNATURE)
OR ANY CHANGE WHATEVER.
------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE PROGRAM), PURSUANT TO S.E.C.
RULE 17Ad-15.
-------------------------------------------------
SIGNATURE(S) GUARANTEED BY:
-------------------------------------------------
<PAGE>
EXHIBIT 4.2
WARRANT AGREEMENT
By and Among
DSI TOYS, INC.
and
TUCKER ANTHONY INCORPORATED
SUTRO & CO. INCORPORATED
Dated as of May __, 1997
<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT dated as of May __, 1997 by and among DSI TOYS,
INC., a Texas corporation (the "Company"), and TUCKER ANTHONY INCORPORATED and
SUTRO & CO. INCORPORATED (the "Underwriters").
The Company proposes to issue to the Underwriters warrants as
hereinafter described (the "Warrants") to purchase up to an aggregate of 250,000
shares of the Company's Common Stock, $0.01 par value per share (the "Common
Stock"), subject to adjustment as provided in Section 8 hereof (such 250,000
shares, as adjusted, being hereinafter referred to as the "Shares"), each
Warrant entitling the holder ("Holder") thereof to purchase one hundred shares
of Common Stock. All capitalized terms used herein and not otherwise defined
herein shall have the same meanings as in that certain underwriting agreement,
of even date herewith, by and between the Company and the Underwriters (the
"Underwriting Agreement").
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth and for other good and valuable consideration, the
parties hereto agree as follows:
1. Issuance of Warrants; Form of Warrant. On the Closing Date the
-------------------------------------
Company will issue, sell and deliver the Warrants to the Underwriters or their
bona fide officers for an aggregate price of $2,500. The Warrants shall be
issued to the Underwriters or such designees in the amounts set forth on
Schedule I attached hereto. The form of the Warrant and of the form of election
to purchase Shares to be attached thereto shall be substantially as set forth on
Exhibit A attached hereto. The Warrants shall be executed on behalf of the
Company by the manual or facsimile signature of the present or any future
Chairman, President or any Vice President of the Company and attested by the
manual or facsimile signature of the present or any future Secretary or
Assistant Secretary of the Company.
2. Registration. The Warrants shall be numbered and shall be
------------
registered in a Warrant register (the "Warrant Register"). The Company shall be
entitled to treat the registered holder of any Warrant on the Warrant Register
as the owner in fact thereof for all purposes and shall not be bound to
recognize any equitable or other claim to or interest in such Warrant on the
part of any other person, and shall not be liable for any registration or
transfer of Warrants which are registered or are to be registered in the name of
a fiduciary or the nominee of a fiduciary unless made with the Company's actual
knowledge that a fiduciary or nominee is committing a breach of trust in
requesting such registration or transfer, or with such knowledge
<PAGE>
of such facts that its participation therein amounts to bad faith. The Warrants
shall be registered initially in the name of the Underwriters in such
denominations as the Underwriters may request in writing to the Company;
provided, however, that the Underwriters may designate in writing that all or a
- -------- -------
portion of the Warrants be issued in varying amounts directly to their bona fide
officers and not to the Underwriters. Such designation will only be made by the
Underwriters if they determine that such issuances would not violate the
interpretation of the Board of Governors of the National Association of
Securities Dealers, Inc. (the "NASD"), relating to the review of corporate
financing arrangements.
3. Transfer of Warrants. The Warrants will not be sold, transferred,
--------------------
assigned or hypothecated, in part or in whole, prior to the first anniversary of
the effective date of the Registration Statement, and thereafter only to bona
fide officers, directors, shareholders, employees or registered representatives
of the Underwriters upon written request to the Company delivered in accordance
with Section 12 and upon delivery of the Warrant Certificate duly endorsed by
the Holder or by his duly authorized attorney or representative, or accompanied
by proper evidence of succession, assignment or authority to transfer. In all
cases of transfer by an attorney, the original power of attorney, duly approved,
or an official copy thereof, duly certified, shall be deposited with the
Company. In case of transfer by executors, administrators, guardians or other
legal representatives, duly authenticated evidence of their authority shall be
produced, and may be required to be deposited with the Company in its
discretion. Upon any registration of transfer, the Company shall deliver a new
Warrant or Warrants to the persons entitled thereto. The Warrants may be
exchanged at the option of the Holder thereof for other Warrants of different
denominations, of like tenor and representing in the aggregate the right to
purchase a like number of shares of Common Stock upon surrender to the Company
or its duly authorized agent. The Company may require payment of a sum
sufficient to cover all taxes and other governmental charges that may be imposed
in connection with any voluntary transfer, exchange or other disposition of the
Warrants. Notwithstanding the foregoing, the Company shall have no obligation
to cause Warrants to be transferred on its books to any person, if such transfer
would violate the Securities Act of 1933, as amended (the "Act") or applicable
state securities laws.
4. Term of Warrants; Exercise of Warrants.
--------------------------------------
(a) Term of Warrants. Each Warrant entitles the registered
----------------
owner thereof to purchase one hundred Shares at a purchase price of $____
per Share (as adjusted from time to time pursuant to the provisions hereof,
the "Exercise Price") at any time from the first anniversary of the
2
<PAGE>
effective date of the Registration Statement until 5:00 p.m., New York City
time, on ________ __, 2002 (the "Warrant Expiration Date").
(b) Exercise of Warrants. The Exercise Price and the number of
--------------------
Shares issuable upon exercise of Warrants are subject to adjustment upon
the occurrence of certain events, pursuant to the provisions of Section 8
of this Agreement. Subject to the provisions of this Agreement, and in
addition to the right to surrender warrants without any cash payment as set
forth in subsection (c) below, each Holder shall have the right, which may
be exercised as set forth in such Warrants, to purchase from the Company
(and the Company shall issue and sell to such Holder) the number of fully
paid and nonassessable Shares specified in such Warrants, upon surrender to
the Company, or its duly authorized agent, of such Warrants, with the form
of election to purchase attached thereto duly completed and signed, with
signatures guaranteed by a member firm of a national securities exchange, a
commercial bank (not a savings bank or savings and loan association) or
trust company located in the United States or a member of the NASD and upon
payment to the Company of the Exercise Price, as adjusted in accordance
with the provisions of Section 8 of this Agreement, for the number of
Shares in respect of which such Warrants are then exercised. No adjustment
shall be made for any dividends on any Shares issuable upon exercise of a
Warrant. Upon each surrender of Warrants and payment of the Exercise
Price, the Company shall issue and cause to be delivered with all
reasonable dispatch, but in no event later than three trading days
following such surrender and payment, to or upon the written order of the
Holder of such Warrants and in such name or names as such Holder may
designate, a certificate or certificates for the number of full Shares so
purchased upon the exercise of such Warrants, together with cash, as
provided in Section 9 of this Agreement, in respect of any fractional
Shares otherwise issuable upon such surrender. Such certificate or
certificates shall be deemed to have been issued and any person so
designated to be named therein shall be deemed to have become a holder of
record of such Shares as of the date of the surrender of Warrants and
payment of the Exercise Price as aforesaid; provided, however, that if, at
the date of surrender of such Warrants, the transfer books for the Common
Stock or other class of securities issuable upon the exercise of such
Warrants shall be closed, the certificates for the Shares shall be issuable
as of the date on which such books shall next be opened (whether before, on
or after the Warrant Expiration Date) and until such date the Company shall
be under no duty to deliver any certificate for such Shares; provided,
further, however, that the transfer books of record, unless otherwise
required by law, shall not be closed at any one time for a
3
<PAGE>
period longer than twenty (20) days. The rights of purchase represented by
the Warrants shall be exercisable, at the election of the Holder(s)
thereof, either in full or from time to time in part in increments of 100
Shares and, in the event that any Warrant is exercised in respect of less
than all of the Shares issuable upon such exercise at any time prior to the
Warrant Expiration Date, a new Warrant or Warrants will be issued for the
remaining number of Shares specified in the Warrant so surrendered.
(c) Payment of Exercise Price. Payment of the Exercise Price
-------------------------
may be made in cash or by certified check or official bank check payable to
the order of the Company. In addition and in lieu of any cash payment, the
Holder of the Warrants shall have the right at any time and from time to
time to exercise the Warrants in full or in part by surrendering the
Warrant in exchange for the number of Shares equal to the product of (x)
the number of shares as to which the Warrants are being exercised
multiplied by (y) a fraction, the numerator of which is the Market Price
(as defined below) of the Shares less the Exercise Price and the
denominator of which is such Market Price. Solely for the purposes of this
paragraph, "Market Price" shall be the average last reported sale price of
the Common Stock as calculated over the five (5) trading day period
preceding the date on which the Election to Purchase is sent to the
Company.
