<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 26, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DSI TOYS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 5092 74-1673513
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
---------------
M. D. DAVIS
CHAIRMAN AND CEO
DSI TOYS, INC.
1100 WEST SAM HOUSTON PARKWAY (NORTH)
SUITE A
1100 WEST SAM HOUSTON PARKWAY HOUSTON, TEXAS 77043
(NORTH) (713) 365-9900
SUITE A
HOUSTON, TEXAS 77043
(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, 2029 CENTURY PARK EAST, SUITE 1800
SUITE 3300 LOS ANGELES, CALIFORNIA 90067
DALLAS, TEXAS 75201 (310) 556-5800
(214) 969-1700
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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. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, par value
$0.0001 per share...... 3,220,000 $11.00 $35,420,000 $10,733.33
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Representatives'
Warrants to Purchase
Common Stock........... 2,500 N/A $ 2,500 $ 0.76
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Common Stock underlying
Representatives'
Warrants............... 250,000(3) $13.20 $ 3,300,000 $ 1,000.00
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TOTAL REGISTRATION FEE.. N/A N/A N/A $11,734.09
</TABLE>
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(1) Includes 420,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(a) under the Securities Act of 1933, as
amended, solely for the purpose of determining the amount of the
registration fee.
(3) Plus such indeterminate number of shares as may be issued pursuant to the
antidilution provisions of the Representatives' Warrants.
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.
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<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 MARCH 26, 1997
PROSPECTUS
2,800,000 Shares
[LOGO OF DSI TOYS, INC. APPEARS HERE]
Common Stock
Of the 2,800,000 shares of common stock (the "Common Stock") offered hereby,
2,500,000 shares are being sold by DSI Toys, Inc. (the "Company") and 300,000
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 Company has applied for inclusion of the Common Stock in The
Nasdaq Stock Market's National Market (the "Nasdaq National Market") under the
symbol "DSIT." 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.
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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.
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<TABLE>
<CAPTION>
Proceeds
Underwriting Proceeds to to Selling
Price to Public Discount(1) Company(2) Shareholder
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<S> <C> <C> <C> <C>
Per Share ................ $ $ $ $
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Total(3) ................. $ $ $ $
</TABLE>
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(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 $600,000, payable by the
Company.
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to a maximum of 420,000 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.
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>
[INSERT PHOTOS OF REPRESENTATIVE PRODUCTS HERE]
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 value-priced products that provide its
customers 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.
3
<PAGE>
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. 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.... 300,000 shares (1)
Common Stock to be Outstanding after the Offering.. 6,000,000 shares (2)
Use of Proceeds.................................... For (i) repayment of
approximately $16.7
million in debt of the
Company, consisting of a
senior term loan of
approximately $5.0
million, a subordinated
term loan of approximately
$1.6 million, outstanding
principal under a
revolving line of credit
of approximately $3.0
million, and indebtedness
to the Estate of Mr. Moss
of approximately $7.1
million, and (ii) $5.8
million for working
capital and general
corporate purposes. See
"Use of Proceeds."
Proposed 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. See "Management--1997 Stock Option Plan," "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 $10,998
Total assets........... 8,349 7,460 10,389 17,390 16,304 22,129
Long-term debt (less
current portion)(4)... -- -- 17 18,188 14,203 55
Shareholders' equity
(deficit) (4)......... 3,817 4,179 5,147 (11,582) (9,422) 13,103
</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
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.
RAPID GROWTH. Between fiscal 1993 and fiscal 1996, the Company has
experienced rapid growth in net sales and net income. 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'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
36.2% of the outstanding Common Stock (33.8% 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 Company has applied to include the Common Stock in the Nasdaq National
Market, 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 2,800,000 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), 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 Corporation and the
9
<PAGE>
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")
involving the Company was consummated resulting in (i) the Company
repurchasing from Tommy Moss, the former sole shareholder of the Company,
2,719,000 shares (77.7%) of Common Stock for $22.2 million ($8.15 per share)
and (ii) Rosie Acquisition, L.L.C. ("RAC") acquiring 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 term loan,
(b) $3.0 million of proceeds from a new subordinated term 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, (ii) two notes issued by the Company to Mr. Moss in the respective
principal amounts of $6.0 million 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."
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 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.
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 ($26.4 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." Of such net proceeds, (i) approximately
$5.0 million will be used to repay the outstanding indebtedness under the
Company's five year term loan with Bank One, Texas, N.A. (the "Bank One
Loan"), (ii) approximately $6.1 million will be used to repay the outstanding
indebtedness under the $6.0 million term note issued to Mr. Moss in the
Recapitalization (the "Moss Note"), (iii) approximately $1.6 million will be
used to repay the outstanding indebtedness under the Company's five-year
subordinated term loan with Hibernia Corporation (the "Hibernia Loan"), (iv)
approximately $1.0 million will be used to repay the outstanding indebtedness
under the $1.0 million note issued to Mr. Moss as a bonus (the "Moss Bonus
Note"), (v) approximately $3.0 million will be used to repay a portion of the
outstanding indebtedness under the Company's revolving line of credit with
Bank One, Texas, N.A. (the "Revolver") and (vi) approximately $5.8 million
will be used for working capital and general corporate purposes. 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%. 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 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. 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 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
12
<PAGE>
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 the 300,000
shares of Common Stock by the Selling Shareholder.
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 ($2.65 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 term 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):
Bank One revolving line of credit......................... $ 3,055 $ 55
Bank One term 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 55
------- -------
Shareholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized;
none issued (2).......................................... -- --
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
(1)(2)................................................... 62 87
Additional paid-in capital................................ 3,443 25,943
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) 13,103
------- -------
Total capitalization.................................... $ 4,781 $13,158
======= =======
</TABLE>
- --------
(1) 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."
(2) Gives effect to a proposed amendment to the Company's Articles of
Incorporation which will authorize the issuance of preferred stock, reduce
the number of authorized shares of Common Stock and change the par value
of Common Stock to $0.01.
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>
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>
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 sale in the Offering of
5,560,000 shares at the end of fiscal 1996 (based on 1,821,000 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 ($1,768,000),
net of tax ($636,000), 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, the Company completed the Recapitalization whereby 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 $16.7 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 two 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 for such periods:
<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 the introduction of the Rosie(R) doll during fiscal 1995, to
increased sales to Wal-Mart and to the addition of Target as a customer.
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) increased 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, and (iii) a decrease in the costs associated with mock-up, design,
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 January 31, 1997, the Company had outstanding indebtedness under the Hong
Kong Credit Facility of $485,000, which accrued interest at 8.25%.
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 January 31, 1997, the borrowing loan limit calculated in this manner was
$4.5 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
January 31, 1997, the Company had outstanding borrowings under the Revolver of
approximately $3.1 million, which accrued interest at 9.0% 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 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.
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
21
<PAGE>
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 value-priced products that provide its
customers 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. 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 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.
23
<PAGE>
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 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)
24
<PAGE>
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 Ranger(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 <artwork>
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 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; available in four
languages.
Baby Pick Me Up(TM), a soft-body doll that
says, "Pick me up, Mommy," laughs and
giggles, and 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 hand is held. (New for fiscal
1997)
BOYS' TOYS
American Frontier(TM), a brand of western
Western Toys toy guns and play sets.
Combat Force Ranger(TM), a brand of
Military Toys military toy guns and play sets.
Real Tech(R), a brand of battery operated
Fantasy Space Guns light 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 fiscal 1997)
JUVENILE AUDIO
PRODUCTS
Walkie-Talkies Digi-Tech(TM), Escort(R), Kawasaki(R) and
Combat Force Ranger(TM), brands of hand-
held and headset units, base station units
and other models.
Musical Toys Kawasaki(R) Power Chords(TM), a battery-
operated 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
Pre-school Audio players and radios.
LA Rock(R) personal cassette players and
Pre-teen Audio 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 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 by
children as a base for plastic building
blocks. (New for 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
-------------------
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."
27
<PAGE>
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 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
----- ----- -----
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. 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.
28
<PAGE>
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.
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
DSH(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.
29
<PAGE>
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 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 full fiscal years, an average of approximately 66%
of the Company's annual Houston-based sales have occurred during the months of
August through November.
30
<PAGE>
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 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.
31
<PAGE>
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 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.
In March 1997, a former independent sales representative for the Company
sued the Company for additional royalties and sales commissions. The
representative also is seeking to recover exemplary damages, interest, costs
and attorneys fees. The Company believes that it has fulfilled its obligations
to this representative and intends to defend against the claims.
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........ 47 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 Vice Chairman of the Board
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 will receive beginning an annual
grant of options to purchase shares of Common Stock. See "--1997 Stock
Option Plan."
The Board of Directors recently has established standing audit, compensation
and stock option 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 auditors. The members of
the compensation and stock option committees 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 stock option 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 the fiscal year ended January 31, 1997 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 -- $ 9,500
Chairman of the Board and Chief
Executive Officer
Richard R. Neitz................. $ 225,000 -- $ 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 $ 4,000 $ 9,500
Vice President and Controller
Thomas V. Yarnell................ $ 90,000 $ 5,300 $ 6,900
Administrative Vice President,
General Counsel and Secretary
</TABLE>
- --------
(1) No individual named above received perquisites or non-cash compensation
during any of the years indicated 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
In 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 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).
The Stock Option Plan provides for automatic grants of stock options to
each non-employee director on an annual basis. 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 exercise price of those options to be granted upon
consummation of the Offering will be equal to the greater of the initial
public offering price and the market price on the date of grant.
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 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
five percent or more of the Common Stock and (iv) the Selling Shareholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO OFFERING(2)(3) COMMON OFFERING(2)(3)
----------------------- STOCK -----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER (1) NUMBER PERCENT OFFERED 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 (4)......... 21,622 * -- 21,622 *
Thomas V. Yarnell (5).... 18,920 * -- 18,920 *
Barry B. Conrad (6)...... 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 (7)....... 427,115 12.2% -- 427,115 7.1%
327 Congress Avenue
Suite 200
Austin, Texas 78701
Joseph N. Matlock (8).... 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
percent or more
(excluding persons named
above)
The Tommy Moss Living
Trust................... 781,000 22.3% 300,000 481,000 8.0%
1001 Fannin
Suite 3700
Houston, Texas 77002-
6797
Attn: M. M. Sheinfeld,
Trustee
Hibernia Corporation
(9)..................... 388,888 10.0% -- 388,888 6.1%
313 Carondelet Street
New Orleans, Louisiana
70130
Conrad/Collins Merchant
Banking Group Ltd. (6)... 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. (7)... 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) 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.
(5) Includes 8,110 shares held in an IRA in Mr. Yarnell's name.
(6) 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.
(7) Consists of 427,115 shares owned of record by Rust Capital, Ltd., as to
which Mr. Crosby is founder and Chairman.
(8) 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.
(9) Consists of 388,888 shares issuable upon exercise of warrants issued to
Hibernia Corporation, all of which are currently exercisable.
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 (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. See "Risk Factors--Potential Adverse Impact of Anti-Takeover
Provisions."
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 and
former 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 Articles of Incorporation 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 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 Texas Business Corporation Act.
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, only the Board of Directors has 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. 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. 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
Selling Shareholder is selling, 300,000 of the shares of Common Stock held by
The Tommy Moss Living Trust (successor to Mr. Moss) in this Offering. 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 Company has applied to include the Common Stock in
the Nasdaq National Market under the symbol "DSIT."
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 (6,420,000 shares if the Underwriters'
over-allotment option is exercised in full). Of such shares, the 2,800,000
shares sold in the Offering will be freely tradeable without restriction or
registration under the Securities Act, except for any shares purchased by an
"affiliate" (as defined in the Securities Act) of the
43
<PAGE>
Company. The remaining pre-offering 3,200,000 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
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.
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 no options have been granted or are outstanding. 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 stock options to various employees of the Company, the amount,
terms and timing of which have not yet been determined.
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
44
<PAGE>
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 have 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............................................................ 2,800,000
=========
</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 has 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 420,000 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, 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.
46
<PAGE>
The Company and the Selling Shareholder 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
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):
Common stock, $0.0001 par value, 703,503,500
shares authorized, 6,219,000 shares issued...... 622 622
Additional paid-in capital....................... 3,504,661 3,504,661
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
--------- ---- ---------- -------- ---------- ------ ------------ -----------
Balance, January 31,
1997................... 6,219,000 $622 $3,504,661 $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. 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
Television advertising is expensed each period in direct proportion to the
net sales of products being advertised. 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. There were no such matching contributions to the
Plan for fiscal 1994, 1995 and 1996.
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 an officer and 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.
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>
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,800,000 Shares
[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........................................... $ 11,734.09
NASD Filing Fee................................................ 4,042.00
Nasdaq National Market Listing Fees............................ 32,500.00
Blue Sky Fees and Expenses..................................... *
Accounting Fees and Expenses................................... *
Legal Fees and Expenses........................................ *
Transfer Agent and Registrar Fees.............................. *
Printing and Engraving Expenses................................ *
Miscellaneous.................................................. *
------------
Total........................................................ $ 600,000.00
============
</TABLE>
- --------
* To be provided by amendment.
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 Articles of Incorporation and Bylaws of the Registrant
provide for indemnification of directors and officers to the fullest extent
permitted by the TBCA. Reference is made to the Articles of Incorporation and
the Bylaws of the Registrant, filed as Exhibits 3.1 and 3.2 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.+
4.1 Form of Common Stock Certificate.+
4.2 Form of Stock Option Agreements under the Registrant's 1997 Stock
Option Plan.+
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.
4.6 Form of Common Stock Purchase Warrant to be issued to the
Representatives to purchase 250,000 shares of Common Stock.+
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 July 2, 1993, 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 (included on page II-4).
27 Financial Data Schedule.
</TABLE>
- --------
+ To be filed by amendment.
* Management contract or compensatory plan.
II-3
<PAGE>
(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 REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF
TEXAS, ON MARCH 25, 1997.
DSI Toys, Inc.
By: /s/ M. D. Davis
-----------------------------------
M. D. DAVIS CHAIRMAN OF THE BOARD
OF DIRECTORS AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors and officers
of DSI Toys, Inc., a Texas corporation, which is filing a Registration
Statement on Form S-1 with the Securities and Exchange Commission, Washington,
D.C. 20549 under the provisions of the Securities Act of 1933, as amended (the
"Securities Act"), hereby constitute and appoint M. D. Davis and Richard R.
Neitz, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign such Registration
Statement and any or all amendments, including post-effective amendments, to
the Registration Statement, including a Prospectus or an amended Prospectus
therein and any registration statement for the same offering that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act, and
all other documents in connection therewith to be filed with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact as agents or any of
them, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
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 March 25, 1997
- ------------------------------------- Executive Officer
M. D. DAVIS (principal
executive officer)
President, Chief
/s/ Richard R. Neitz Operating Officer March 25, 1997
- ------------------------------------- and Director
RICHARD R. NEITZ
Vice President and
/s/ Dale Yung Chen Controller March 25, 1997
- ------------------------------------- (principal
DALE YUNG CHEN accounting officer)
/s/ Barry B. Conrad Director March 25, 1997
- -------------------------------------
BARRY B. CONRAD
/s/ Jack R. Crosby Director March 25, 1997
- -------------------------------------
JACK R. CROSBY
/s/ J. N. Matlock Director March 25, 1997
- -------------------------------------
J. N. MATLOCK
/s/ Douglas A. Smith Director March 25, 1997
- -------------------------------------
DOUGLAS A. SMITH
II-5
<PAGE>
SIGNATURE TITLE DATE
Executive Vice
/s/ J. Russell Denson Presidentand Chief March 25, 1997
- ------------------------------------- Financial Officer
J. RUSSELL DENSON (principal
financial officer)
II-6
<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.+
4.1 Form of Common Stock Certificate.+
4.2 Form of Stock Option Agreements under the Registrant's
1997 Stock Option Plan.+
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.
4.6 Form of Common Stock Purchase Warrant to be issued to
the Representatives to purchase 250,000 shares of
Common Stock.+
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 July 2, 1993,
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 (included on page II-4).
27 Financial Data Schedule.
</TABLE>
- --------
+ To be filed by amendment.
* Management contract or compensatory plan.
<PAGE>
EXHIBIT 4.3
THE SECURITY REPRESENTED BY THIS CERTIFICATE
HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
LAWS, AND MAY NOT BE OFFERED OR SOLD UNLESS SO
REGISTERED OR UNLESS THE COMPANY IS FURNISHED
WITH AN OPINION OF COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED, AND THAT AN
EXEMPTION THEREFROM IS AVAILABLE.
COMMON STOCK PURCHASE WARRANT
-----------------------------
Date of Issuance: December 11, 1995
Certificate No. A-1
For value received in connection with the Senior Subordinated Loan
Agreement dated as of December 11, 1995 (the "Loan Agreement") by and between
DIVERSIFIED SPECIALISTS, INC., a Texas corporation (the "Company"), and HIBERNIA
CORPORATION, a Louisiana corporation ("Hibernia"), the Company hereby grants to
Hibernia or its registered assigns (the "Registered Holder") the right to
purchase from the Company an aggregate of 388,888 shares of Common Stock of the
Company at a price per share of $2.00 (the "Initial Exercise Price"). Certain
capitalized terms used herein are defined in Section 3 hereof. The amount and
kind of securities purchasable pursuant to the rights granted hereunder and the
purchase price for such securities are subject to adjustment pursuant to the
provisions contained in this Warrant.
This Warrant is subject to the following provisions:
Section 1. Exercise of Warrant.
-------------------
1A. Exercise Period; Expiration; Redemption. (1) The Registered Holder
---------------------------------------
may exercise, in whole or in part, the purchase rights represented by this
Warrant at any time and from time to time after the Date of Issuance until 5:00
p.m., New Orleans time, until the tenth anniversary of the date hereof.
(2) Notwithstanding the foregoing, this Warrant if not sooner exercised in
full, will expire simultaneously with the reacquisition by Tommy Moss ("Moss")
of indefeasible ownership of at least 85% of the outstanding common stock of the
Company ("Moss Reacquisition") following a default by the Company in the
indebtedness of the Company to Tommy Moss in the original principal amount of
$21,400,000 ("Moss Loan").
<PAGE>
(3) In the event that this Warrant is exercised in whole or in part and
thereafter a Moss Reacquisition occurs, then for a period of thirty days after
the Moss reacquisition, the Company shall have the right to redeem the Common
Stock acquired pursuant to the exercise of this Warrant upon payment to the
Registered Holder of an amount equal to the Exercise Price for the Common Stock
so acquired. The provisions of this subsection (3) shall terminate upon the
repayment in full of the Moss Loan.
1B. Exercise Procedure.
------------------
(i) This Warrant shall be deemed to have been exercised when all of
the following items have been delivered to the Company (the "Exercise Time"):
(a) a completed Exercise Agreement, as described in paragraph 1C
below, executed by the Person exercising all or part of the purchase rights
represented by this Warrant (the "Purchaser");
(b) this Warrant;
(c) if this Warrant is not registered in the name of the
Purchaser, an Assignment or Assignments in the form set forth in Exhibit II
----------
hereto evidencing the assignment of this Warrant to the Purchaser, in which
case the Registered Holder shall have complied with the provision set forth
in Section 5 hereof; and
(d) the product of the Exercise Price (as such term is defined in
the first sentence of Section 2) multiplied by the number of shares of
Common Stock being purchased upon such exercise (the "Aggregate Exercise
Price") payable, at the option of the Purchaser, by either (A) a certified
or official bank check payable to the Company in an amount equal to the
Aggregate Exercise Price, or (B) if, and only if, the Purchaser is the
payee under the Loan Agreement, crediting certain principal payments due
under the Loan Agreement (in the inverse order of maturity) in an amount
equal to the Aggregate Exercise Price.
(ii) Certificates for shares of Common Stock purchased upon exercise
of this Warrant shall be delivered by the Company to the Purchaser within five
business days after the date of the Exercise Time together with any cash payable
in lieu of a fraction of a share pursuant to Section 12 hereof. Unless this
Warrant has expired or all of the purchase rights represented hereby have been
exercised, the Company shall prepare a new Warrant, substantially identical
hereto, representing the rights formerly represented by this Warrant which have
not expired or been exercised and shall, within such five-day period, deliver
such new Warrant to the Person designated for delivery in the Exercise
Agreement.
(iii) The Common Stock issuable upon the exercise of this Warrant
shall be deemed to have been issued to the Purchaser at the Exercise Time, and
the Purchaser shall be
- 2 -
<PAGE>
deemed for all purposes to have become the record holder of such Common Stock at
the Exercise Time.
(iv) The issuance of certificates for shares of Common Stock upon
exercise of this Warrant shall be made without charge to the Registered Holder
or the Purchaser for any issuance tax in respect thereof or other cost incurred
by the Company in connection with such exercise and the related issuance of
shares of Common Stock; 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 issuance of any Warrants or any certificates for shares of
Common Stock in a name other than that of a Registered Holder, and the Company
shall not be required to issue or deliver such Warrant or certificate for shares
of Common Stock unless and until the Person requesting the issuance thereof
shall have paid to the Company the amount of such tax or shall have established
to the reasonable satisfaction of the Company that such tax has been paid.
(v) The Company shall not close its books against the transfer of
this Warrant or of any share of Common Stock issued or issuable upon the
exercise of this Warrant in any manner which interferes with the timely exercise
of this Warrant. The Company shall from time to time take all such action as
may be necessary to assure that the par value per share of the unissued Common
Stock acquirable upon exercise of this Warrant is at all times equal to or less
than the Exercise Price then in effect.
(vi) The Company shall assist and cooperate with the Registered
Holder or any Purchaser required to make any governmental filings or obtain any
governmental approvals prior to or in connection with any exercise of this
Warrant. Until all requisite government approvals are received (including,
without limitation, any approvals required under the Bank Holding Company Act of
1956, as amended), this Warrant shall be exercisable only to the extent that
governmental approvals are not required.
(vii) Notwithstanding any other provision hereof, the exercise of any
portion of this Warrant may be made on a conditional basis, and such exercise
shall not be deemed to be effective until the condition has been met.
(viii) The Company shall at all times reserve and keep available out
of its authorized but unissued shares of Common Stock solely for the purpose of
issuance upon the exercise of this Warrant, the aggregate number of shares of
Common Stock issuable upon the exercise of this Warrant. All shares of Common
Stock which are so issuable shall, when issued and upon the payment of the
Exercise Price therefor, be duly and validly issued, fully paid and
nonassessable and free from all taxes (subject to the provisions of paragraph
1B(iv)), liens and charges. The Company shall take all such actions as may be
necessary to assure that all such shares of Common Stock may be so issued
without violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which shares of Common
Stock may be listed (except for official notice of issuance which shall be
immediately delivered by the Company upon each such issuance). The Company will
use its best efforts to cause the shares of Common Stock issuable upon exercise
of this Warrant,
- 3 -
<PAGE>
immediately upon such exercise, to be listed on any domestic securities exchange
upon which shares of such class of Common Stock are listed at the time of
issuance.
1C. Exercise Agreement. Upon any exercise of this Warrant, the Exercise
------------------
Agreement shall be substantially in the form set forth in Exhibit I hereto,
---------
except that if the shares of Common Stock are not to be issued in the name of
the Person in whose name this Warrant is registered, the Exercise Agreement
shall also state the name of the Person to whom the certificates for the shares
of Common Stock are to be issued and if less than all of the number of shares of
Common Stock purchasable hereunder are to be so purchased, it shall also state
the name of the Person to whom a new Warrant for the unexercised portion of the
rights hereunder is to be delivered. Such Exercise Agreement shall be dated the
actual date of execution thereof.
1D. Condition to Exercise of Warrant. Hibernia may exercise the Warrant
--------------------------------
only to the extent that Hibernia does not own, after such exercise, more than
4.9% of the total voting power of all outstanding voting securities of the
Company; provided, however, that this restriction will lapse at such time as
Hibernia transfers the Warrant to a Small Business Investment Company owned by
Hibernia.
Section 2. Adjustment of Exercise Price and Number of Shares. In order to
-------------------------------------------------
prevent dilution of the rights granted under this Warrant, the Initial Exercise
Price shall be subject to adjustment from time to time as provided in this
Section 2 (such price or such price as last adjusted pursuant to the terms
hereof, as the case may be, is herein called the "Exercise Price"), and the
number of shares of Common Stock obtainable upon exercise of this Warrant shall
be subject to adjustment from time to time as provided in this Section 2.
2A. Adjustment of Exercise Price if Common Stock is Issued Below Exercise
---------------------------------------------------------------------
Price. If and whenever on or after the Date of Issuance of this Warrant, the
- -----
Company issues or sells, or in accordance with paragraph 2C is deemed to have
issued or sold, any shares of Common Stock (other than pursuant to a Permitted
Issuance) for a consideration per share less than the Exercise Price, then
immediately upon such issue or sale the Exercise Price shall be reduced to equal
the amount of such consideration per share.
2B. Adjustment of Exercise Price if Common Stock is Issued Below Market
-------------------------------------------------------------------
Value. If and whenever on or after the Date of Issuance of this Warrant, the
- -----
Company issues or sells, or in accordance with paragraph 2C is deemed to have
issued or sold, any shares of Common Stock (other than pursuant to a Permitted
Issuance) for a consideration per share less than the Market Price then in
effect (but greater than the Exercise Price), then immediately upon such issue
or sale the Exercise Price shall be reduced to equal the amount determined by
multiplying the Exercise Price in effect immediately prior to such issue or sale
by a fraction, the numerator of which will be the sum of (x) the number of
shares of Common Stock Deemed Outstanding immediately prior to such issuance or
sale multiplied by the Market Value per share of Common Stock determined as of
the date of such issuance or sale (but without giving effect to such issuance or
sale), plus (y) the consideration, if any, received by the Company upon such
issuance or sale, and the denominator of which will be the product derived by
multiplying such
- 4 -
<PAGE>
Market Value per share of Common Stock by the number of shares of Common stock
Deemed Outstanding immediately after such issuance or sale. If the holder of
this Warrant does not exercise preemptive rights in connection with such
issuance, then, in addition to the foregoing adjustment to the Exercise Price,
the number of shares of Common Stock acquirable upon exercise of this Warrant
shall be adjusted to the number of shares determined by multiplying the Exercise
Price in effect immediately prior to such adjustment by the number of shares of
Common Stock acquirable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Exercise Price resulting from
such adjustment. For purposes of this Section 2, the calculation of the number
of shares of Common Stock Deemed Outstanding shall exclude the shares of Common
Stock issuable upon exercise of this Warrant.