5. Payment of Taxes. The Company will pay all documentary stamp
----------------
taxes, if any, attributable to the issuance of Shares upon the exercise of
Warrants; provided, however, that the Company shall not be required to pay any
tax or taxes which may be payable in respect of any transfer involved in the
issue or delivery of any certificates for Shares in a name other than that of
the Holder of Warrants in respect of which such Shares are issued.
6. Mutilated or Missing Warrants. In case any of the Warrants shall
-----------------------------
be mutilated, lost, stolen or destroyed, the Company shall issue and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant, or
in lieu of and substitution for the Warrant lost, stolen or destroyed, a new
Warrant of like tenor and representing an equivalent right or interest, but only
upon receipt of evidence reasonably satisfactory to the Company of such
mutilation, loss, theft or destruction of such Warrant and indemnity, if
requested, reasonably satisfactory to the Company. An applicant for such
substitute Warrants shall also comply with such other reasonable regulations and
pay such other reasonable charges and expenses as the Company may prescribe.
4
<PAGE>
7. Reservation of Shares, etc. There have been reserved, and the
--------------------------
Company shall at all times keep reserved, out of the authorized and unissued
Common Stock, a number of shares of Common Stock sufficient to provide for the
exercise of the rights of purchase represented by the outstanding Warrants.
American Stock Transfer & Trust Company, transfer agent for the Common Stock
(the "Transfer Agent"), and every subsequent transfer agent, if any, for the
Company's securities issuable upon the exercise of the Warrants will be
irrevocably authorized and directed at all times until the Warrant Expiration
Date to reserve such number of authorized and unissued shares as shall be
required for such purpose. The Company will keep a copy of this Agreement on
file with the Transfer Agent and with every subsequent transfer agent for any
shares of the Company's securities issuable upon the exercise of the Warrants.
Upon request, the Company will supply the Transfer Agent or any subsequent
transfer agent with duly executed certificates for such purpose and will itself
provide or otherwise make available any cash which may be distributable as
provided in Section 9 of this Agreement. All Warrants surrendered in the
exercise of the rights thereby evidenced shall be canceled, and such canceled
Warrants shall constitute sufficient evidence of the number of Shares that have
been issued upon the exercise of such Warrants. No shares of Common Stock shall
be subject to reservation in respect of unexercised Warrants subsequent to the
Warrant Expiration Date.
8. Adjustments of Exercise Price and Number of Shares. The Exercise
--------------------------------------------------
Price and the number and kind of securities issuable upon exercise of each
Warrant shall be subject to adjustment from time to time upon the happening of
certain events, as follows:
(a) In case the Company shall (i) declare a dividend on its
Common Stock in shares of Common Stock or make a distribution in shares of
Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii)
combine its outstanding shares of Common Stock into a smaller number of
shares of Common Stock or (iv) issue by reclassification of its shares of
Common Stock other securities of the Company (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing corporation), the number of Shares purchasable
upon exercise of each Warrant immediately prior thereto shall be adjusted
so that the Holder of each Warrant shall be entitled to receive the kind
and number of Shares or other securities of the Company which he would have
owned or have been entitled to receive after the happening of any of the
events described above, had such Warrant been exercised immediately prior
to the happening of such event or any record date with respect thereto. An
adjustment made pursuant to this paragraph (a) shall become effective
immediately after the effective date
5
<PAGE>
of such event retroactive to immediately after the record date, if any, for
such event.
(b) In case the Company shall issue rights, options or warrants
to all holders of its shares of Common Stock, without any charge to such
holders, entitling them (for a period expiring within 45 days after the
record date mentioned below in this paragraph (b)) to subscribe for or to
purchase shares of Common Stock at a price per share that is lower at the
record date mentioned below than the then current market price per share of
Common Stock (as defined in paragraph (d) below), the number of Shares
thereafter purchasable upon exercise of each Warrant shall be determined by
multiplying the number of Shares theretofore purchasable upon exercise of
each Warrant by a fraction, of which the numerator shall be the number of
shares of Common Stock outstanding on such record date plus the number of
additional shares of Common Stock offered for subscription or purchase, and
of which the denominator shall be the number of shares of Common Stock
outstanding on such record date plus the number of shares which the
aggregate offering price of the total number of shares of Common Stock so
offered would purchase at the then current market price per share of Common
Stock. Such adjustment shall be made whenever such rights, options or
warrants are issued, and shall become effective retroactively to
immediately after the record date for the determination of shareholders
entitled to receive such rights, options or warrants.
(c) In case the Company shall distribute to all holders of its
shares of Common Stock shares of stock other than Common Stock or evidences
of its indebtedness or assets (excluding cash dividends payable out of
consolidated earnings or retained earnings and dividends or distributions
referred to in paragraph (a) above) or rights, options or warrants or
convertible or exchangeable securities containing the right to subscribe
for or purchase shares of Common Stock (excluding those referred to in
paragraph (b) above), then in each case the number of Shares thereafter
issuable upon the exercise of each Warrant shall be determined by
multiplying the number of Shares theretofore issuable upon the exercise of
each Warrant, by a fraction, of which the numerator shall be the current
market price per share of Common Stock (as defined in paragraph (d) below)
on the record date mentioned below in this paragraph (c), and of which the
denominator shall be the current market price per share of Common Stock on
such record date, less the then fair value (as determined in good faith by
the Board of Directors of the Company, whose determination shall be
conclusive) of the portion of the shares of stock other than Common Stock
or assets or evidences of indebtedness so distributed or of such
subscription rights, options or
6
<PAGE>
warrants, or of such convertible or exchangeable securities applicable to
one share of Common Stock. Such adjustment shall be made whenever any such
distribution is made, and shall become effective on the date of
distribution retroactive to immediately after the record date for the
determination of shareholders entitled to receive such distribution.
(d) For the purpose of any computation under paragraphs (b) and
(c) of this Section 8, the current market price per share of Common Stock
at any date shall be the average of the daily closing prices for fifteen
(15) consecutive trading days commencing twenty (20) trading days before
the date of such computation. The closing price for each day shall be the
last reported sale price regular way or, in case no such reported sale
takes place on such day, the average of the closing bid and asked prices
regular way for such day, in either case on the principal national
securities exchange on which the shares are listed or admitted to trading,
or if they are not listed or admitted to trading on any national securities
exchange, but are traded in the over-the-counter market, the closing sale
price of the Common Stock or, in case no sale is publicly reported, the
average of the representative closing bid and asked quotations for the
Common Stock, on the NASDAQ system or any comparable system, or if the
Common Stock is not listed on the NASDAQ system or a comparable system, the
closing sale price of the Common Stock or, in case no sale is publicly
reported, the average of the closing bid and asked prices as furnished by
two members of the NASD selected from time to time by the Company for that
purpose.
(e) No adjustment in the number of Shares purchasable hereunder
shall be required unless such adjustment would require an increase or
decrease of at least one percent (1%) in the number of Shares purchasable
upon the exercise of each Warrant; provided, however, that any adjustments
which by reason of this paragraph (e) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations shall be made to the nearest one thousandth of a share.
(f) Whenever the number of Shares purchasable upon the exercise
of each Warrant is adjusted, as herein provided, the Exercise Price shall
be adjusted by multiplying the Exercise Price in effect immediately prior
to such adjustment by a fraction, of which the numerator shall be the
number of Shares purchasable upon the exercise of each Warrant immediately
prior to such adjustment, and of which the denominator shall be the number
of Shares so purchasable immediately thereafter.
7
<PAGE>
(g) For the purpose of this Section 8, the term "shares of Common
Stock" shall mean (i) the class of stock designated as the Common Stock of
the Company at the date of this Agreement or (ii) any other class of stock
resulting from successive changes or reclassification of such shares
consisting solely of changes in par value, or from no par value to par
value, or from par value to no par value. In the event that at any time, as
a result of an adjustment made pursuant to paragraph (a) above, the Holders
shall become entitled to purchase any shares of capital stock of the
Company other than shares of Common Stock, thereafter the number of such
other shares so purchasable upon exercise of each Warrant and the Exercise
Price of such shares shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions
with respect to the Shares contained in paragraphs (a) through (f),
inclusive, and paragraphs (h) through (m), inclusive, of this Section 8,
and the provisions of Sections 4, 5, 7 and 10, with respect to the Shares,
shall apply on like terms to any such other shares.
(h) Upon the expiration of any rights, options, warrants or
conversion rights or exchange privileges, if any thereof shall not have
been exercised, the Exercise Price and the number of shares of Common Stock
purchasable upon the exercise of each Warrant shall, upon such expiration,
be readjusted and shall thereafter be such as each would have been had it
originally been adjusted (or had the original adjustment not been required,
as the case may be) as if (i) the only shares of Common Stock so issued
were the shares of Common Stock, if any, actually issued or sold upon the
exercise of such rights, options, warrants or conversion rights or exchange
privileges and (ii) such shares of Common Stock, if any, were issued or
sold for the consideration actually received by the Company upon such
exercise plus the aggregate consideration, if any, actually received by the
Company for the issuance, sale or grant of all of such rights, options,
warrants or conversion rights or exchange privileges whether or not
exercised; provided, however, that no such readjustment shall have the
effect of decreasing the number of shares issuable upon the exercise of
each Warrant or increasing the Exercise Price by an amount in excess of the
amount of the adjustment initially made in respect of the issuance, sale or
grant of such rights, options, warrants or conversion rights or exchange
privileges.
(i) The Company may, at its option and in its sole discretion at
any time during the term of the Warrants, reduce the then current Exercise
Price to any amount deemed appropriate by the Board of Directors of the
Company.
8
<PAGE>
(j) Whenever the number of Shares issuable upon the exercise of
each Warrant or the Exercise Price of such Shares is adjusted, as herein
provided, the Company shall promptly mail by first class mail, postage
prepaid, to each Holder notice of such adjustment or adjustments.
(k) Except as provided in this Section 8, no adjustment in
respect of any dividends shall be made during the term of a Warrant or upon
the exercise of a Warrant.
(l) In case of any consolidation of the Company with or merger of
the Company with or into another corporation or in case of any sale or
conveyance to another corporation of the property of the Company as an
entirety or substantially as an entirety, the Company or such successor or
purchasing corporation (or an affiliate of such successor or purchasing
corporation), as the case may be, agrees that each Holder shall have the
right thereafter upon payment of the Exercise Price in effect immediately
prior to such action to purchase upon exercise of each Warrant the kind and
amount of shares and other securities and property (including cash) which
he would have owned or have been entitled to receive after the happening of
such consolidation, merger, sale or conveyance had such Warrant been
exercised immediately prior to such action. The provisions of this
paragraph (l) shall similarly apply to successive consolidations, mergers,
sales or conveyances.
(m) Notwithstanding any adjustment in the Exercise Price or the
number or kind of shares purchasable upon the exercise of the Warrants
pursuant to this Agreement, certificates for Warrants issued prior or
subsequent to such adjustment may continue to express the same price and
number and kind of Shares as are initially issuable pursuant to this
Agreement.
9. Fractional Interests. The Company shall not be required to issue
--------------------
fractions of Shares on the exercise of Warrants. If more than one Warrant shall
be presented for exercise in full at the same time by the same Holder, the
number of Shares which shall be issuable upon the exercise thereof shall be
computed on the basis of the aggregate number of Shares issuable on exercise of
the Warrants so presented. If any fraction of a Share would, except for the
provisions of this Section 9, be issuable on the exercise of any Warrant (or
specified portions thereof), the Company shall purchase such fraction for an
amount in cash equal to the same fraction of the current market price per share
of Common Stock (determined as provided in Section 8(d) of this Agreement) on
the date of exercise.
9
<PAGE>
10. Registration Rights.
-------------------
(a) Demand Registration Rights. The Company covenants and agrees with
--------------------------
the Underwriters and any other or subsequent Holders of the Registrable
Securities (as defined in paragraph (f) of this Section 10) that, subject to the
availability of audited financial statements which would comply with Regulation
S-X under the Act, upon written request of the then Holder(s) of at least a
majority of the Warrants or the Registrable Securities, or both, which were
originally issued to the Underwriters or their designees, made at any time
within the period commencing one year and ending five years after the Effective
Date, the Company will file as promptly as practicable and, in any event, within
60 days after receipt of such written request, no more than once, a post-
effective amendment (the "Amendment") to the Registration Statement, or a new
registration statement under the Act, registering or qualifying the Registrable
Securities for sale. Within fifteen (15) days after receiving any such notice,
the Company shall give notice to the other Holders of the Registrable Securities
advising that the Company is proceeding with such Amendment or registration
statement, as applicable and offering to include therein the Registrable
Securities of such Holders. The Company shall not be obligated to any such
other Holder unless such other Holder shall accept such offer by notice in
writing to the Company within ten (10) days after receipt of such notice. The
Company will use its best efforts, through its officers, directors, auditors and
counsel in all matters necessary or advisable, to file and cause to become
effective such Amendment or registration statement as promptly as practicable
and for a period of two years thereafter to reflect in the Amendment or
registration statement financial statements which are prepared in accordance
with Section 10(a)(3) of the Act and any facts or events arising that,
individually, or in the aggregate, represent a fundamental and/or material
change in the information set forth in the Amendment or registration statement
to enable any Holders of the Warrants to exercise such Warrants and sell Shares,
or to enable any holders of Shares to sell such Shares, during said two year
period. If any registration pursuant to this paragraph (a) is an underwritten
offering, the Holders of a majority of the Registrable Securities to be included
in such registration shall be entitled to select the underwriter or managing
underwriter (in the case of a syndicated offering) of such offering, subject to
the Company's approval which shall not be unreasonably withheld.
(b) Piggyback Registration Rights. The Company covenants and agrees
-----------------------------
with the Underwriters and any other Holders or subsequent Holders of the
Registrable Securities that if, at any time within the period commencing one
year and ending five years after the Effective Date, it proposes to file a
registra-tion statement with respect to any class of equity or equity-related
security (other than in connection with an offering to
10
<PAGE>
the Company's employees or in connection with an acquisition, merger or similar
transaction) under the Act in a primary registration on behalf of the Company
and/or in a secondary registration on behalf of holders of such securities and
the registration form to be used may be used for registration of the Registrable
Securities, the Company will give prompt written notice (which, in the case of a
registration statement or notification pursuant to the exercise of demand
registration rights other than those provided in Section 10(a) of this
Agreement, shall be within ten (10) business days after the Company's receipt of
notice of such exercise and, in any event, shall be at least 30 days prior to
such filing) to the Holders of Registrable Securities (regardless of whether
some of the Holders shall have theretofore availed themselves of the right
provided in Section 10(a) of this Agreement) at the addresses appearing on the
records of the Company of its intention to file a registration statement and
will offer to include in such registration statement all of the Registrable
Securities subject to paragraphs (i) and (ii) of this paragraph (b), such number
of Registrable Securities with respect to which the Company has received written
requests for inclusion therein within ten (10) days after the giving of notice
by the Company. All registrations requested pursuant to this paragraph (b) are
referred to herein as "Piggyback Registrations". This paragraph is not
applicable to a registration statement filed by the Company with the Commission
on Forms S-4 or S-8 or any successor forms.
(i) Priority on Primary Registrations. If a Piggyback
---------------------------------
Registration includes an underwritten primary registration on behalf of the
Company, and the underwriter(s) for such offering determines in good faith
and advises the Company in writing that in its/their opinion the number of
Registrable Securities requested to be included in such registration
exceeds the number that can be sold in such offering without materially
adversely affecting the distribution of such securities by the Company, the
Company will include in such registration (A) first, the securities that
the Company proposes to sell and (B) second, the Registrable Securities
requested to be included in such registration and the shares of Common
Stock entitled to registration rights under that certain Warrant Agreement
dated December 11, 1995 (the "Hibernia Shares"), apportioned pro rata among
the Holders of Registrable Securities and the holders of the Hibernia
Shares, provided, however, the Company will use its best efforts to include
not less than 20% of the Registrable Securities requested to be included in
such registration, and (C) third, securities of the holders of other
securities requesting registration.
(ii) Priority on Secondary Registrations. If a Piggyback
-----------------------------------
Registration consists only of an underwritten secondary registration on
behalf of holders of securities of
11
<PAGE>
the Company (other than pursuant to Section 10(a)), and the underwriter(s)
for such offering advises the Company in writing that in its/their opinion
the number of Registrable Securities requested to be included in such
registration exceeds the number which can be sold in such offering without
materially adversely affecting the distribution of such securities by the
Company, the Company will include in such registration (A) first, the
securities requested to be included therein by the holders requesting such
registration; (B) second, the Registrable Securities requested to be
included in such registration, pro rata among all such holders on the basis
of the number of shares requested to be included by each such holder
(provided, that if the person requesting registration is not a holder of
Hibernia Shares, the securities to be included in such registration under
this clause (B) shall be the Registrable Securities and the Hibernia Shares
requested to be included in such registration, apportioned pro rata among
the Holders of Registrable Securities and the holders of the Hibernia
Shares); and (C) third, other securities requested to be included in such
registration.