2C. Effect on Exercise Price of Certain Events. For purposes of
------------------------------------------
determining the adjusted Exercise Price under paragraphs 2A and 2B, the
following shall be applicable:
(i) Issuance of Rights or Options. If the Company in any manner
-----------------------------
grants any rights, options or warrants to subscribe for or to purchase Common
Stock or any evidences of indebtedness, stock or other securities convertible
into or exchangeable for Common Stock (such rights or options being herein
called "Options" and such convertible or exchangeable stock or securities being
herein called "Convertible Securities") and the price per share for which Common
Stock is issuable upon the exercise of such Options or upon conversion or
exchange of such Convertible Securities is less than the Market Price, or less
than the Exercise Price then in effect, then the total maximum number of shares
of Common Stock issuable upon the exercise of such Options or upon conversion or
exchange of the total maximum amount of such Convertible Securities issuable
upon the exercise of such Options shall be deemed to be outstanding and to have
been issued and sold by the Company for such price per share, unless the
issuance of such shares of Common Stock upon such exercise, conversion or
exchange constitutes a Permitted Issuance. For purposes of this paragraph, the
"price per share for which Common Stock is issuable upon exercise of such
Options or upon conversion or exchange of such Convertible Securities" is
determined by dividing (A) the total amount, if any, received or receivable by
the Company as consideration for the granting of such Options, plus the minimum
aggregate amount of additional consideration payable to the Company upon the
exercise of all such Options, plus in the case of such Options which relate to
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the issuance or sale of such
Convertible Securities and the conversion or exchange thereof, by (B) the total
maximum number of shares of Common Stock issuable upon exercise of such Options
or upon the conversion or exchange of all such Convertible Securities issuable
upon the exercise of such Options. No adjustment of the Exercise Price shall be
made upon the actual issuance of such Common Stock or of such Convertible
Securities upon the exercise of such Options or upon the actual issuance of such
Common Stock upon conversion or exchange of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Company in any
----------------------------------
manner issues or sells any Convertible Securities and the price per share for
which Common Stock is issuable upon such conversion or exchange is less than the
Market Price or the Exercise Price then in
- 5 -
<PAGE>
effect, then the maximum number of shares of Common Stock issuable upon
conversion or exchange of such Convertible Securities shall be deemed to be
outstanding and to have been issued and sold by the Company for such price per
share, unless the issuance of such shares of Common Stock upon such exercise,
conversion or exchange constitutes a Permitted Issuance. For the purposes of
this paragraph, the "price per share for which Common Stock is issuable upon
such conversion or exchange" is determined by dividing (A) the total amount
received or receivable by the Company as consideration for the issue or sale of
such Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the conversion or exchange
thereof, by (B) the total maximum number of shares of Common Stock issuable upon
the conversion or exchange of all such Convertible Securities. No adjustment of
the Exercise Price shall be made upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Securities, and if any such issue or
sale of such Convertible Securities is made upon exercise of any Options for
which adjustments of the Exercise Price had been or are to be made pursuant to
other provisions of this paragraph 2C, no further adjustment of the Exercise
Price shall be made by reason of such issue or sale.
(iii) Change in Option Price or Conversion Rate. If (A) the purchase
-----------------------------------------
price provided for in any Options, (B) the additional consideration, if any,
payable upon the issue, conversion or exchange of any Convertible Securities, or
(C) the rate at which any Convertible Securities are convertible into or
exchangeable for Common Stock shall change at any time, the Exercise Price in
effect at the time of such change shall be readjusted to the Exercise Price
which would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or changed conversion rate, as the case may be, at the
time initially granted, issued or sold and the number of shares of Common Stock
shall be correspondingly readjusted; provided that if such adjustment would
result in an increase of the Exercise Price then in effect, such adjustment
shall not be effective until 30 days after written notice thereof has been given
by the Company to the Registered Holder.
(iv) Treatment of Expired Options and Unexercised Convertible
--------------------------------------------------------
Securities. Upon the expiration of any Option or the termination of any right
- ----------
to convert or exchange any Convertible Securities without the exercise of such
Option or right, the Exercise Price then in effect and the number of shares of
Common Stock acquirable hereunder shall be adjusted to the Exercise Price and
the number of shares which would have been in effect at the time of such
expiration or termination had such Option or Convertible Securities never been
issued.
(v) Calculation of Consideration Received. If any Common Stock,
-------------------------------------
Options or Convertible Securities are issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor shall be deemed to
be the net amount received by the Company therefor. In case any Common Stock,
Options or Convertible Securities are issued or sold for a consideration other
than cash, the amount of the consideration other than cash received by the
Company shall be the fair value of such consideration, except where such
consideration consists of securities, in which case the amount of consideration
received by the Company shall be the Market Price thereof as of the date of
receipt. In case any Common Stock, Options or
- 6 -
<PAGE>
Convertible Securities are issued to the owners of the non-surviving entity in
connection with any merger in which the Company is the surviving entity, the
amount of consideration therefor shall be deemed to be the fair value of such
portion of the net assets and business of the non-surviving entity as is
attributable to such Common Stock, Options or Convertible Securities, as the
case may be. The fair value of any consideration other than cash or securities
shall be determined jointly by the Company and the Registered Holders of
Warrants representing a majority of the shares of Common Stock obtainable upon
exercise of such Warrants. If such parties are unable to reach agreement within
a reasonable period of time, the value of such consideration shall be determined
by an appraiser jointly selected by the Company and the Registered Holders of
Warrants representing a majority of the shares of Common Stock obtainable upon
exercise of such Warrants. The determination of such appraiser shall be final
and binding on the Company and the registered Holder, and the fees and expenses
of such appraiser shall be paid by the Company.
(vi) Integrated Transactions. In case any Option is issued in
-----------------------
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options shall be deemed to
have been issued for such consideration as shall have been determined jointly by
the Company and the Registered Holders of Warrants representing a majority of
the shares of Common Stock obtainable upon exercise of such Warrants. If such
parties are unable to reach agreement within a reasonable period of time, the
value of such consideration shall be determined by an appraiser jointly selected
by the Company and the Registered Holders of Warrants representing a majority of
the shares of Common Stock obtainable upon exercise of such Warrants. The
determination of such appraiser shall be final and binding on the Company and
the registered Holder, and the fees and expenses of such appraiser shall be paid
by the Company.
(vii) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time does not include shares owned or held by or for
the account of the Company or any Subsidiary, and the disposition of any shares
so owned or held shall be considered an issue or sale of Common Stock.
(viii) Record Date. If the Company takes a record of the holders of
-----------
Common Stock for the purpose of entitling them (A) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible Securities
or (B) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date shall be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be.
2D. Subdivision or Combination of Common Stock. If the Company at any
------------------------------------------
time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares or pays a dividend or makes a distribution to holders
of its Common Stock of shares of Common Stock, the
- 7 -
<PAGE>
Exercise Price in effect immediately prior to such subdivision shall be
proportionately reduced and the number of shares of Common Stock obtainable upon
exercise of this Warrant shall be proportionately increased. If the Company at
any time combines (by reverse stock split or otherwise) one or more classes of
its outstanding shares of Common Stock into a small number of shares, the
Exercise Price in effect immediately prior to such combination shall be
proportionately increased and the number of shares of Common Stock obtainable
upon exercise of this Warrant shall be proportionately decreased.
2E. Reorganization, Reclassification, Consolidation, Merger or Sale. Any
---------------------------------------------------------------
recapitalization, reorganization, reclassification, consolidation, merger, sale
of all or substantially all of the Company's assets to another Person or other
transaction which is effected in such a way that holders of Common Stock are
entitled to receive (either directly or upon subsequent liquidation) stock,
securities or assets with respect to or in exchange for Common Stock is referred
to herein as a "Company Sale." Prior to the consummation of any Company Sale,
the Company shall make appropriate provision (in form and substance satisfactory
to the Registered Holders of the Warrants representing a majority of the Common
Stock obtainable upon exercise of all Warrants then outstanding) to insure that
each of the Registered Holders of the Warrants shall thereafter have the right
to acquire and receive in lieu of or addition to (as the case may be) the shares
of Common Stock immediately theretofore acquirable and receivable upon the
exercise of such holder's Warrant, such shares of stock, securities or assets as
may be issued or payable with respect to or in exchange for the number of shares
of Common Stock immediately theretofore acquirable and receivable upon exercise
of such holder's Warrant had such Company Sale not taken place. In any such
case, the Company shall make appropriate provision (in form and substance
satisfactory to the Registered Holders of the Warrants representing a majority
of the Common Stock obtainable upon exercise of all Warrants then outstanding)
with respect to such holders' rights and interest to insure that the provisions
of this Section 2 and Section 3 hereof shall thereafter be applicable to the
Warrants (including, in the case of any such consolidation, merger or sale in
which the successor entity or purchasing entity is other than the Company, an
immediate adjustment of the Exercise Price to the value for the Common Stock
reflected by the terms of such consolidation, merger or sale, and a
corresponding immediate adjustment in the number of shares of Common Stock
acquirable and receivable upon exercise of the Warrants, if the value so
reflected is less than the Exercise Price in effect immediately prior to such
consolidation, merger or sale). The Company shall not effect any such
consolidation, merger or sale, unless prior to the consummation thereof, the
successor entity (if other than the Company) resulting from a consolidation or
merger or the corporation purchasing such assets assumes by written instrument
(in form and substance satisfactory to the Registered Holders of Warrants
representing a majority of the Common Stock obtainable upon exercise of all of
the Warrants then outstanding), the obligation to deliver to each such holder
such shares of stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to acquire.
2F. Certain Events. If any event occurs of the type contemplated by the
--------------
provisions of this Section 2 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity
- 8 -
<PAGE>
features but excluding any Permitted Issuance), then the Company's board of
directors shall make an appropriate adjustment in the Exercise Price and the
number of shares of Common Stock obtainable upon exercise of this Warranty so as
to protect the rights of the holders of the Warrants; provided that no such
adjustment shall increase the Exercise Price or decrease the number of shares of
Common Stock obtainable as otherwise determined pursuant to this Section 2.
2G. Notices.
-------
(i) Immediately upon adjustment of the Exercise Price, the Company
shall give written notice thereof to the Registered Holders, setting forth in
reasonable detail and certifying the calculation of such adjustment.
(ii) The Company shall give written notice to the Registered Holders
at least 30 days prior to the date on which the Company closes its books or
takes a record (A) with respect to any dividend or distribution upon the Common
Stock, (B) with respect to any pro rata subscription offer to holders of Common
Stock or (C) for determining rights to vote with respect to any Company Sale,
dissolution or liquidation.
(iii) The Company shall also give written notice to the Registered
Holders at least 30 days prior to the date on which any Company Sale,
dissolution or liquidation shall take place.
2H. Liquidating Dividends. If the Company declares or pays a
---------------------
dividend upon the Common Stock payable otherwise than in cash out of earnings or
earned surplus (determined in accordance with generally accepted accounting
principles, consistently applied) except for a stock dividend payable in shares
of Common Stock (a "Liquidating Dividend"), then the Company shall, at least
thirty (30) days prior to the record date established for such Liquidating
Dividend, give notice to the Registered Holders of this Warrant, which notice
shall specify the occurrence and the amount of the Liquidating Dividend per
share, the type of securities and other property to be included in such
Liquidating Dividend and the record and payment dates for such Liquidating
Dividend.
Section 3. Definitions. The following terms have the meanings set forth
-----------
below:
"Affiliate", as applied to any Person, means (a) any other Person directly
---------
or indirectly controlling, controlled by or under common control with, that
Person, (b) any other Person that owns or controls (i) 5% or more of any class
of equity securities of that Person or any of its Affiliates or (ii) 5% or more
of any class of equity securities (including any equity securities issuable upon
the exercise of any option or convertible security) of that Person or any of its
Affiliates, or (c) any director, partner, officer, agent, employee or relative
of such Person. For the purposes of this definition, "control" (including with
correlative meanings, the terms "controlling", "controlled by", and "under
common control with") as applied to any Person, means the possession, directly
or indirectly, of the power to direct or cause the direction of the
- 9 -
<PAGE>
management and policies of that Person, whether through ownership of voting
securities or by contract or otherwise.
"Common Stock" means the Company's Common Stock and any capital stock of
------------
any class of the Company hereafter authorized which is not limited to a fixed
sum or percentage of par or stated value in respect to the rights of the holders
thereof to participate in dividends or in the distribution of assets upon any
liquidation, dissolution or winding up of the Company; provided that if there is
a change such that the securities issuable upon exercise of the Warrants are
issued by an entity other than the Company or there is a change in the class of
securities so issuable, then the term "Common Stock" shall mean one share of the
security issuable upon exercise of the Warrants if such security is issuable in
shares, or shall mean the smallest unit in which such security is issuable if
such security is not issuable in shares.
"Common Stock Deemed Outstanding" means, at any given time, the number of
-------------------------------
shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock deemed to be outstanding pursuant to Section 2 hereof.
"Market Price" means as to any security the average of the closing prices
------------
of such security's sales on all domestic securities exchanges on which such
security may at the time be listed, or, if there have been no sales on any such
exchange on any day, the average of the highest bid and lowest asked prices on
all such exchanges at the end of such day, or, if on any day such security is
not so listed, the average of the representative bid and asked prices quoted
Stock Market as of 4:00 P.M., New York time, on such day, or, if on any day such
security is not traded on the Stock Market, the average of the highest bid and
lowest asked prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau, Incorporated, or any similar
successor organization, in each such case averaged over a period of 21 days
consisting of the day as of which "Market Price" is being determined and the 20
consecutive business days prior to such day; provided that if such security is
listed on any domestic securities exchange the term "business days" as used in
this sentence means business days on which such exchange is open for trading.
If at any time such security is not listed on any domestic securities exchange
or traded on the Stock Market or the domestic over-the-counter market, the
"Market Price" shall be the fair value thereof as determined jointly by the
Company and the Registered Holders of Warrants representing a majority of the
shares of Common Stock obtainable upon exercise of such Warrants. If such
parties are unable to reach agreement within a reasonable period of time, the
value of such consideration shall be determined by an appraiser jointly selected
by the Company and the Registered Holders of Warrants representing a majority of
the shares of Common Stock obtainable upon exercise of such Warrants. The
determination of such appraiser shall be final and binding on the Company and
the registered Holder, and the fees and expenses of such appraiser shall be paid
by the Company. The value of such consideration shall be determined without
giving effect to any discount for minority interest, any restrictions on
transferability or any lack of liquidity of the Common Stock or to the fact that
the Company has no class of equity registered under the Securities Exchange Act
of 1934.
- 10 -
<PAGE>
"Permitted Issuance" means the issuance by the Company of shares of Common
------------------
Stock (a) on or prior to the Date of Issuance of this Warrant; (b) upon exercise
of this Warrant; (c) upon the conversion or exchange of any shares of any class
of Common Stock into a different class of Common Stock; and (d) in connection
with any dividend or distribution to the holders of Common Stock.
"Person" means an individual, a partnership, a joint venture, a
------
corporation, a trust, an unincorporated organization and a government or any
department or agency thereof.
"Registered Holders" means, collectively, the Registered Holder specified
------------------
in the first paragraph of this Warrant and each holder of a Warrant, if any,
registered as such on the books of the Company in accordance with the provision
of Section 11 hereof.
"Restricted Common Stock" means shares of Common Stock which are, or which
-----------------------
upon their issuance on the exercise of this Warrant would be, evidenced by a
certificate bearing one or more legends referred to in Section 3 hereof.
Section 4. No Voting Rights; Limitations of Liability. This Warrant shall
------------------------------------------
not entitle the holder hereof to any voting rights or other rights as a
stockholder of the Company. No provision hereof, in the absence of affirmative
action by the Registered Holder to purchase Common Stock, and no enumeration
herein of the rights or privileges of the Registered Holder shall give rise to
any liability or such holder for the Exercise Price of Common Stock acquirable
by exercise hereof or as a stockholder of the Company.
Section 5. Restrictions. Subject to the provisions of this Section 5,
------------
this Warrant and all rights hereunder are transferable, in whole or in part,
without charge to the Registered Holder (subject to the provisions of paragraph
1B(iv) hereof), upon surrender of this Warrant with a properly executed
Assignment (in the form of Exhibit II hereto) at the principal office of the
----------
Company. The Registered Holder agrees that it will not sell, transfer or
otherwise dispose of this Warrant or any shares of Common Stock purchased upon
exercise of this Warrant, in whole or in part, except pursuant to an effective
registration statement under the Securities Act of 1933 or an exemption from
registration thereunder. The Company shall cooperate with Hibernia in providing
information and executing forms reasonably required by Hibernia to assign this
Warrant to a qualified and licensed small business investment company owned by
Hibernia.
Section 6. Warrant Exchangeable for Different Denominations. This Warrant
------------------------------------------------
is exchangeable upon the surrender hereof by the Registered Holder at the
principal office of the Company, for new Warrants of like tenor representing in
the aggregate the purchase rights hereunder, and each of such new Warrants shall
represent such portion of such rights as is designated by the Registered Holder
at the time of such surrender. The date the Company initially issues this
Warrant shall be deemed to be the "Date of Issuance" hereof regardless of the
number of times new certificates representing the unexpired and unexercised
rights formerly represented by this Warrant shall be issued. All Warrants
representing portions of the rights hereunder are referred to herein as the
"Warrants."
- 11 -
<PAGE>
Section 7. Replacement. Upon receipt of evidence reasonable satisfactory
-----------
to the Company (an affidavit of the Registered Holder shall be satisfactory) of
the ownership and the loss, theft, destruction or mutilation of any certificate
evidencing this Warrant, and in the case of any such loss, theft or destruction,
upon receipt of indemnity reasonably satisfactory to the Company (provided that
if the holder is a financial institution or other institutional investor its own
agreement shall be satisfactory) or, in the case of any such mutilation upon
surrender of such certificate, the Company shall (at its expense) execute and
deliver in lieu of such certificate a new certificate of like kind representing
the same rights represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate.
Section 8. Notices. Except as otherwise expressly provided herein, all
-------
notices and deliveries referred to in this Warrant shall be in writing and shall
be delivered personally or sent by registered or certified mail, return receipt
requested, postage prepaid, or sent via a nationally recognized overnight
courier service and shall be deemed to have been given when so delivered,
deposited in the U.S. Mail or sent (i) to the Company, at its principal
executive offices and (ii) to the Registered Holder of this Warrant, at such
holder's address as it appears in the records of the Company (unless otherwise
indicated by any such holder).
Section 9. Amendment and Waiver. Except as otherwise provided herein, the
--------------------
provisions of this Warrant may be amended and the Company may take any action
herein prohibited, or omit to perform any act herein required to be performed by
it, only if the Company has obtained the written consent of the Registered
Holders of Warrants representing a majority of the shares of Common Stock
obtainable upon exercise of the Warrants; provided that no such action may
change the Exercise Price of the Warrants or the number of shares or class of
stock obtainable upon exercise of the Warrants without the written consent of
the Registered Holders of Warrants representing at least 75% of the shares of
Common Stock obtainable upon exercise of the Warrants.
Section 10. Descriptive Headings; Governing Law. The descriptive headings
-----------------------------------
of the several Sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. This Warrant
shall be governed and construed in accordance with the laws of the state of
Texas applicable to a contract executed and performed in such state without
giving effect to the conflicts of laws principles thereof.
Section 11. Warrant Register. The Company shall maintain at its principal
----------------
executive offices books for the registration and, subject to the provisions of
Section 5 hereof, the registration of transfer of this Warrant. The Company may
deem and treat the Registered Holder as the absolute owner hereof
(notwithstanding any notation of ownership or other writing thereon made by
anyone) for all purposes and shall not be affected by any notice to the
contrary.
Section 12. Fractions of Shares. The Company may, but shall not be
-------------------
required to, issue a fraction of a share of Common Stock upon the exercise of
this Warrant in whole or in part. As to any fraction of a share which the
Company elects not to issue, the Company shall make
- 12 -
<PAGE>
a cash payment in respect of such fraction in an amount equal to the same
fraction of the Market Price on the date of such exercise.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
and attested by its duly authorized officers under its corporate seal and to be
dated the Date of Issuance hereof.
DIVERSIFIED SPECIALISTS, INC.
By /s/ M.D. Davis
------------------------------
Name: M.D. Davis
Title: CEO
Attest:
/s/ Thomas V. Yarnell
- -----------------------------
Name: Thomas V. Yarnell
Title: Secretary
- 13 -
<PAGE>
EXHIBIT I
EXERCISE AGREEMENT
------------------
To: Dated:
The undersigned, pursuant to the provisions set forth in the attached
Warrant (Certificate No. _________), hereby agrees to subscribe for the purchase
of _________ shares of Common Stock covered by such Warrant and makes payment
herewith in full therefor at the price per share provided by such Warrant.
Please issue a certificate for such shares of Common Stock in the name of, and
pay any cash in lieu of fractional shares to:
Name________________________________
Signature___________________________
Address_____________________________
NOTE: The name should correspond exactly with the name on
the face of the Warrant or the name of the assignee
appearing in the accompanying assignment form.
If such number of shares of Common Stock is not all of the shares purchasable
under the attached Warrant, a new Warrant is to be issued in the name appearing
above covering the balance of the shares purchasable thereunder, less any
fraction of a share paid in cash.
- 14 -
<PAGE>
EXHIBIT II
ASSIGNMENT
----------
FOR VALUE RECEIVED, _________________________________ hereby sells,
assigns and transfers all the rights of the undersigned under the attached
Warrant (Certificate No. _____) with respect to the number of shares of the
Common Stock covered thereby set forth below, unto:
Names of Assignees Address No. of Shares
- ------------------ ------- -------------
and hereby irrevocably constitutes and appoints ______________________ as agent
and attorney-in-fact to transfer said Warrant on the books of the within named
corporation, with full power of substitution in the premises.
Dated: Signature ___________________________
___________________________
Witness ___________________________
NOTE: The above signature must correspond exactly
with the name on the face of the attached Warrant.
- 15 -
<PAGE>
EXHIBIT 4.4
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated December
11, 1995, is between DIVERSIFIED SPECIALISTS, INC., a Texas corporation (the
"Company"), and HIBERNIA CORPORATION, a Louisiana corporation ("Hibernia").
RECITALS
A. The Company and Hibernia have entered into a Senior Subordinated
Loan Agreement dated the date hereof, pursuant to which Hibernia has made a
senior subordinated term loan to the Company in the principal amount of
$3,000,000 (the "Loan Agreement");
B. In consideration of Hibernia's entering into the Loan Agreement,
the Company has issued to Hibernia a Warrant to purchase up to 10% of the common
stock of the Company, subject to the terms and conditions set forth in a Common
Stock Purchase Warrant between the Company and Hibernia (the "Warrant") dated
the date hereof;
C. In further consideration of Hibernia entering into the Loan
Agreement, the Company has also agreed to grant to Hibernia certain registration
rights relating to the common stock to be acquired through the exercise of the
Warrant.
D. Capitalized terms used and not otherwise defined herein have the
respective meanings ascribed thereto in Article 9.
AGREEMENT
NOW THEREFORE, in consideration of the foregoing and for and in
consideration of the mutual covenants and undertakings, the parties hereto agree
as follows:
ARTICLE 1
DEMAND REGISTRATIONS
--------------------
1.01 Requests for Registration. At any time after the Initial Public
-------------------------
Offering, Hibernia may request registration under the Securities Act of all or
part of its Registrable Securities, subject to the limitations set forth in this
Article 1 (i) on Form S-1 or any similar long-form registration ("Long-Form
Registrations"), and (ii) on Form S-2 or S-3 or any similar short-form
registration ("Short-Form Registrations") if the Company qualifies to use such
short form. Thereafter, the Company will use its best efforts to effect the
registration under the Securities Act on the form requested by Hibernia and will
include in such registration all Registrable Securities requested by Hibernia.
All registrations requested pursuant to this Section 1.01 are referred to herein
as "Demand Registrations." Hibernia may, at any time prior to the effective date
of the registration statement relating to such registration, revoke such request
by providing written notice to the Company.
<PAGE>
1.02 Number of Registrations. Hibernia will be entitled to request up
-----------------------
to two Demand Registrations in which the Company will pay all Registration
Expenses; provided, however, that (i) the Company shall only be required to
effect one Demand Registration of Registrable Securities within any one-year
period; (ii) Hibernia shall lose the right to demand one registration pursuant
to this Article 1 if the number of Registrable Securities then held by Hibernia,
together with the number of shares that Hibernia is then entitled to purchase
subject to the Warrant, decreases to less than five percent of the then
outstanding Common Stock; and (iii) the Company shall not be obligated to effect
any registration requested pursuant to this Article 1 if (a) the number of
shares of Registrable Securities then held by Hibernia, together with the number
of shares that Hibernia is then entitled to purchase subject to the Warrant,
shall be less than one percent of the then outstanding Common Stock or (b) such
registration is not permitted by law. Demand Registrations shall be
underwritten registrations or shelf registrations, as requested by Hibernia.
Once the Company has become subject to the reporting requirements of the
Exchange Act, the Company will use its best efforts to make Short-Form
Registrations available for the sale of Registrable Securities.
1.03 Effective Registration Statement. A registration requested
--------------------------------
pursuant to Section 1.01 of this Agreement shall not be deemed to have been
effected (i) unless a registration statement with respect thereto has become
effective, (ii) if after it has become effective, such registration is
interfered with by any stop order, injunction or other order or requirement of
the Securities and Exchange Commission or other governmental agency or court for
any reason (other than due to the fault of Hibernia) for a period of 15
consecutive Business Days, and the Registrable Securities covered thereby have
not been sold, (iii) if the reasonable conditions to closing of the type
normally contained in purchase agreements or underwriting agareements generally
and specified in the purchase agreement or underwriting agreement entered into
in connection with such registration are not satisfied by reason of a failure by
or inability of the Company to satisfy any thereof, or the occurrence of an
event outside the control of Hibernia, or (iv) if Hibernia is not able to
register at least 90% of the amount of Registrable Securities requested to be
included in such registration; provided that the Company will pay all
Registration Expenses in connection with any registration if pursuant to this
Section 1.03 the registration is deemed not to have been effected.
1.04 Priority on Demand Registrations. The Company will not include
--------------------------------
in any Demand Registration any securities which are not Registrable Securities
without the written consent of Hibernia, which consent shall not unreasonably be
withheld.