Notwithstanding the foregoing, if any such underwriter shall consent
to such Registrable Securities being included in the Company's registration
statement but shall determine in good faith and advise the Company in writing
that the distribution of the Registrable Securities requested to be included in
the registration concurrently with the securities being registered by the
Company would materially adversely affect the distribution of such securities by
the Company, then the Holders of such Registrable Securities shall delay their
offering and sale for such period ending on the earliest of (1) 90 days
following the effective date of the Company's registration statement, (2) the
day upon which the underwriting syndicate, if any, for such offering shall have
been disbanded or, (3) such date as the Company, managing underwriter and
Holders of Registrable Securities shall otherwise agree. In the event of such
delay, the Company shall file such supplements, post-effective amendments and
take any such other steps as may be necessary to permit such Holders to make
their proposed offering and sale for a period of 120 days immediately following
the end of such period of delay. If any party disapproves of the terms of any
such underwriting, it may elect to withdraw therefrom by written notice to the
Company, the underwriter, and the Underwriters. Notwithstanding the foregoing,
the Company shall not be required to file a registration statement to include
Shares pursuant to this Section 10(b) if independent counsel, reasonably
satisfactory to counsel for the Company and counsel for the Underwriters,
renders an opinion to the Company that the Shares proposed to be disposed of may
be transferred pursuant to the provisions of Rule 144 under the Act or otherwise
without registration under the Act.
12
<PAGE>
(c) Other Registration Rights. In addition to the rights above
-------------------------
provided, the Company will cooperate with the then Holders of the Registrable
Securities in preparing and signing any registration statement, in addition to
the registration statements discussed above, required in order to sell or
transfer the Registrable Securities and will supply all information required
therefor, but such additional registration statement, shall be at the then
Holders' cost and expense; provided, however, that if the Company elects to
-------- -------
register or qualify additional shares of Common Stock, the cost and expense of
such registration statement will be pro rated between the Company and the
Holders of the Registrable Securities according to the aggregate sales price of
the securities being issued. Notwithstanding the foregoing, the Company will
not be required to file a registration statement pursuant to this paragraph (c),
(i) at a time when the audited financial statements required to be included
therein are not available, which time shall be limited to the period commencing
45 days after the end of the Company's last fiscal year and ending 90 days after
the end of such fiscal year, or (ii) within 90 days after completion of a public
offering by the Company of any of its Common Stock or equity-related securities
or (iii) if it would adversely impact the Company in its capital raising plans
or otherwise (in which latter case filing may be delayed no longer than 120
days).
(d) During a period of up to 45 days duration (a Blackout Period), the
Holders agree that upon receipt of a notice from the Company of the occurrence
of an event which requires the making of any change in a registration statement
or related prospectus so that such document will not contain any untrue
statements of material fact or omit to state any material fact required to be
stated therein, Holders will forthwith discontinue disposition of the
Registrable Securities pursuant to the registration statement covering such
Registrable Securities until the Holders shall have received notice from the
Company of the end of such delay period and, if applicable, copies of any
supplemental or amended prospectus; provided, that the aggregate number of days
during which one or more Blackout Periods in effect shall not exceed 90 days
during any twelve month period and at least 20 days shall have elapsed between
each Blackout Period.
(e) Action to be Taken by the Company. In connection with the
---------------------------------
registration of Registrable Securities in accordance with paragraphs (a), (b) or
(c) of this Section 10, the Company agrees to:
(i) Bear the expenses of any registration or qualification under
paragraphs (a) or (b) of this Section 10, including, but not limited to,
legal, accounting and printing fees; provided, however, that in no event
-------- -------
shall the Company be obligated to pay (A) any fees and
13
<PAGE>
disbursements of counsel for Holders of Registrable Securities, or (B) any
underwriters' discount or commission in respect of such Registrable
Securities, (C) any stock transfer taxes attributable to the sale of the
Registrable Securities, or (D) upon the exercise of any demand registration
right provided for in paragraph (a) of this Section 10, the cost of any
liability or similar insurance required by an underwriter, to the extent
that such costs are attributable solely to the offering of such Registrable
Securities, payment of which shall, in each case, be the sole
responsibility of the Holders of the Registrable Securities; and
(ii) Use its best efforts to register or qualify the Registrable
Securities for offer or sale under state securities or Blue Sky laws of
such jurisdictions in which the Underwriters or such Holders shall
reasonably request, provided, however, that no qualification shall be
-------- -------
required in any jurisdiction where, as a result thereof, the Company would
be subject to service of general process or to taxation as a foreign
corporation doing business in such jurisdiction to which it is not then
subject, and to do any and all other acts and things which may be necessary
or advisable to enable the holders to consummate the proposed sale,
transfer or other disposition of such securities in any jurisdiction.
(f) Action to be Taken by the Holders. In connection with the
---------------------------------
registration of Registrable Securities in accordance with paragraphs (a), (b) or
(c) of this Section 10, the Company's obligation shall be conditioned as to each
such public offering upon a timely receipt by the Company in writing of:
(i) Information as to the terms of such public offering furnished
by or on behalf of each Holder intending to make a public offering of his
or its Registrable Securities; and
(ii) Such other information as the Company may reasonably require
from such Holders, or any underwriter for any of them, for inclusion in
such Registration Statement.
(g) For purposes of this Section 10, (i) the term "Holder" shall
include holders of Shares, and (ii) the term "Registrable Securities" shall
include the Warrants and the Shares, if issued.
14
<PAGE>
11. Notices to Holders.
------------------
(a) Nothing contained in this Agreement or in any of the Warrants
shall be construed as conferring upon the Holders thereof the right to vote or
to receive dividends or to consent or to receive notice as shareholders in
respect of the meetings of shareholders or the election of directors of the
Company or any other matter, or any rights whatsoever as shareholders of the
Company; provided, however, that in the event that a meeting of shareholders
-------- -------
shall be called to consider and take action on a proposal for the voluntary
dissolution of the Company, other than in connection with a consolidation,
merger or sale of all, or substantially all, of its property, assets, business
and good will as an entirety, then and in that event the Company shall cause a
notice thereof to be sent by first-class mail, postage prepaid, at least twenty
(20) days prior to the date fixed as a record date or the date of closing the
transfer books in relation to such meeting, to each registered Holder of
Warrants at such Holder's address appearing on the Warrant Register; but failure
to mail or to receive such notice or any defect therein or in the mailing
thereof shall not affect the validity of any action taken in connection with
such voluntary dissolution.
(b) In the event the Company intends to make any distribution on its
Common Stock (or other securities which may be issuable in lieu thereof upon the
exercise of Warrants), including, without limitation, any such distribution to
be made in connection with a consolidation or merger in which the Company is the
continuing corporation, or to issue subscription rights or warrants to holders
of its Common Stock, the Company shall cause a notice of its intention to make
such distribution to be sent by first-class mail, postage prepaid, at least
twenty (20) days prior to the date fixed as a record date or the date of closing
the transfer books in relation to such distribution, to each registered Holder
of Warrants at such Holder's address appearing on the Warrant Register, but
failure to mail or to receive such notice or any defect therein or in the
mailing thereof shall not affect the validity of any action taken in connection
with such distribution.
12. Notices. Any notice pursuant to this Agreement to be given or
-------
made by the Holder of any Warrant and/or the holder of any Share to or on the
Company shall be sufficiently given or made if sent by first-class mail, postage
prepaid, addressed as follows or to such other address as the Company may
designate by notice given in accordance with this Section 12, to the Holders of
Warrants and/or the holders of Shares:
15
<PAGE>
DSI TOYS, INC.
1100 West Sam Houston Parkway (North)
Suite A
Houston, Texas 77043
Attention: Chairman
Notices or demands authorized by this Agreement to be given or made by
the Company to or on the Holder of any Warrant and/or the holder of any Share
shall be sufficiently given or made (except as otherwise provided in this
Agreement) if sent by first-class mail, postage prepaid, addressed to such
Holder or such holder of Shares at the address of such Holder or such holder of
Shares as shown on the Warrant Register or the books of the Company, as the case
may be.
13. Governing Law. This Agreement and each Warrant issued hereunder
-------------
shall be governed by and construed in accordance with the substantive laws of
the Commonwealth of Massachusetts. The Company hereby agrees to accept service
of process by notice given to it pursuant to the provisions of Section 12.
14. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which so executed shall be deemed to be an original; but
such counterparts together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day, month and year first above written.
DSI TOYS, INC.
By:
-----------------------------
Its:
-------------------------
TUCKER ANTHONY INCORPORATED
By:
-----------------------------
Its:
-------------------------
SUTRO & CO. INCORPORATED
By:
-----------------------------
Its:
-------------------------
16
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Name of Number of
Underwriter Warrants
- ----------- ---------
<S> <C>
Tucker Anthony Incorporated 100,000
Sutro & Co. Incorporated 150,000
-------
Total 250,000
=======
</TABLE>
<PAGE>
No. Warrants
---- -----
VOID AFTER 5:00 P.M. NEW YORK CITY TIME
ON ________ __, 2002
DSI TOYS, INC.