1.05 Selection of Underwriters. Subject to the approval of the
-------------------------
Company, which approval will not unreasonably be withheld, Hibernia will have
the right to select the underwriters and the managing underwriter to administer
any Demand Registration.
1.06 Other Registration Rights. Except as provided in this Agreement
-------------------------
or for the warrants issued this date to Tommy Moss or as Hibernia shall
otherwise consent to in writing, the Company will not grant to any Person the
right to request the Company to register any equity securities of the Company,
or any securities convertible, exchangeable or exercisable for or into such
securities, other than piggyback registration rights entitling the holder
thereof to participate in Company-initiated registrations on a pari passu basis
with Hibernia.
-2-
<PAGE>
ARTICLE 2
OTHER REGISTRATIONS
-------------------
2.01 Right to Piggyback. Whenever the Company proposes to register
------------------
any of its securities under the Securities Act (other than pursuant to (i) a
Demand Registration, (ii) an IPO if no other selling shareholders are selling
shares in the IPO, (iii) an employee or non-employee director compensation or
benefit program, (iv) an exchange offer or an offering of securities solely to
the existing stockholders or employees of the Company, or (v) an acquisition,
merger or other business combination using a registration statement on Form S-4
or any successor form), and the registration form to be used may be used for the
registration of Registrable Securities (a "Piggyback Registration"), the Company
will give prompt written notice (in any event within three Business Days after
its receipt of notice of any exercise of other demand registration rights) to
Hibernia of its intention to effect such a registration and will include in such
registration all Registrable Securities with respect to which the Company has
received Hibernia's written request for inclusion therein within 15 days after
the receipt of the Company's notice.
2.02 Piggyback Registration Expenses. The Registration Expenses of
-------------------------------
Hibernia will be paid by the Company in all Piggyback Registrations.
2.03 Priority on Primary Registrations. If a Piggyback Registration
---------------------------------
is an underwritten primary registration on behalf of the Company, and the
managing underwriters advise the Company in writing that in their opinion the
number of securities requested to be included in such registration exceeds the
number which can be sold in such offering, the Company will include in such
registration (i) first, the securities the Company proposes to sell, and (ii)
second, the Registrable Securities requested to be included in such
registration, along with other securities requested to be included in such
registration by other holders who have piggyback registration rights, provided,
that if the managing underwriters in good faith determine that a lower number of
Registrable Securities and other such securities should be included, then the
Company shall be required to include in the underwriting only that lower number
of Registrable Securities and other securities on a pro rata basis.
2.04 Priority on Secondary Registrations. If a Piggyback
-----------------------------------
Registration is not a Demand Registration pursuant to Article 1 but is an
underwritten secondary registration on behalf of holders of the Company's
securities, and the managing underwriters advise the Company in writing that in
their opinion the number of securities requested to be included in such
registration exceeds the number which can be sold in such offering, the Company
will include in such registration (i) first, the securities requested to be
included therein by the holders requesting such registration, and (ii) second,
the Registrable Securities requested to be included in such registration,
provided, that if the managing underwriters in good faith determine that a lower
number of Registrable Securities should be included, then the Company shall be
required to include in the underwriting only that lower number of Registrable
Securities.
2.05 Other Registrations. If the Company has previously filed a
-------------------
registration statement with respect to Registrable Securities pursuant to
Article 1 of this Agreement or pursuant to this Article 2, and if such previous
registration has not been withdrawn or abandoned, the Company will not file or
cause to be effected any other registration of any of its equity securities or
-3-
<PAGE>
securities convertible, exchangeable or exercisable for or into its equity
securities under the Securities Act (except on Form S-8 or S-4, or any successor
forms), whether on its own behalf or at the request of any holder or holders of
such securities, until a period of at least 6 months has elapsed from the
effective date of such previous registration.
ARTICLE 3
HOLDBACK AGREEMENTS
-------------------
3.01 Hibernia Holdback. Hibernia agrees not to effect any public
-----------------
sale or distribution of equity securities of the Company, or any securities
convertible, exchangeable or exercisable for or into such securities, including
a sale pursuant to Rule 144 or Rule 145 under the Securities Act, during the
seven days prior to the effective date of any underwritten Demand Registration
(except as part of such underwritten registration), and for such period
following the effective date of the Demand Registration as the managing
underwriters of the registered public offering required for the directors and
officers of the Company.
3.02 Company Holdback. The Company agrees (i) not to effect any
----------------
public sale or distribution of its equity securities, or any securities
convertible, exchangeable or exercisable for or into such securities, during the
seven days prior to, and during the 90-day period (or for such longer period as
the managing underwriters of the registered public offering request, not to
exceed 180 days) beginning on, the effective date of any underwritten Demand
Registration or any underwritten Piggyback Registration in which Hibernia is a
selling stockholder (except as part of such underwritten registration or
pursuant to registrations on Form S-8 or any successor form), unless the
managing underwriters of the registered public offering otherwise agree, and
(ii) to use all reasonable efforts to cause each holder of at least 5% (on a
fully-diluted basis) of its equity securities, or any securities convertible,
exchangeable or exercisable for or into such securities, to agree not to effect
any public sale or distribution of any such securities during such period
(except as part of such underwritten registration, if otherwise permitted),
unless the managing underwriters of the registered public offering otherwise
agree.
ARTICLE 4
REGISTRATION PROCEDURES
-----------------------
4.01 Registration Procedures. Whenever Hibernia has requested that
-----------------------
any Registrable Securities be registered pursuant to this Agreement, the Company
will use its best efforts to effect the registration and the sale of such
Registrable Securities in accordance with the intended method of disposition
thereof, and pursuant thereto the Company will, as expeditiously as possible or,
in the case of clause (p) below, will not:
(a) prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Registrable Securities (such
registration statement to include all information which Hibernia shall
reasonably request) and use its best efforts to cause such registration
statement to become effective, provided that at least five days before filing a
registration statement or prospectus or any amendments or supplements thereto,
the Company
-4-
<PAGE>
will (i) furnish to counsel selected by Hibernia copies of all such documents
proposed to be filed, and the Company shall not file any thereof to which such
counsel shall have reasonably objected on the grounds that such document does
not comply in all material respects with the requirements of the Securities Act
or of the rules or regulations thereunder, and (ii) notify Hibernia of (x) any
request by the Securities and Exchange Commission to amend such registration
statement or amend or supplement any prospectus, or (y) any stop order issued or
threatened by the Securities and Exchange Commission, and take all reasonable
actions required to prevent the entry of such stop order or to remove it if
entered;
(b) (i) prepare and file with the Securities and Exchange Commission
such amendments and supplements to such registration statement and the
prospectus used in connection therewith as may be necessary to keep such
registration statement effective for a period of not less than 30 days in the
case of a registration statement not filed pursuant to Rule 415 of the
Securities Act of 1933 (except that such 30 day period shall be extended (x) by
the length of any period that a stop order or similar proceeding is in effect
which prohibits the distribution of the Registrable Securities, and (y) by the
number of days during the period from and including the date on which Hibernia
shall have received a notice delivered pursuant to clause (f) below until the
date when Hibernia shall have received a copy of the supplemented or amended
prospectus contemplated by clause (f) below) or for a period of two years in the
case of a registration statement filed pursuant to Rule 415 under the Securities
Act of 1933, and (ii) comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such registration
statement during such period in accordance with the intended methods of
disposition by the sellers thereof set forth in such registration statement;
(c) furnish to Hibernia, without charge, such number of conformed
copies of such registration statement, each amendment and supplement thereto,
the prospectus included in such registration statement (including each
preliminary prospectus and, in each case including all exhibits) and such other
documents as Hibernia may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by Hibernia;
(d) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
Hibernia shall reasonably request, to keep such registration or qualification in
effect for so long as such registration statement remains in effect and do any
and all other acts and things which may be reasonably necessary or advisable to
enable Hibernia to consummate the disposition in such jurisdictions of the
Registrable Securities owned by Hibernia, provided, however, that the Company
--------
will not be required to (i) qualify generally to do business in any jurisdiction
where it would not otherwise be required to qualify but for this clause (d),
(ii) subject itself to taxation in any such jurisdiction or (iii) consent to
general service of process in any such jurisdiction;
(e) furnish to Hibernia a signed copy, addressed to Hibernia (and the
underwriters, if any) of an opinion of counsel for the Company or special
counsel to the selling stockholders, dated the effective date of such
registration statement (and, if such registration statement includes an
underwritten public offering, dated the date of the closing under the
underwriting agreement), reasonably satisfactory in form and substance to
Hibernia, covering substantially the same matters with respect to such
registration statement (and the prospectus included therein) as are customarily
covered in opinions of issuer's counsel delivered to the
-5-
<PAGE>
underwriters in underwritten public offerings, and such other legal matters as
Hibernia (or the underwriters, if any) may reasonably request;
(f) notify Hibernia, at a time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any event
known to the Company as a result of which the prospectus included in such
registration statement, as then in effect, contains an untrue statement of a
material fact or omits to state any fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances under which they were made, and, at the request of Hibernia, the
Company will prepare and furnish Hibernia a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such Registrable Securities, such
prospectus shall not include 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 in the light of the circumstances under which
they were made;
(g) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed, and to enter into such customary agreements as may be required in
furtherance thereof, including,without limitation, listing applications and
indemnification agreements in customary form;
(h) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;
(i) enter into such customary arrangements and take all such other
actions as Hibernia reasonably requests in order to expedite or facilitate the
disposition of such Registrable Securities;
(j) make available for inspection by Hibernia, any underwriter
participating in any disposition pursuant to such registration statement and any
attorney, accountant or other agent retained by Hibernia or any underwriter, all
financial and other records, pertinent corporate documents and properties of the
Company, and cause the Company's officers, directors, employees and independent
accountants to supply all information reasonably requested by Hibernia, or any
underwriter, attorney, accountant or agent in connection with such registration
statement;
(k) use its best efforts to cause such Registrable Securities covered
by such registration statement to be registered with or approved by such other
governmental agencies or authorities or self-regulatory organizations as may be
necessary to enable Hibernia to consummate the disposition of such Registrable
Securities;
(l) use its best efforts to obtain a "comfort" letter, dated the
effective date of such registration statement (and, if such registration
includes an underwritten offering, dated the date of the closing under the
underwriting agreement), signed by the independent public accountants who have
certified the Company's financial statements, addressed to Hibernia, and to the
underwriters, if any, covering substantially the same matters with respect to
such registration statement (and the prospectus included therein) and with
respect to events subsequent to the date of such financial statements, as are
customarily covered in accountants' letters delivered to the
-6-
<PAGE>
underwriters in underwritten public offerings of securities and such other
financial matters as Hibernia (or the underwriters, if any) may reasonably
request;
(m) otherwise use its best efforts to comply with all applicable
rules and regulations of the Securities and Exchange Commission and make
available to its security holders, in each case as soon as practicable, an
earnings statement covering a period of at least twelve months, beginning with
the first month after the effective date of the registration statement, which
earnings statement shall satisfy the provisions of Section 11(a) of the
Securities Act;
(n) permit Hibernia, if Hibernia, in its sole judgment, exercised in
good faith, believes that it might be deemed to be a controlling person of the
Company (within the meaning of the Securities Act or the Exchange Act), to
participate in the preparation of any registration statement covering securities
of the Company (regardless of whether Hibernia is selling any Registrable
Securities pursuant to such registration statement) and to include therein
material, furnished to the Company in writing, which in the reasonable judgment
of Hibernia should be included and which is reasonably acceptable to the
Company.
(o) use every reasonable effort to obtain the lifting at the earliest
possible time of any stop order suspending the effectiveness of any registration
statement or of any order preventing or suspending the use of any preliminary
prospectus;
(p) at any time file or make any amendment to a registration
statement, or any amendment of or supplement to a prospectus (including
amendments of the documents incorporated by reference into the prospectus), of
which Hibernia or the managing underwriters shall not have previously been
advised and furnished a copy or to which Hibernia, the managing underwriters, or
counsel for Hibernia or for the underwriters shall reasonably object;
(q) make such representations and warranties (subject to appropriate
disclosure schedule exceptions) to Hibernia and the underwriters, if any, in
form, substance and scope as are customarily made by issuers to underwriters and
selling holders, as the case may be, in underwritten public offerings of
substantially the same type; and
(r) if any proposed registration statement refers to Hibernia by name
or otherwise as the holder of any securities of the Company then (whether or
not, in the sole judgment, exercised in good faith, of Hibernia, Hibernia is or
might be deemed to be a controlling person of the Company), (i) the Company
shall be required at the request of Hibernia to insert therein language, in form
and substance reasonably satisfactory to Hibernia, the Company and the managing
underwriters, to the effect that the holding by Hibernia of such securities is
not to be construed as a recommendation by Hibernia of the investment quality of
the Company's securities covered thereby and that such holding does not imply
that Hibernia will assist in meeting any future financial requirements of the
Company, or (ii) in the event that such reference to Hibernia by name or
otherwise is not required by the Securities Act, any similar Federal or state
statute, or any rule or regulation of any other regulatory body having
jurisdiction over the offering, then in force, the Company shall be required at
the request of Hibernia to delete the reference to Hibernia.
-7-
<PAGE>
ARTICLE 5
REGISTRATION EXPENSES
---------------------
5.01 Company Expenses. All expenses incident to the Company's
----------------
performance of or compliance with this Agreement, including, without limitation,
all registration and filing fees, fees and expenses of compliance with
securities or blue sky laws, printing expenses, messenger and delivery expenses,
and fees and disbursements of counsel for the Company and all independent
certified public accountants, underwriters (excluding discounts and commissions)
and other Persons retained by the Company (all such expenses being herein called
"Registration Expenses"), will be borne by the Company, and the Company will, in
any event, pay its internal expenses (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit or quarterly review, the
expense of any liability insurance and the expenses and fees for listing the
securities to be registered on each securities exchange on which similar
securities issued by the Company are then listed.
5.02 Hibernia Expenses. To the extent Registration Expenses are not
-----------------
required to be paid by the Company, Hibernia will pay those Registration
Expenses allocable to the registration of Hibernia's securities so included, and
any Registration Expenses not so allocable will be borne by all sellers of
securities included in such registration in proportion to the aggregate selling
price of the securities to be so registered.
ARTICLE 6
UNDERWRITTEN OFFERINGS
----------------------
6.01 Demand Underwritten Offerings. If requested by the underwriters
-----------------------------
for any underwritten offerings of Registrable Securities pursuant to a Demand
Registration, the Company will enter into a customary underwriting agreement
with such underwriters for such offering, such agreement to be satisfactory in
substance and form to Hibernia and the underwriters, and to contain such
representations and warranties by the Company and such other terms as are
generally included in agreements of this type, including, without limitation,
indemnities customarily included in such agreements. Hibernia will cooperate
with the Company in the negotiation of the underwriting agreement. Hibernia may
be a party to such underwriting agreement and may, at its option, require that
any or all of the representations and warranties by, and the other agreements on
the part of, the Company to and for the benefit of such underwriters shall also
be made to and for the benefit of Hibernia and that any or all of the conditions
precedent to the obligations of such underwriters under such underwriting
agreement be conditions precedent to the obligations of Hibernia. The Company
shall cooperate with Hibernia in order to limit any representations or
warranties to, or agreements with, the Company or the underwriters to be made by
Hibernia only to those representations, warranties or agreements regarding
Hibernia, Hibernia's Registrable Securities and Hibernia's intended method of
distribution and any other representation required by law.
6.02 Incidental Underwritten Offerings. If the Company at any time
---------------------------------
proposes to register any of its securities under the Securities Act as
contemplated by Article 2 of this
-8-
<PAGE>
Agreement and such securities are to be distributed by or through one or more
underwriters, the Company will, if requested by Hibernia as provided in Article
2 of this Agreement, arrange for such underwriters to include all the
Registrable Securities to be offered and sold by Hibernia, subject to the
limitations set forth in Article 2 hereof, among the securities to be
distributed by such underwriters. Hibernia shall be a party to the underwriting
agreement between the Company and such underwriters, and may, at its option,
require that any or all of the representations and warranties by, and the other
agreements on the part of, the Company to and for the benefit of such
underwriters shall also be made to and for the benefit of Hibernia and that any
or all of the conditions precedent to the obligations of such underwriters under
such underwriting agreement be conditions precedent to the obligations of
Hibernia. The Company shall cooperate with Hibernia in order to limit any
representations or warranties to, or agreements with, the Company or the
underwriters to be made by Hibernia only to those representations, warranties or
agreements regarding Hibernia's Registrable Securities and Hibernia's intended
method of distribution and any other representation required by law.
ARTICLE 7
INDEMNIFICATION
---------------
7.01 Company Indemnification. The Company agrees to indemnify and
-----------------------
hold harmless, to the extent permitted by law, Hibernia, each other Person, if
any, who controls Hibernia within the meaning of the Securities Act or the
Exchange Act, and each of Hibernia's directors and officers, as follows:
(i) against any and all loss, liability, claim, damage or expense
arising out of or based upon an untrue statement or alleged untrue
statement of a material fact contained in any registration statement
(or any amendment or supplement thereto), including all documents
incorporated therein by reference, or in any preliminary prospectus or
prospectus (or any amendment or supplement thereto) or the omission or
alleged omission therefrom of a 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;
(ii) against any and all loss, liability, claim, damage and
expense to the extent of the aggregate amount paid in settlement of
any litigation, investigation or proceeding by any governmental agency
or body, commenced or threatened, or of any claim whatsoever based
upon any such untrue statement or omission or any such alleged untrue
statement or omission, if such settlement is effected with the written
consent of the Company; and
(iii) against any and all expense incurred by them in connection
with investigating, preparing or defending against any litigation, or
investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under clause
(i) or (ii) above;
-9-
<PAGE>
provided, that the Company will not be liable to any Person seeking
indemnification under this Section 7.01 where any loss, liability, claim, damage
or expense arises out of an untrue statement or alleged untrue statement or
omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company by or on behalf of such Person
expressly for use in the preparation of any registration statement (or any
amendment or supplement thereto), including all documents incorporated therein
by reference, or in any preliminary prospectus or prospectus (or any amendment
or supplement thereto); and provided further, that the Company will not be
----------------
liable to Hibernia, with respect to any preliminary prospectus or the final
prospectus or the final prospectus as amended or supplemented, as the case may
be, to the extent that any such loss, liability, claim, damage or expense of
Hibernia results from the fact that Hibernia sold Registrable Securities to a
Person to whom there was not sent or given, at or prior to the written
confirmation of such sale, a copy of the final prospectus or of the final
prospectus as then amended or supplemented, whichever is most recent, if the
Company has previously and timely furnished copies thereof to Hibernia. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of Hibernia or any such director, officer, or other
controlling person and shall survive the transfer of such securities by
Hibernia.
7.02 Hibernia Indemnification. In connection with any registration
------------------------
statement in which Hibernia is participating, Hibernia agrees to indemnify and
hold harmless (in the same manner and to the same extent as set forth in Section
7.01 of this Agreement), to the extent permitted by law, the Company and its
directors, officers and controlling Persons, and their respective directors,
officers and general partners, with respect to any statement or alleged
statement in or omission or alleged omission from such registration statement,
any preliminary, final or summary prospectus contained therein, or any amendment
or supplement thereto, if such statement or alleged statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by or on behalf of Hibernia, specifically
stating that it is for use in the preparation of such registration statement,
preliminary, final or summary prospectus or amendment or supplement. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Company, or Hibernia, as the case may be, or any of
their respective directors, officers, controlling Persons or general partners
and shall survive the transfer of such securities by Hibernia. With respect to
each claim pursuant to this Section 7.02, Hibernia's maximum liability under
this Section shall be limited to an amount equal to the net proceeds actually
received by Hibernia (after deducting any underwriting discount and expenses)
from the sale of Registrable Securities being sold pursuant to such registration
statement or prospectus by Hibernia.
7.03 Indemnification Procedures. Promptly after receipt by an
--------------------------
indemnified party hereunder of written notice of the commencement of any action
or proceeding involving a claim referred to in Section 7.01 or Section 7.02 of
this Agreement, such indemnified party will, if a claim in respect thereof is to
be made against an indemnifying party, give written notice to the latter of the
commencement of such action; provided, that the failure of any indemnified party
--------
to give notice as provided herein shall not relieve the indemnifying party of
its obligations under Section 7.01 or Section 7.02 of this Agreement except to
the extent that the indemnifying party is actually prejudiced by such failure to
give notice. In case any such action is brought against an indemnified party,
the indemnifying party will be entitled to participate in and to assume the
defense thereof, jointly with any other indemnifying party similarly notified,
to the extent that it may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice
-10-
<PAGE>
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof, unless in such indemnified
party's reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist in respect of such claim, in which case the
indemnifying party shall not be liable for the fees and expenses of (i) more
than one counsel for Hibernia, (which choice shall be reasonably satisfactory to
the Company), or (ii) more than one counsel for the Company in connection with
any one action or separate but similar or related actions. An indemnifying party
who is not entitled to, or elects not to, assume the defense of a claim will not
be obligated to pay the fees and expenses of more than one counsel for all
parties indemnified by such indemnifying party with respect to such claim,
unless in the reasonable judgment of any indemnified party a conflict of
interest may exist between such indemnified party and any other of such
indemnified parties with respect to such claim, in which event the indemnifying
party shall be obligated to pay the fees and expenses of such additional counsel
or counsels. The indemnifying party will not, without the prior written consent
of each indemnified party, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnification may be sought hereunder (whether or not such
indemnified party or any Person who controls such indemnified party is a party
to such claim, action, suit or proceeding), unless such settlement, compromise
or consent includes an unconditional release of such indemnified party from all
liability arising out of such claim, action, suit or proceeding. Notwithstanding
anything to the contrary set forth herein, and without limiting any of the
rights set forth above, in any event any party will have the right to retain, at
its own expense, counsel with respect to the defense of a claim.
7.04 Underwriting Agreement. The Company and Hibernia shall provide
----------------------
for the foregoing indemnity (with appropriate modifications) in any underwriting
agreement with respect to any required registration or other qualification of
securities under any Federal or state law or regulation of any governmental
authority other than the Securities Act.
7.05 Contributions. If the indemnification provided for in Sections
-------------
7.01 and 7.02 of this Agreement are unavailable or insufficient to hold harmless
an indemnified party under such Sections, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of the losses, claims, damages or liabilities referred to in Section 7.01 or
Section 7.02 of this Agreement in such proportion as is appropriate to reflect
the relative fault of the indemnifying party on the one hand, and the
indemnified party on the other, in connection with statements or omissions which
resulted in such losses, liabilities, claims, damages or expenses, as well as
any other relevant equitable considerations, including, without limitation, the
relative benefits received by each party from the offering of the securities
covered by such registration statement, the parties' relative knowledge and
access to information concerning the matter with respect to which the claim was
asserted and the opportunity to correct and prevent any statement or omission.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the indemnifying party or the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statements or omission. The parties hereto agree that it
would not be just and equitable if contributions pursuant to this Section 7.05
were to be determined by pro rata or per capita allocation (even if the
underwriters were treated as one entity for such purpose) or by any other method
of allocation which does
-11-
<PAGE>
not take account of the equitable considerations referred to in the first
sentence of this Section 7.05. The amount paid by an indemnified party as a
result of the losses, claims, damages or liabilities referred to in the first
sentence of this Section 7.05 shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any action or claim (which shall be limited as
provided in Section 7.03 of this Agreement if the indemnifying party has assumed
the defense of any such action in accordance with the provisions thereof) which
is the subject of this Section 7.05. Promptly after receipt by an indemnified
party under this Section 7.05 of notice of the commencement of any action
against such party in respect of which a claim for contribution may be made
against an indemnifying party under this Section 7.05, such indemnified party
shall notify the indemnifying party in writing of the commencement thereof if
the notice specified in Section 7.03 of this Agreement has not been given with
respect to such action; provided, that the omission to so notify the
--------
indemnifying party shall not relieve the indemnifying party from any liability
which it may otherwise have to any indemnified party under this Section 7.05,
except to the extent that the indemnifying party is actually prejudiced by such
failure to give notice. The Company and Hibernia agree with each other and will
agree with the underwriters of the Registrable Securities, if requested by such
underwriters, that (i) the underwriters' portion of such contribution shall not
exceed the underwriting discount and (ii) that the amount of such contribution
shall not exceed an amount equal to the net proceeds actually received by such
indemnifying party from the sale of Registrable Securities in the offering to
which the losses, liabilities, claims, damages or expenses of the indemnified
parties relate. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
7.06 Indemnification Payments. The indemnification required by this
------------------------
Article 7 shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, as and when bills are received or
expense, loss, damage or liability is incurred.
ARTICLE 8
RULE 144 COMPLIANCE
-------------------
8.01 Rule 144 Compliance. If the Company shall have filed a
-------------------
registration statement pursuant to the requirements of Section 12 of the
Exchange Act or a registration statement pursuant to the requirements of the
Securities Act, the Company covenants that it will file the reports required to
be filed by it under the Securities Act and the Exchange Act and the rules and
regulations adopted by the Securities and Exchange Commission thereunder (or, if
the Company is not required to file such reports, it will, upon the request of
Hibernia, make publicly available other comparable information), and it will
take such further action as Hibernia may reasonably request, all to the extent
required from time to time to enable Hibernia to sell shares of Registrable
Securities without registration under the Securities Act within the limitation
of the exemption provided by (i) Rule 144 under the Securities Act, as such Rule
may be amended from time to time, or (ii) any similar rule or regulation
hereafter adopted by the Securities and Exchange Commission. Upon the request of
Hibernia, the Company will deliver to Hibernia a written statement as to whether
it has complied with such requirements.
-12-
<PAGE>
ARTICLE 9
DEFINITIONS
-----------
9.01 Certain Definitions. As used in this Agreement, the following
-------------------
terms shall have the following meanings unless the context otherwise requires:
"Business Day" means a day other than Saturday, Sunday or any day on
------------
which banks located in the State of New York are authorized or obligated to
close.
"Common Stock" means the common stock of the Company of any class or
------------
series.
"Diluted Basis" means, with respect to a calculation of the number of
-------------
shares of Registrable Securities, (i) all shares of Common Stock that are
Registrable Securities outstanding at the time of determination and (ii) all
shares of Common Stock issuable upon exercise of the Warrants outstanding at the
time of determination.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
or any similar Federal statute then in effect, and any reference to a particular
section thereof shall include a reference to the equivalent section, if any, of
any such similar Federal statute, and the rules and regulations thereunder.