Warrant Certificate
THIS CERTIFIES THAT for value received ________________, or registered
assigns, is the owner of the number of Warrants set forth above, each of which
entitles the owner thereof to purchase at any time from ________ __, 1998, until
5:00 p.m., New York City time on ________ __, 2002 (the "Warrant Expiration
Date"), one hundred fully paid and nonassessable shares of common stock, $0.01
par value per share (the "Common Stock"), of DSI TOYS, INC., a Texas corporation
(the "Company"), at the purchase price of $____ per share (as adjusted from time
to pursuant to the Warrant Agreement referenced below, the "Exercise Price")
upon presentation and surrender at the principal office of the Company or its
duly authorized agent of this Warrant Certificate with the Form of Election to
Purchase duly executed. The number of Warrants evidenced by this Warrant
Certificate (and the number of shares which may be purchased upon exercise
thereof) set forth above, and the Exercise Price per share set forth above, are
the number and Exercise Price as of the date of original issuance of the
Warrants, based on the shares of Common Stock of the Company as constituted at
such date. As provided in the Warrant Agreement referred to below, the Exercise
Price and the number or kind of shares which may be purchased upon the exercise
of the Warrants evidenced by this Warrant Certificate are, upon the happening of
certain events, subject to modification and adjustment.
This Warrant Certificate is subject to, and entitled to the benefits of,
all of the terms, provisions and conditions of an agreement dated as of ________
__, 1997 (the "Warrant Agreement") among the Company and Tucker Anthony
Incorporated and Sutro & Co. Incorporated, which Warrant Agreement is hereby
incorporated herein by reference and made a part hereof and to which Warrant
Agreement reference is hereby made for a full description of the rights,
limitations of rights, duties and immunities hereunder of the Company and the
holders of the Warrant Certificates. Copies of the Warrant Agreement are on
file at the principal office of the Company.
1
<PAGE>
This Warrant Certificate, with or without other Warrant Certificates,
upon surrender at the principal office of the Company, may be exchanged for
another Warrant Certificate or Warrant Certificates of like tenor and date
evidencing Warrants entitling the holder to purchase a like aggregate number of
shares of Common Stock as the Warrants evidenced by the Warrant Certificate or
Warrant Certificates surrendered entitled such holder to purchase. If this
Warrant Certificate shall be exercised in part, the holder hereof shall be
entitled to receive upon surrender hereof another Warrant Certificate or Warrant
Certificates for the number of whole Warrants not exercised.
No fractional shares of Common Stock will be issued upon the exercise of
any Warrant or Warrants evidenced hereby, but in lieu thereof a cash payment
will be made, as provided in the Warrant Agreement.
No holder of this Warrant Certificate shall be entitled to vote, receive
dividends, subscription rights or be deemed the holder of Common Stock or any
other securities of the Company which may at any time be issuable on the
exercise hereof for any purpose, nor shall anything contained in the Warrant
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action (whether
upon any recapitalization, issue of stock, reclassification of stock, change of
par value or change of stock to no par value, consolidation, merger, conveyance,
or otherwise) or, except as provided in the Warrant Agreement, to receive notice
of meetings, until the Warrant or Warrants evidenced by this Warrant Certificate
shall have been exercised and the Shares shall have become deliverable as
provided in the Warrant Agreement.
If this Warrant shall be surrendered for exercise within any period
during which the transfer books for the Company's Common Stock or other class of
stock purchasable upon the exercise of this Warrant are closed for any purpose,
the Company shall not be required to make delivery of certificates for shares
purchasable upon such exercise until the date of the reopening of said transfer
books, provided, however, that such books shall not be closed for longer than a
20-day period.
2
<PAGE>
IN WITNESS WHEREOF, DSI TOYS, INC. has caused the signature (or facsimile
signature) of its Chairman or its President and its Secretary to be affixed
hereon and its corporate seal (or facsimile) to be affixed hereon.
Dated ________ __, 1997
DSI TOYS, INC.
By:
-----------------------------
Its:
-------------------------
Attest:
- -------------------------
3
<PAGE>
FORM OF
ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
Warrant Certificates.)
FOR VALUE RECEIVED __________________ hereby sells, assigns and transfers
unto ________________________ this Warrant Certificate, together with all right,
title and interest therein, and does hereby irrevocably constitute and appoint
____________________, to transfer the within Warrant Certificate on the books of
the within-named Company, with full power of substitution.
The undersigned represents and warrants that the transfer of the within
Warrant is permitted by the terms of the Warrant Agreement pursuant to which the
within Warrant has been issued, and the transferee hereof, by his acceptance of
this Assignment, represents and warrants that he is familiar with the terms of
said Warrant Agreement and agrees to be bound by the terms thereof with the same
force and effect as if a signatory thereto.
Dated: ______________________, ____
---------------------------------
Signature
Signature Guaranteed:
NOTICE
The signature of the foregoing Assignment must correspond to the name as
written upon the face of this Warrant Certificate in every particular, without
alteration or enlargement or any change whatsoever.
<PAGE>
FORM OF
ELECTION TO PURCHASE
(To be executed if holder desires to exercise the Warrant Certificate).
TO: DSI TOYS, INC.
The undersigned hereby irrevocably elects to exercise Warrants
represented by this Warrant Certificate to purchase ______ shares of Common
Stock issuable upon the exercise of such Warrants and requests that certificates
for such shares be issued in the name of:
Please insert social security, tax identification or other
identifying number
------------------------------
------------------------------
------------------------------
(Please print name and address)
If such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, a new Warrant Certificate for the balance remaining of such
Warrants shall be registered in the name of and delivered to:
Please insert social security, tax identification or other identifying number
-----------------------------
-----------------------------
-----------------------------
(Please print name and address)
Dated: _______________, ____
------------------------------
Signature
(Signature must conform in all
respects to name of holder as
specified on the face of this
Warrant Certificate)
Signature Guaranteed:
<PAGE>
EXHIBIT 10.1
DSI TOYS, INC.
1997 STOCK OPTION PLAN
ARTICLE I.
PURPOSES
1.1. Purposes of Plan. The Company hereby adopts this Plan subject to
----------------
stockholder approval. The purpose of the Plan is to foster and promote the
financial success of the Company and materially increase stockholder value by
(i) strengthening the Company's capability to develop and maintain an
outstanding management team, (ii) motivating superior performance by the
management team, (iii) encouraging and providing for obtaining an ownership
interest in the Company, (iv) attracting and retaining outstanding executive
talent by providing incentive compensation opportunities competitive with other
companies, and (v) enabling key employees to participate in the long-term growth
and financial success of the Company.
ARTICLE II.
DEFINITIONS
2.1. Definitions. Certain terms used herein shall have the meaning below
-----------
stated, subject to the provisions of Section 8.1:
(a) "Board" or "Board of Directors" means the Board of Directors of
----- ------------------
the Company and "Board Member" means each member of the Board of Directors.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
----
(c) "Committee" means the committee of directors appointed by the
---------
Board to administer the Plan pursuant to Article VIII.
(d) "Common Stock" means the common stock, par value ($0.01) per
------------
share, of the Company.
(e) "Company" means DSI Toys, Inc., a Texas corporation.
-------
(f) "Effective Date" means the date the Board of Directors adopts this
--------------
Plan.
(g) "Employee" means any employee of the Company.
--------
(h) "Fair Market Value" means the fair market value of a share of
-----------------
Common Stock as provided in Section 5.3(a).
(i) "Incentive Stock Option" means an option to purchase Common Stock,
----------------------
granted by the Company to an Employee pursuant to Section 5.1 that satisfies the
requirements of Section 422 of the Code.
<PAGE>
(j) "Long Term Disability" means permanent and total disability within
--------------------
the meaning of Section 22(e)(3) of the Code.
(k) "Nonstatutory Stock Option" means an option to purchase Common
-------------------------
Stock, granted by the Company to an Employee or Board Member pursuant to Section
5.1 that does not satisfy the requirements of Section 422 of the Code or will
not be treated as an Incentive Stock Option.
(l) "Option" means an Incentive Stock Option or a Nonstatutory Stock
------
Option.
(m) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms of an Option granted under the Plan.
(n) "Optionee" means an Employee or Board Member to whom an Option has
--------
been granted under the Plan.
(o) "Plan" means this DSI Toys, Inc. 1997 Stock Option Plan, as from
----
time to time amended.
(p) "Retirement" means the termination of the employment of an
----------
Employee upon or after such Employee's sixty-fifth (65th) birthday or such other
age as may be specified in any mandatory retirement policy of the Company then
in effect.
(q) "Stock Appreciation Right" means a right granted by the Company to
------------------------
an Employee to receive cash or Common Stock pursuant to Article VI.
ARTICLE III.
RESERVATION OF SHARES
3.1. Shares Reserved Under Plan. The aggregate number of shares of Common
--------------------------
Stock that may be issued upon the exercise of Options granted under the Plan
shall not exceed Six Hundred Thousand (600,000) shares, all or any part of which
may be issued pursuant to Incentive Stock Options, Nonstatutory Stock Options or
any combination thereof. Shares of Common Stock issued upon the exercise of
Options granted under the Plan may consist of either authorized but unissued
shares or shares that have been issued and which shall have been or shall be
reacquired by the Company. The total number of shares authorized under the Plan
shall be subject to increase or decrease in order to give effect to the
provisions of Sections 10.3 and 10.4, and to give effect to any amendment
adopted pursuant to Article IX. If any Option granted under the Plan shall
expire, terminate or be canceled for any reason without having been exercised in
full, the number of shares as to which such Option was not exercised shall again
be available for purposes of the Plan. The Company shall at all times while the
Plan is in effect reserve such number of shares of Common Stock as will be
sufficient to satisfy the requirements of the Plan.
3.2. Limitation on Amount. No Employee may be granted Incentive Stock
--------------------
Options which first become exercisable in any single calendar year and which
entitle such individual to purchase Common Stock that has an aggregate Fair
Market Value (determined as of the time the
-2-
<PAGE>
Option is granted) under all incentive stock option plans of the Company and its
parent and subsidiary corporations, within the meaning of Section 422(d) of the
Code, of more than One Hundred Thousand and No/100 Dollars ($100,000.00).
ARTICLE IV.
PARTICIPATION IN PLAN
4.1. Employees. Options under the Plan may be granted to any Employee of
---------
the Company who performs services for the Company. The Committee shall
determine in its sole and absolute discretion those Employees to whom Options
shall be granted, the type of Option to be granted to each such Employee and,
subject to Sections 3.1 and 3.2, the number of shares of Common Stock subject to
each such Option and the exercise price thereof. Nothing in this Plan shall be
interpreted as a representation, guarantee or other undertaking on the part of
the Company that any particular Options granted pursuant to this Plan are, or
will be determined to be, Incentive Stock Options under Section 422 of the Code.
4.2. Board Members. Nonstatutory Stock Options under the Plan may be
-------------
granted to any Board Member. The Committee shall determine in its sole and
absolute discretion those Board Members to whom Nonstatutory Stock Options shall
be granted, and subject to Section 3.1 and 3.2, the number of shares of Common
Stock subject to each Nonstatutory Stock Option and the exercise price thereof.
ARTICLE V.
GRANT AND EXERCISE OF OPTIONS
5.1. Grant of Options. The Committee may from time to time in its sole and
----------------
absolute discretion grant Nonstatutory Stock Options to Employees and Board
Members and/or Incentive Stock Options to Employees. All Options under the Plan
shall be granted within ten (10) years from the Effective Date.
5.2. Option Agreements. Each Option granted under the Plan shall be
-----------------
evidenced by an Option Agreement between the Company and the Optionee and shall
contain such provisions and conditions as the Committee shall determine.
5.3. Option Terms. Options granted under the Plan shall be subject to the
------------
following requirements:
(a) Option Price. The exercise price of each Incentive Stock Option
------------
shall be one hundred percent (100%) of the Fair Market Value of the shares of
Common Stock subject to the Option on the date the Option is granted. Such
exercise price shall be at least one hundred percent (100%) of the average of
the closing prices of the Common Stock (subject to such option) on the
securities exchange on which the Common Stock is traded, if any, on the ten (10)
most recent trading days prior to the time such Option is granted in accordance
with the procedures established by the Committee. If the exercise price of each
Incentive Stock Option cannot be determined in accordance with the preceding
sentence, the Committee shall determine the exercise price. Except as otherwise
provided in this Section 5.3(a), the exercise price of each Nonstatutory Stock
Option shall be the amount determined by the Committee as set forth
-3-
<PAGE>
in the applicable Option Agreement, provided that such amount shall not be less
than the par value of the shares of Common Stock subject to the Option on the
date the Option is granted. The exercise price of each Incentive Stock Option
and each Nonstatutory Stock Option shall be determined by the Committee no later
than the date any Option is granted to an Optionee except as otherwise provided
in this Section 5.3(a). The exercise price of an Option may be subject to
adjustment pursuant to Sections 10.3 and 10.4.
(b) Term of Option. The term during which an Option is exercisable
--------------
shall be that period determined by the Committee as set forth in the applicable
Option Agreement, provided that no Option shall have a term that exceeds a
period of ten (10) years from the date of its grant.
(c) Employment Agreement. The Committee may, in its discretion,
--------------------
include in any Option granted under the Plan, a condition that the Optionee
shall agree to remain in the employ of, and render services to, Company for a
period of time specified in such employment agreement following the date the
Option is granted. Nothing in this Plan or in any Option Agreement shall in any
manner be construed to limit in any way the right of the Company to terminate
an Employee's employment at any time, without regard to the effect of such
termination on any rights such Employee would otherwise have under this Plan, or
give any right to an Employee to remain employed or retained by the Company in
any particular position or at any particular rate of compensation.
(d) Non-transferability of Option. No Option granted under the Plan
-----------------------------
shall be transferable by the Optionee otherwise than by last will and testament
or the laws of descent and distribution, and each such Option shall be
exercisable during the Optionee's lifetime only by him or her (which right to
exercise is personal). No transfer of an Option by an Optionee by last will and
testament or by the laws of descent and distribution shall be effective to bind
the Company unless the Company shall have been furnished with written notice
thereof and a copy of the last will and testament and/or such other evidence as
the Committee may determine is necessary to establish the validity of the
transfer.
(e) Time and Amount Exercisable. Each Option shall be exercisable in
---------------------------
accordance with the provisions of the Option Agreement pursuant to which it is
granted in whole, or from time to time in part, subject to any limitations with
respect to the number of shares of Common Stock for which the Option may be
exercised at a particular time and to such other conditions as the Committee in
its sole and absolute discretion may specify in the Option Agreement. Any
portion of an Option that has become exercisable shall remain exercisable until
it is exercised in full or it terminates or expires pursuant to the terms of the
Plan or the applicable Option Agreement.
(f) Incentive Stock Options Granted to Ten Percent Shareholders. No
-----------------------------------------------------------
Incentive Stock Option shall be granted to any Employee who owns, directly or
indirectly within the meaning of Section 424(d) of the Code, stock possessing
more than ten percent (10%) of the total combined voting power of all classes of
stock of the Company, unless at the time the Incentive Stock Option is granted,
the exercise price of the Incentive Stock Option is at least one hundred ten
percent (110%) of the Fair Market Value of the Common Stock subject to such
-4-
<PAGE>
Incentive Stock Option and such Incentive Stock Option, by its terms, is not
exercisable after the expiration of five (5) years from the date such Incentive
Stock Option is granted.
5.4. Payment of Exercise Price and Delivery of Shares.
------------------------------------------------
(a) Notice and Payment for Shares. Each Option shall be exercised by
-----------------------------
delivery of a written notice to the Company in such form as the Committee shall
approve stating the number of whole shares of Common Stock as to which the
Option is being exercised and accompanied by payment therefor and investment
representations as required by Section 10.2. No Option shall be deemed exercised
in the event that payment therefor plus applicable withholding is not received,
and shares of Common Stock shall not be issued upon the exercise of an Option
unless the exercise price is paid in full at the time of exercise. Payment for
shares of Common Stock purchased upon the exercise of an Option shall be made in
cash or by bank cashier's check.
(b) Rights of Optionee in Stock. Neither any Optionee nor the legal
---------------------------
representatives, heirs, legatees, devisees or distributees of any Optionee,
shall be deemed to be the holder of, or to have any of the rights of a holder
with respect to, any shares of Common Stock issuable upon exercise of an Option
granted hereunder unless and until such shares are issued to him or them and
such person or persons have received a certificate or certificates therefor.
Upon the issuance and receipt of such certificate or certificates, such Optionee
or the legal representatives, heirs, legatees, devisees or distributees of such
Optionee shall have absolute ownership of the shares of Common Stock evidenced
thereby, including the right to vote such shares, to the same extent as any
other owner of shares of Common Stock, and to receive dividends thereon,
subject, however, to the terms, conditions and restrictions of this Plan.
ARTICLE VI.
STOCK APPRECIATION RIGHTS
6.1. Terms and Conditions. The Committee may grant Stock Appreciation
--------------------
Rights to Employees at the same time as such Employees are awarded Options under
the Plan. Such Stock Appreciation Rights shall be evidenced by agreements in
such form as the Committee shall from time to time approve. Such agreements
shall comply with, and be subject to, the terms and conditions set out in this
Article VI.
6.2. Employment Agreement. The Committee may, in its discretion, include
--------------------
in any Stock Appreciation Rights granted under the Plan a condition that the
Employee shall agree to remain in the employ of, and to render services to, the
Company for a period of time (specified in the agreement) from the date the
Stock Appreciation Rights are granted. No such agreement shall impose upon the
Company, however, any obligation to employ the Employee for any period of time.