"Initial Public Offering" or "IPO" means the first time a registration
----------------------- ---
statement filed by the Company under the Securities Act with the Commission
respecting an offering, whether primary or secondary, of Common Stock (or
securities convertible, exercisable or exchangeable for or into Common Stock or
rights to acquire Common Stock or such securities), which is underwritten on a
firmly committed basis, is declared effective and the securities so registered
are issued and sold.
"Permitted Transferees" shall have the meaning specified in the
---------------------
Warrant Agreement.
"Person" means any individual, corporation, partnership, association,
------
trust or other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
"Registrable Securities" means any Common Stock acquired by Hibernia
----------------------
as a result of the exercise of the Warrant. As to any particular Registrable
Securities, such securities will cease to be Registrable Securities, unless such
securities are held at such time by Hibernia, when they have (x) been
effectively registered under the Securities Act and disposed of in accordance
with the registration statement covering them, (y) been transferred pursuant to
Rule 144 (or any similar rule then in force) under the Securities Act or (z)
been otherwise transferred and new certificates for them not bearing a
restrictive Securities Act legend have been delivered by the Company.
"Securities Act" means the Securities Act of 1933, as amended, or any
--------------
similar Federal statute then in effect, and any reference to a particular
section thereof shall include a
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<PAGE>
reference to a comparable section, if any, of any such similar Federal statute,
and the rules and regulations thereunder.
"Warrants" means the Common Stock Purchase Warrants dated the date
--------
hereof initially exercisable for an aggregate of 350,000 shares of Common Stock,
issued to Hibernia and any warrants issued upon subdivision or combination, or
in substitution, thereof.
9.02 Unless otherwise stated, other defined terms used in this
Agreement shall have the meanings set forth in the Warrant Agreement.
9.03 The following defined terms, when used in this Agreement, shall
have the meaning ascribed to them in the corresponding Sections of this
Agreement listed below:
<TABLE>
<S> <C> <C>
"Company" - Preamble
"Long-Form Registrations" - Section 1.01
"Short-Form Registrations" - Section 1.01
"Demand Registrations" - Section 1.01
"Company-Paid Long-Form Registration" - Section 1.02
"Piggyback Registration" - Section 2.01
"Registration Expenses" - Section 5.01
</TABLE>
ARTICLE 10
MISCELLANEOUS
-------------
10.01 No Inconsistent Agreements. The Company will not hereafter
--------------------------
enter into any agreement with respect to its securities which is inconsistent
with the rights granted to Hibernia in this Agreement.
10.02 Adjustments Affecting Registrable Securities. The Company will
--------------------------------------------
not take any action, or fail to take any action which it may properly take, with
respect to its securities which would adversely affect the ability of Hibernia
to include Registrable Securities in a registration undertaken pursuant to this
Agreement or which, to the extent within its control, would adversely affect the
marketability of such Registrable Securities in any such registration.
10.03 Specific enforcement. The parties hereby acknowledge and agree
--------------------
that the failure of the Company to fulfill any of its covenants and agreements
hereunder will cause irreparable injury to Hibernia for which damages, even if
available, will not be an adequate remedy. Accordingly, the Company hereby
consents and waives any defense to the issuance of injunctive relief by any
court of competent jurisdiction to compel performance of the Company's
obligations and to the granting by any such court of the remedy of the specific
performance by the Company of its obligations hereunder.
10.04 Assignment. This Agreement shall be assignable by Hibernia to
----------
any party to whom Hibernia transfers the Warrant or the equity securities of the
Company acquired by Hibernia upon exercise of the Warrant (the "Warrant
Shares"). In case of any such assignment,
-14-
<PAGE>
any reference to Hibernia herein shall be deemed to refer to the transferee of
the Warrant or the Warrant Shares.
10.05 Notices. (a) Any notice or demand which, by provision of this
-------
Agreement, is required or permitted to be given or served by Hibernia to or on
the Company shall be deemed to have been sufficiently given and served for all
purposes (if mailed) three calendar days after being deposited, postage
prepaid, in the United States Mail, registered or certified mail, or (if
delivered by express courier) one Business Day after being delivered to such
courier, or (if delivered in person) the same day as delivery, in each case
addressed (until another address or addresses is given in writing by the Company
to Hibernia) as follows:
Diversified Specialists, Inc.
1100 West Sam Houston Parkway (North), Suite A
Houston, Texas 77043
(b) Any notice or demand which, by any provision of this Agreement,
is required or permitted to be given or served by the Company to or on Hibernia
shall be deemed to have been sufficiently given and served for all purposes (if
mailed) three calendar days after being deposited, postage prepaid, in the
United States Mail, registered or certified mail, or (if delivered by express
courier) one Business Day after being delivered to such courier, or (if
delivered in person) the same day as delivery, in each case addressed (until
another address or addresses are given in writing by Hibernia to the Company) as
follows:
Hibernia Corporation
313 Carondelet Street
New Orleans, Louisiana 70130
or
P. O. Box 61540
New Orleans, Louisiana 70161
Attention: Manager, Private Equity Investments
10.06 Invalidity. In the event that any one or more of the
----------
provisions contained in this Agreement shall, for any reason, be held invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement.
10.07 Successors and Assigns. All covenants and agreements contained
----------------------
by or on behalf of the Company and Hibernia shall bind their respective
successors and assigns and shall inure to the benefit of their respective
successors and assigns.
10.08 Singular and Plural. Words used herein in the singular, where
-------------------
the context so permits, shall be deemed to include the plural and vice versa.
The definitions of words in the singular herein shall apply to such words when
used in the plural where the context so permits and vice versa.
10.09 Titles of Articles, Sections and Subsections. All titles or
--------------------------------------------
headings to articles, sections, subsections or other divisions of this
Agreement or the exhibits hereto are only for the convenience of the parties and
shall not be construed to have any effect or meaning with respect
-15-
<PAGE>
to the other content of such articles, sections, subsections or other divisions,
such other content being controlling as to the agreement between the parties
hereto.
10.10 Amendment. Neither this Agreement nor any provisions hereof
---------
may be changed, waived, discharged or terminated orally or in any manner other
than by an instrument in writing signed by the party against whom enforcement of
the change, waiver, discharge or termination is sought.
10.11 Time of the Essence. Time shall be deemed of the essence with
-------------------
respect to the performance of all of the terms, provisions and conditions on the
part of the Company and Hibernia to be performed hereunder.
10.12 Counterparts. This Agreement may be executed in two or more
------------
counterparts, and it shall not be necessary that the signatures of all parties
hereto be contained on any one counterpart hereof; each counterpart shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
10.13 Choice of Law. The validity of this Agreement, the
-------------
construction of its terms and the determination of the rights and duties of the
parties hereto shall be governed by and construed in accordance with the laws of
the State of Texas applicable to contracts made and to be performed wholly
within such State.
-16-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed on the date first above written.
COMPANY: DIVERSIFIED SPECIALISTS, INC.
- -------
By: /s/ M.D. Davis
---------------------------
Name: M.D. Davis
Title: CEO
HIBERNIA: HIBERNIA CORPORATION
- --------
By: /s/ Floyd W. Collins
---------------------------
Name: Floyd W. Collins
Title: Authorized Agent
-17-
<PAGE>
EXHIBIT 4.5
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This Registration Rights Agreement is entered into as of December 11th,
1995, between DIVERSIFIED SPECIALISTS, INC., a Texas corporation (the
"Corporation"), and Tommy Moss, who is sometimes referred to in this Agreement
as a "Stockholder."
WHEREAS, the Stockholder owns twenty (20%) percent of the outstanding
shares of Common Stock (the "Shares") of the Corporation; and
WHEREAS, the Corporation desires to provide for registration rights for
Stockholder's Shares, such rights to be exercisable on certain terms and
conditions;
NOW, THEREFORE, in consideration of the premises, mutual covenants and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereby agree as follows:
1. Registration Rights.
-------------------
(a) If at any time after the initial public offering of shares of its
Common Stock, the Corporation proposes to register any shares of its Common
Stock for public sale under the Securities Act of 1933 as amended (the
"Securities Act"), for its own account or for the account of other security
holders, on a registration statement Form S-1, S-2, S-3, S-18 or any
comparable or successor form, it will give written notice at least 30 days
prior to the proposed initial filing date of such registration statement to
the Stockholder of its intention to do so. If the Stockholder notifies the
Corporation within 10 days after receipt of such notice of his desire to
include a portion of his Shares in such proposed registration statement,
the Corporation shall afford the Stockholder, subject to the provisions
hereof, the opportunity to have all or any part of his Shares registered
under such registration statement.
(b) At any time or times six (6) months after the initial public
offering of shares of the Corporation's Common Stock, Stockholder may
request that the Corporation prepare and file for public sale under the
Securities Act a registration statement on form S-1, S-2, S-3, S-18 or any
comparable or successor form permitting registration of all or any part,
but not less than twenty percent (20%) of shares, of Stockholder's Shares
for resale in a manner designated by Stockholder (including, without
limitation, sales in open market transactions, bulk trades or one or more
underwritten offers). The Corporation thereafter shall use its best
efforts to prepare and file such registration statement and cause the
registration to be declared effective under the Securities Act on or prior
to 90 days from the date that Stockholder gives written notice to the
Corporation of his desire for the registration of the Shares and the
Corporation shall take all necessary actions (including, without
limitation, preparing and filing supplements or amendments thereto) to keep
the registration continuously current and effective under the applicable
-1-
<PAGE>
federal and state securities laws until the date which is 36 months from
the date on which the initial registration is declared effective.
(c) The Corporation shall have the right to refuse to include the
Stockholder's Shares in an offering only if the Stockholder, in his sole
discretion, consents to such refusal. In the event the Corporation
proposes to reduce the number of Shares the Stockholder proposes to
register and the Stockholder consents, the Stockholder will be permitted to
have included in the offering that pro rata portion of the total number of
Shares the Corporation has proposed and to which the Stockholder consents.
(d) If the Stockholder elects to include any of Stockholder's Shares
in any registration by the Corporation, Stockholder shall agree either to
(i) sell its Shares through the underwriter or underwriters selected by the
Corporation on the same terms and conditions as the underwriter or
underwriters are selling the securities on behalf of the Corporation or
other holder of securities in the Corporation and to complete and execute
all questionnaires, powers of attorney, indemnities, underwriting
agreements, custodial or escrow agreements and other documents required
under the terms of such underwriting arrangement, or (ii) withdraw its
Shares from such registration.
(e) If, in the opinion of the managing underwriter or underwriters
for any proposed registration pursuant to Section 1(a) above the total
number of Shares of the registrable securities to be offered exceeds the
maximum number of Shares which can be marketed without materially and
adversely affecting the entire offering, the Corporation will be obligated
to include in the registration statement with respect to such underwriting
only the number of Shares owned by the Stockholder which the Corporation
and the managing underwriter shall determine appropriate. Any exclusion of
Shares shall be made pro rata among all holders of securities requesting
registration in proportion to the number of Shares to be registered by each
of them.
(f) The Stockholder agrees that upon receipt of (i) a reasonable
request from the Corporation that the Stockholder discontinue use of any
registration statement covering his shares for a reasonable length of time
or from time to time or (ii) any notice from the Corporation of a happening
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, Stockholder will forthwith discontinue
disposition of the Shares pursuant to the registration statement covering
such Shares until Stockholder shall have received notice from the
Corporation of the end of such delay period and, if applicable, copies of
any supplemental or amended prospectus.
(g) In connection with any registration statement under this Section,
the Corporation covenants and agrees:
-2-
<PAGE>
(i) To use its best efforts to prepare, file and have any such
registration statement declared effective at the earliest possible time and
remain effective thereafter, and to furnish such number of copies of the
registration statement and prospectus as shall reasonably be requested by
the Stockholder;
(ii) To prepare and file such amendments and supplements to such
registration statement and the prospectus used in connection therewith as
may be necessary to keep such registration statement effective;
(iii) To the extent permitted by applicable federal and state
securities laws, to pay all costs, fees and expenses in connection with any
such registration statement including, without limitation, the
Corporation's legal and accounting fees, printing expenses, and blue sky
fees and expenses, and the fees and expenses of one counsel for
Stockholder, except that the Corporation shall not pay for any of the
following costs, fees or expenses: underwriting discounts and commissions
allocable to the Stockholder's Shares, state transfer taxes, brokerage
commissions and fees, and expenses of additional counsel and any
accountants for the Stockholder;
(iv) To take all necessary action which may be required to
qualify or register the Shares included in a registration statement for
offering and sale under the securities or blue sky laws of any state
designated by the Stockholder, provided that the Corporation shall not be
obligated to execute or file any general consent to service of process or
to qualify as a foreign corporation to do business under the laws of any
such jurisdiction;
(v) To notify the Stockholder any time when a prospectus relating
to such registration statement is required to be delivered under the
Securities Act or the happening of any event as a result of which the
prospectus contained in such registration statement, as then in effect,
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
statement therein not misleading under the circumstances then existing;
(vi) To make available for inspection by Stockholder and any
underwriter, attorney, accountant or agent of such Stockholder, all
financial and other records, pertinent corporate documents and properties
of the Corporation, and to cause the Corporation's officers, directors and
employees to supply all information reasonably requested by any of such
persons in connection with such registration statement; and
(vii) To indemnify the Stockholder against all losses, claims,
damages, expenses, or liabilities (including all expenses reasonably
incurred in investigating, preparing or defending against any claim
whatsoever) to which any
-3-
<PAGE>
of them may become subject under the Securities Act, the Securities
Exchange Act of 1934 as amended (the "Exchange Act"), or otherwise, arising
from any untrue statement or alleged untrue statement of a material fact
contained in the registration statement or any prospectus included therein
or caused by an omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages,
expenses or liabilities are caused by any such untrue statement or alleged
untrue statement or omission or alleged omission based upon information
furnished in writing to the Corporation by the Stockholder or any
underwriter expressly for use therein.