6.3. Grant. Each Stock Appreciation Right shall relate to a specific
-----
Option under the Plan, and shall be awarded to an Employee concurrently with the
grant of such Option. The number of Stock Appreciation Rights granted to an
Employee shall be equal to the number of
-5-
<PAGE>
shares of Common Stock that the Employee is entitled to receive pursuant to the
related Option. The number of Stock Appreciation Rights held by an Employee
shall be reduced by:
(a) the number of Stock Appreciation Rights exercised for shares of
Common Stock or cash under the Stock Appreciation Rights agreement, and
(b) the number of shares of Common Stock purchased by such Employee
pursuant to the related Option.
6.4. Manner of Exercise. An Employee shall exercise Stock Appreciation
------------------
Rights by giving written notice of such exercise to the Company. The date upon
which such written notice is received by the Company shall be the exercise date
for the Stock Appreciation Rights.
6.5. Appreciation Available. Each Stock Appreciation Right shall entitle
----------------------
an Employee to the following amount of appreciation: the excess of the Fair
Market Value of a share of Common Stock on the exercise date over the option
price of the related Option. The total appreciation available to an Employee
from any exercise of Stock Appreciation Rights shall be equal to the number of
Stock Appreciation Rights being exercised, multiplied by the amount of
appreciation per Right determined under the preceding sentence.
6.6. Payment of Appreciation. In the discretion of the Committee, the
-----------------------
total appreciation available to an Employee from an exercise of Stock
Appreciation Rights may be paid to the Employee either in shares of Common Stock
or in cash. If paid in cash, the amount thereof shall be the amount of
appreciation determined under Section 6.5. If paid in Common Stock, the number
of shares of Common Stock that shall be issued pursuant to the exercise of Stock
Appreciation Rights shall be determined by dividing the amount of appreciation
determined under Section 6.5 by the Fair Market Value of a share of Common Stock
on the exercise date of the Stock Appreciation Rights; provided, however, that
no fractional shares of Common Stock shall be issued upon the exercise of Stock
Appreciation Rights.
6.7. Limitations Upon Exercise of Stock Appreciation Rights. Stock
------------------------------------------------------
Appreciation Rights may be exercised only at such times and by such Employees as
may exercise Options under the Plan. Adjustment to the number of shares of
Common Stock in the Plan and the price per share of Common Stock pursuant to
Sections 10.3 and 10.4 shall also be made to any Stock Appreciation Rights held
by each Employee. Any termination, amendment, or revision of the Plan pursuant
to Article IX shall be deemed a termination, amendment, or revision of Stock
Appreciation Rights to the same extent.
ARTICLE VII.
TERMINATION AND DEATH
7.1. Termination.
-----------
(a) Except as provided below in this Article VII, if an Optionee's
position as an Employee terminates for any reason, any Option previously granted
to such Employee shall immediately terminate and shall no longer be exercisable.
-6-
<PAGE>
(b) Notwithstanding the provisions of subsection (a) of this Section
7.1, with respect to any Option granted to an Employee in connection with the
commencement of employment of such Employee by the Company, the Committee may
provide for terms as to Retirement, Disability, death or other termination of
employment which are different from the terms provided in this Article VII, if
such different terms are set forth in a written employment agreement with such
Employee.
7.2. Death. If an Optionee dies, the Optionee's Option shall, unless the
-----
applicable Option Agreement provides otherwise, expire one (1) year after the
date of his or her death, but in no event later than the date on which the
Option would have expired if the Optionee had lived. During such one (1) year
period, the Option may be exercised by the Optionee's executor or administrator
or by any person or persons who shall have acquired the Option directly from the
Optionee by bequest or inheritance, but only to the extent that the Optionee
would have been entitled to exercise the Option on the date of his or her death
and, to the extent the Option is not so exercised, it shall expire at the end of
such one (1) year period.
7.3. Retirement. In the event of an Optionee's Retirement, the Optionee's
----------
Option shall, unless the applicable Option Agreement provides otherwise, expire,
in the case of Incentive Stock Options, three (3) months, and in the case of
Nonstatutory Stock Options, six (6) months, after the date of Retirement, but in
no event longer than the date on which the Option would have expired absent such
Retirement. During such three (3) or six (6) month period, as applicable, the
Option may be exercised by the Optionee, but only to the extent that the
Optionee would have been entitled to exercise the Option on the date of his
Retirement had the Retirement not occurred and, to the extent the Option is not
so exercised, it shall expire at the end of such three (3) or six (6) months
period, as applicable.
7.4. Disability. In the event of the Optionee's termination of employment
----------
with the Company because of that Optionee's Long Term Disability, the Optionee's
Option shall, unless the applicable Option Agreement provides otherwise, expire
one (1) year after the date of such termination, but in no event longer than the
date on which the Option would have expired absent such termination. During
such one (1) year period the Option may be exercised by the Optionee, but only
to the extent that the Optionee would have been entitled to exercise the Option
at the date of termination of employment had the termination not occurred, and,
to the extent the Option is not so exercised, it shall expire at the end of such
one (1) year period.
7.5. Termination for Cause. Notwithstanding anything to the contrary in
---------------------
this Plan, if an Employee's employment is terminated at the request of the
Company for substantial cause, the Employee's right to exercise his Option shall
terminate at the time notice of termination of employment is given by the
Company to such Employee. For purposes of this Section substantial cause means:
(a) the commission of a criminal act against, or in derogation of the
interests of, the Company;
(b) the divulgence of confidential information about the Company; or
-7-
<PAGE>
(c) the performance of any action similar to (a) and (b) above that
the Committee, in its sole discretion, may deem to be sufficiently injurious to
the interest of the Company to constitute substantial cause for termination.
ARTICLE VIII.
ADMINISTRATION OF PLAN
8.1. Administration. The Plan shall be administered by a committee of the
--------------
Board of Directors, which Committee shall consist of not less than three (3)
members, all of whom are members of the Board of Directors. If the Board of
Directors does not appoint such a committee, the Committee shall consist of the
entire Board. The members of the Committee shall not be eligible to participate
in the Plan except as otherwise provided in Section 4.2. The Committee shall
meet the plan administration requirements described under Rule 16b-3(c)(2)
promulgated under the Securities Exchange Act of 1934. See 17 CFR Section
240.16b-3(c)(2) or any similar rule which may subsequently be in effect. A
majority of the Committee shall constitute a quorum thereof and the actions of a
majority of the Committee at a meeting at which a quorum is present, or actions
unanimously approved in writing by all members of the Committee, shall be the
actions of the Committee. Vacancies occurring on the Committee shall be filled
by the Board. The Committee shall have full and final authority in its sole and
absolute discretion (i) to interpret the Plan and each of the Option Agreements,
(ii) to prescribe, amend and rescind rules and regulations, if any, relating to
the Plan, (ii) to make all determinations necessary or advisable for the
administration of the Plan, and (iv) to correct any defect, supply any omission
and reconcile any inconsistency in the Plan and any Option Agreement. The
Committee's determination in all matters referred to herein shall be conclusive
and binding for all purposes and upon all persons, including, without
limitation, the Company, the shareholders of the Company, the Committee, and
each of the members thereof, Employees and their respective successors in
interest. The Committee shall have power to engage outside consultants,
auditors or other professional help to assist in the fulfillment of the
Committee's duties under the Plan at the Company's expense.
8.2. Liability. No member of the Committee shall be liable for anything
---------
done or omitted to be done by him or her or by any other member of the Committee
in connection with the Plan, except for his or her own willful misconduct or
gross negligence (unless the Company's Articles of Incorporation or Bylaws, or
any indemnification agreement between the Company and such person, in each case
in accordance with applicable law, provides otherwise).
8.3. Determination. In making its determinations concerning the Employees
-------------
and Board Members who shall receive Options as well as the number of shares of
Common Stock to be covered thereby and the time or times at which the Options
shall be granted, the Committee may take into account the nature of the services
rendered by the respective Employees and Board Members and their past, present
and potential contribution to the Company's success and such other factors as
the Committee may deem relevant in its sole and absolute discretion. The
Committee shall determine in its sole and absolute discretion the form of Option
Agreements under the Plan and the terms and conditions to be included therein,
provided such terms and conditions are not inconsistent with the terms of the
Plan. The Committee may waive any provisions of any Option Agreement, provided
such waiver is not inconsistent with the terms of the Plan as then in effect.
The Committee's determinations under the Plan need not be uniform and may be
made selectively among
-8-
<PAGE>
Employees and Board Members who receive, or are eligible to receive, Options
under the Plan, whether or not such Employees or Board Members are similarly
situated.
ARTICLE IX.
AMENDMENT AND TERMINATION OF PLAN
9.1. Amendment of Plan.
-----------------
(a) The Plan may be amended at any time and from time to time by the
Board, but no amendment which (i) increases the aggregate number of shares of
Common Stock which may be issued pursuant to Options granted under the Plan,
(ii) decreases the minimum Incentive Stock Option exercise price provided in the
Plan, (iii) extends the period during which Options may be granted pursuant to
the Plan, (iv) changes the class of individuals eligible to be granted Options,
or (v) has the effect of any of the above, shall be effective unless and until
the same is approved by the affirmative vote of the holders of a majority of the
shares of Common Stock or the written consent of the majority of such holders,
in accordance with the applicable provisions of the charter and bylaws of the
Company and applicable state law. No amendment to the Plan shall, without the
consent of an Optionee, affect such Optionee's rights under an Option previously
granted.
(b) To the extent applicable, the Plan is intended to permit (but the
Company is not required) the issuance of Incentive Stock Options to Employees in
accordance with the provisions of Section 422 of the Code. Subject to
Subsection 9.1 (a) above, the Plan and Option Agreements may be modified or
amended at any time, both prospectively and retroactively, and in a manner that
may affect Incentive Stock Options previously granted, if such amendment or
modification is necessary for the Plan and Incentive Stock Options granted
hereunder to qualify under said provisions of the Code. The President of the
Company is authorized and empowered to cause the Company to enter into any
agreements, contracts or understandings with the Internal Revenue Service as are
necessary or appropriate, in his sole and absolute discretion, to carry out such
intent.
9.2. Termination. The Board may at any time terminate the Plan as of any
-----------
date specified in a resolution adopted by the Board. If not earlier terminated,
the Plan shall terminate on the ten (10) year anniversary of the Effective Date.
No Options may be granted after the Plan has terminated but the Committee shall
continue to supervise the administration of Options previously granted.
Termination of the Plan shall not alter or impair, without the consent of the
Optionee, any of the rights or obligations any Optionee has been granted under
the Plan.
ARTICLE X.
MISCELLANEOUS PROVISIONS
10.1. Restrictions Upon Grant of Options. If it is necessary or desirable
----------------------------------
to list upon any stock exchange, or register or qualify under any federal or
state law, any shares of Common Stock to be issued on the exercise of Options
granted under this Plan (in order to permit the grant of Options or the resale
or other disposition of any such shares of Common Stock by or on behalf of the
Optionees) the Board of Directors in its sole and absolute discretion may
determine that delivery of the certificates for such shares of Common Stock
shall not be made
-9-
<PAGE>
until such listing, registration or qualification shall have been completed. The
Company agrees that it will use its best efforts to effect any such listing,
registration or qualification, provided, however, that the Company shall not be
required to use its best efforts to effect such registration under the
Securities Act of 1933 other than on Form S-8 or such other forms as may be in
effect from time to time calling for information comparable to that presently
required to be furnished under Form S-8.
10.2. Restrictions upon Resale of Unregistered Stock. Each Optionee shall,
----------------------------------------------
if the Committee deems it advisable, represent and agree in writing (i) that any
shares of Common Stock acquired by such Optionee pursuant to this Plan will not
be sold except pursuant to an effective registration statement under the
Securities Act of 1933 or pursuant to an exemption from registration under said
Act, (ii) that such Optionee is acquiring such shares of Common Stock for his or
her own account and not with a view to the distribution thereof, and (iii) to
such other customary matters. In such case, no shares of Common Stock shall be
issued to such Optionee unless such Optionee provides such representations and
agreements and the Company is reasonably satisfied that such representations and
agreements are correct.
10.3. Adjustments upon Recapitalization. The aggregate number of shares of
---------------------------------
Common Stock for which Options may be granted to Employees and Board Members
participating under the Plan, the number of shares covered by each outstanding
Option and the exercise price per share for each such Option, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock of the Company resulting from the subdivision or
consolidation of shares, or the payment of a stock dividend after the Effective
Date, or other increase or decrease in such shares effected without receipt of
consideration by the Company; provided, however, that any Options to purchase
fractional shares resulting from any such adjustments shall be eliminated; and
provided further, that any such adjustment shall be made in a manner so as not
to constitute a modification as defined in Section 424(h)(3) of the Code.
10.4. Adjustment of Options Upon Reorganization.
-----------------------------------------
(a) If the Company shall at any time merge or consolidate with or into
another corporation and (i) the Company is not the surviving entity, or (ii) the
Company is the surviving entity and the holders of the Common Stock are required
to exchange their shares for property and/or securities, the holder of each
Option will thereafter receive, upon the exercise thereof, the securities and/or
property to which a holder of the number of shares of Common Stock then
deliverable upon the exercise of such Option would have been entitled upon such
merger or consolidation, and the Company shall take such steps in connection
with such merger or consolidation as may be necessary to assure that the
provisions of this Plan shall thereafter be applicable, as nearly as reasonably
may be practicable, in relation to any securities or property deliverable upon
the exercise of such Option. A sale of all or substantially all the assets of
the Company for consideration (apart from the assumption of obligations)
consisting primarily of securities shall be deemed a merger or consolidation for
the foregoing purposes. Notwithstanding the foregoing, this Subsection 10.4(a)
shall not extend the period during which Options may be granted pursuant to the
Plan.
(b) The Company, or its successor, following any reorganization may at
any time, in its sole and absolute discretion, tender substitute Options as it
may deem appropriate.
-10-
<PAGE>
In no event, however, may the substitute Options entitle the Optionee to any
fewer shares (or at any greater aggregate price) or any less other property than
the Optionee would be entitled to under Subsection 10.4(a) upon an exercise of
the Options held prior to the substitution of the new Option. Any substitution
made under this section shall be made in a manner so as not to constitute a
modification as defined in Section 424(h)(3) of the Code.
(c) In the event of the proposed dissolution or liquidation of the
Company, the Options granted pursuant to this Plan shall terminate as of a date
to be fixed by the Committee, provided that not less than thirty (30) days prior
written notice of the date so fixed shall be given to the Optionee, and the
Optionee shall have the right, during the period of thirty (30) days preceding
such termination, to exercise his or her Option. Notwithstanding the foregoing,
this Subsection 10.4(c) shall not extend the period during which Options may be
granted pursuant to the Plan.
10.5. Withholding of Taxes. Each Optionee who exercises a Nonstatutory
--------------------
Stock Option shall agree that, no later than the date of such exercise or
receipt of shares of Common Stock pursuant thereto, he or she will either: (i)
pay to the Company, or make arrangements satisfactory to the Committee regarding
payment of, any Federal, state or local taxes of any kind required by law to be
withheld with respect to the transfer to him of such shares of Common Stock or
(ii) elect to receive such lesser number of shares of Common Stock upon exercise
of an Option as equates to the amount of such taxes based upon the Fair Market
Value of such shares on the date of exercise. Any election made pursuant to
this Section 10.5 must be made in writing simultaneous with exercise of the
relevant Option. No election may be made pursuant to Subsection (ii) above
unless such Option is exercised to be effective upon sufficient notice to the
Company to allow the Company to make a determination of Fair Market Value of the
shares of Common Stock as of such date.
10.6. Use of Proceeds. The proceeds from the sale of Common Stock pursuant
---------------
to Options granted under the Plan shall constitute general funds of the Company
and may be used for such corporate proposes as the Company may determine in its
sole and absolute discretion.
10.7. Substitution of Options.
-----------------------
(a) The Committee may, with the consent of the holder of any Option
granted under the Plan, cancel such Option and grant a new Option in
substitution therefor, provided that the Option as so substituted shall satisfy
all of the requirements of the Plan as of the date such new Option is granted.
(b) Options may be granted under this Plan in substitution for options
held by individuals who are employees of another corporation and who become
Employees eligible to receive Options pursuant to the Plan as a result of a
merger, consolidation, reorganization or similar event. The terms and
conditions of any Options so granted may vary from those set forth in the Plan
to the extent deemed appropriate by the Committee (in its sole and absolute
discretion) in order to conform the provisions of Options granted pursuant to
the Plan to the provisions of the options in substitution for which they are
granted.
-11-
<PAGE>
10.8. Section References. Except as otherwise indicated, all references in
------------------
this Plan to Sections or Subsections are references to the appropriate Section
or Subsection within this Plan.
-12-
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 2 to the Registration Statement on Form S-1 of our report dated
March 21, 1997, except as to Note 12 which is as of May 1, 1997, relating to
the financial statements of DSI Toys, Inc., which appears in such Prospectus.
We also consent to the application of such report to the Financial Statement
Schedule for the fiscal years 1994, 1995 and 1996 listed under Item 16(b) of
this Registration Statement when such schedule is read in conjunction with the
financial statements referred to in our report. The audits referred to in such
report also included this schedule. We also consent to the references to us
under the headings "Experts" and "Selected Consolidated Financial Data" in
such Prospectus. However, it should be noted that Price Waterhouse LLP has not
prepared or certified such "Selected Consolidated Financial Data."
Price Waterhouse LLP
Houston, Texas
May 27, 1997