(h) The Stockholder and his or its successors and assigns, shall
indemnify the Corporation, its officers and directors and each person who
controls the Corporation within the meaning of Section 15 of the Securities
Act or Section 20(a) of the Exchange Act, against all losses, claims,
damages, expenses, or liabilities (including all expenses reasonably
incurred in investigating, preparing or defending against any claim
whatsoever) to which it or they may become subject under the Securities
Act, the Exchange Act or otherwise, arising from an untrue statement or
alleged untrue statement of a material fact contained in any such
registration statement or any prospectus included therein, or caused by any
omission or alleged omission based upon information furnished in writing to
the Corporation by the Stockholder expressly for use therein.
(i) The Stockholder agrees, if requested in writing by the
underwriter in an underwritten offering and only if similar agreements are
obtained from executive officers and directors of the Corporation who own
Shares, not to effect any public sale or distribution of any Shares,
including a sale pursuant to Rule 144 (except as a part of such
underwritten offering) during the period beginning 9 business days prior to
the proposed date of commencement of the offering and ending 90 days after
the closing date of the offering.
2. Specific Performance. The parties recognize that the Common Stock
--------------------
cannot now be readily purchased or sold on the open market and that it is to the
benefit of the Corporation and the Stockholder for this Agreement to be carried
out. For those and other reasons the parties will be irreparably damaged if
this Agreement is not specifically enforced. Accordingly, if any controversy
concerning the rights or obligations of any party bound by the terms of this
Agreement arises, those rights or obligations shall be enforceable by specific
performance. The remedy of specific performance shall be cumulative of all
other rights or remedies of the parties in law or equity, or under this
Agreement, and it shall not be exclusive.
3. Miscellaneous. This Agreement shall inure to the benefit of and be
-------------
binding upon the parties and their respective successors and assigns. This
Agreement shall be interpreted and enforced under the laws of the State of
Texas. No amendment to this Agreement shall be binding unless in writing and
signed by all the parties to this Agreement. If a court determines that any
restriction in a clause or provision of this Agreement is void, illegal,
unreasonable or
-4-
<PAGE>
unenforceable, the clauses and provisions decreed to be void, illegal,
unreasonable or unenforceable shall be limited to the extent necessary to render
this Agreement reasonable, enforceable and effective to the extent permissible
by law.
4. Termination of this Agreement. This Agreement shall continue until
-----------------------------
the parties terminate it by unanimous consent or until the Stockholder holds
0.5% or less of the Corporation's outstanding Common Stock. Upon the occurrence
of either event, this Agreement shall terminate automatically.
5. Headings. The headings of the paragraphs of this Agreement are
--------
inserted for convenience only and shall not be deemed to constitute a part of
this Agreement.
6 Changes in Common Stock. If there are any changes in the Common Stock
-----------------------
by way of stock split, stock dividend, combination or reclassification, or
through merger, consolidation, reorganization or recapitalization or by any
other means, appropriate adjustment shall be made in the provisions hereof, as
may be required, so that the rights and privileges granted hereby shall continue
with respect to the Common Stock as so changed.
7. Restrictions on Stockholder. The Corporation shall not be obligated
---------------------------
pursuant to Section 1(b) above to effect a registration under the Securities Act
of all or any part of the Stockholder's Shares during any period in which the
Corporation is in the process of effecting a registration of registrable
securities on behalf of the Corporation or other stockholders. The Corporation
shall not be obligated to effect a registration under the Securities Act of all
or any part of the Stockholder's Shares unless a period of at least ninety (90)
days shall have elapsed since the effective date of the Corporation's most
recent prior registration statement.
8. Transfer of Stockholder's Interest. The Stockholder may not assign,
----------------------------------
convey or otherwise transfer all or any part of his or its rights, title or
interest in and to this Agreement; provided, however, that the registration
rights referred to herein with respect to the Shares shall inure to the benefit
of any and all subsequent holders of the Shares.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
DIVERSIFIED SPECIALISTS, INC.
a Texas corporation
By: /s/ M.D. Davis
---------------------------------------------
Name: M.D. Davis
-------------------------------------------
Title: CEO
------------------------------------------
/s/ Tommy Moss
------------------------------------------------
TOMMY MOSS, Stockholder
-5-
<PAGE>
EXHIBIT 10.2
AGREEMENT FOR
SALE OF STOCK
BETWEEN
ROSIE ACQUISITION, L.L.C.
AND
DSI ACQUISITION, INC.
(A WHOLLY OWNED SUBSIDIARY OF ROSIE ACQUISITION, L.L.C.)
AND
DIVERSIFIED SPECIALISTS, INC.
AND
TOMMY MOSS
December 11, 1995
<PAGE>
AGREEMENT FOR
SALE OF STOCK
THIS AGREEMENT, dated as of December 11, 1995 (this "Agreement"), is by
---------
and among Rosie Acquisition, L.L.C., a Texas limited liability company
("Buyer"), DSI Acquisition, Inc., a Texas corporation and a wholly owned
-----
subsidiary of Buyer ("Rosie Subsidiary"), and Tommy Moss, an individual residing
----------------
in Houston, Harris County, Texas ("Moss") and Diversified Specialists, Inc., a
----
Texas corporation ("DSI"). The Buyer, Rosie Subsidiary, Moss and DSI are
sometimes together referred to herein as the "Parties".
-------
RECITALS
--------
Moss owns 1,000 shares of the common stock, $1.00 par value ("Common
Stock") of DSI. The shares of Common Stock owned by Moss are hereinafter
referred to as the "Moss Shares".
-----------
The Moss Shares consist of one hundred percent (100%) of the issued and
outstanding capital stock of DSI.
Moss is the Chief Executive Officer of DSI.
Moss desires to sell a portion of the Moss Shares and Rosie Subsidiary
desires to purchase a portion of the Moss Shares pursuant to the terms of this
Agreement.
DSI desires to sell 2,715,500 new, original issue shares of Common Stock in
DSI ("New Shares") to Buyer, and the Buyer desires to buy such New Shares from
the DSI subject to and in accordance with the terms of this Agreement.
Moss, Buyer and Rosie Subsidiary desire to reorganize and recapitalize DSI
by merging Rosie Subsidiary into DSI in accordance with this Agreement.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the foregoing premises, the
representations, warranties and agreements herein contained and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and subject to the conditions set forth herein, the Parties agree
as follows:
ARTICLE 1
1.1 Agreement to Sell and Purchase New Shares. Subject to the terms and
-----------------------------------------
conditions hereinafter set forth, DSI agrees to sell to the Buyer the New Shares
free and clear of all liens, claims, pledges and encumbrances of every kind,
character and description, and the Buyer agrees to purchase the New Shares at
the Closing (as defined in Section 1.3 hereof). The purchase price for the New
Shares shall be Three Million Eight Hundred Thousand Dollars ($3,800,000).
("New Shares Purchase Price").
-------------------------
1
<PAGE>
1.2 Agreement to Sell Shares. Subject to the terms and conditions
------------------------
hereinafter set forth, immediately after the issue of the New Shares pursuant to
Paragraph 1.1 above, Moss agrees to sell to Rosie Subsidiary 2,795,500 Moss
Shares (the "Transferred Shares") free and clear of all liens, claims, pledges
and encumbrances of every kind, character and description and Rosie Subsidiary
agrees to pay Moss the following consideration:
(a) Fourteen Million Four Hundred Thousand Dollars ($14,400,000) as
evidenced by promissory note attached hereto as Exhibit "A-1" and
-------------
incorporated herein for all purposes, such note being secured by a standby
letter of credit issued by Bank One, Texas, N.A., in a form as set forth in
Exhibit "A-1-A" attached hereto and incorporated herein for all purposes,
---------------
(ii) Six Million Dollars ($6,000,000) as evidenced by promissory note
attached hereto as Exhibit "A-2" and incorporated herein for all purposes,
-------------
(iii) One Million Three Hundred Thousand Dollars ($1,300,000) as evidenced
by promissory note attached hereto as Exhibit "A-3" and incorporated herein
-------------
for all purposes and (iv) immediately following Closing, two tracts of land
known as the Fallstone Tract and Enchanted Valley Tract to be conveyed by
Special Warranty Deed attached hereto as Exhibit "D" and incorporated
-----------
herein for all purposes. Buyer and Rosie Subsidiary agree immediately
following Closing and the merger of Rosie Subsidiary into DSI to cause DSI,
and DSI agrees, to convey the Fallstone Tract and Enchanted Valley Tract to
Moss to satisfy this obligation. All of 1.2(a)(i), (ii), (iii) and (iv),
collectively referred to as the "Transferred Shares Purchase Price".
---------------------------------
1.3 Closing. The closing of the transactions described hereunder (the
-------
"Closing") shall take place on a mutually agreeable date which the Parties
- --------
anticipate to be on or before December _____, 1995 (the "Closing Date"). The
------------
Closing shall be held at the offices of Chamberlain, Hrdlicka, White, Williams &
Martin, 1200 Smith Street, Suite 1400, Houston, Texas 77002 or other location
agreeable to Moss and designated by Buyer in writing at least two (2) business
days before the scheduled Closing. In the event Buyer wishes to extend the
Closing Date for any reason, beyond December _____, 1995, Moss and DSI must
consent to such extension in writing in their sole discretion.
1.4 Payment of New Shares Purchase Price and Transferred Shares Purchase
--------------------------------------------------------------------
Price. The New Shares Purchase Price and Transferred Shares Purchase Price all
- -----
collectively referred to as the "Purchase Price" shall be paid as follows:
--------------
(a) upon execution of this Agreement, Buyer shall pay to Moss the sum
of $200,000 (the "Initial Amount") which Initial Amount shall be dealt with in
--------------
accordance with Section 1.6 below;
(b) on the Closing Date, the Buyer will deliver to DSI $3,800,000 as
consideration for the New Shares in immediately available funds or via wire
transfer as determined by DSI; and
(c) immediately upon Buyer having purchased the New Shares, Rosie
Subsidiary shall deliver to Moss as consideration for the Transferred Shares
$21,700,000 as evidenced by the fully executed promissory notes described in
Exhibit "A-1", Exhibit "A-2" and
- ------------- -------------
2
<PAGE>
Exhibit "A-3" hereof and secured by the Loan and Security Agreement attached
- -------------
hereto as Exhibit "B" and incorporated herein for all purposes and the Guaranty
-----------
Agreement and other agreements from Buyer attached hereto as Exhibit "C" and
-----------
incorporated herein for all purposes and as additional consideration, title to
the Fallstone Tract and Enchanted Valley Tract by delivery of a fully executed
and acknowledged Special Warranty Deed attached hereto as Exhibit "D" and
-----------
incorporated herein for all purposes from Rosie Subsidiary to Moss conveying
good and indefeasible title to the Fallstone Tract and the Enchanted Valley
Tract.
1.5 Delivery of Certificates.
------------------------
(a) Subject to all of the conditions to the obligations of DSI to
issue the New Shares to Buyer as set out in Section 6.3 having been satisfied or
waived by DSI and all of the conditions to the obligations of Moss as set out in
Section 6.2 having been satisfied or waived by Moss, DSI shall deliver to the
Buyer at the Closing the certificate(s) representing the New Shares duly issued
to Buyer to evidence the sale and purchase of the New Shares hereunder.
(b) Subject to all of the conditions to the obligations of Moss to
transfer the Transferred Shares to Rosie Subsidiary as set out in Section 6.2
having been satisfied or waived by Moss and all of the conditions to the
obligations of DSI as set forth in Section 6.3 having been satisfied or waived
by DSI, Moss shall deliver to Rosie Subsidiary at the Closing the certificate(s)
representing the Transferred Shares duly endorsed to Rosie Subsidiary and
accompanied by appropriate stock certificate powers as reasonably requested by
Rosie Subsidiary to evidence purchase of the Transferred Shares hereunder.
1.6 Initial Amount. Upon execution of this Agreement, the Buyer shall pay
--------------
the Initial Amount to Moss. Upon completion of the Closing, the Initial Amount
shall be returned to Buyer by Moss. In the event that Buyer fails to pay or
cause to be paid the New Shares Purchase Price set forth in Section 1.1 or Rosie
Subsidiary fails to purchase the Transferred Shares and pay the Transferred
Shares Purchase Price set forth in Section 1.2 or either Buyer or Rosie
Subsidiary otherwise fail to perform their obligations set forth in this
Agreement, including Buyer's obligation to purchase the New Shares from DSI or
Rosie Subsidiary's obligation to purchase the Transferred Shares from Moss by
the Closing Date, for any reason other than (a) DSI's or Moss' Material Adverse
Breach (as hereinafter defined) of a representation, warranty or covenant
contained in Articles 3 or 4 hereof which breach is not cured or the Disclosure
Statement amended as contemplated in Section 7.1 hereof, or (b) failure of one
or more of the conditions described in Section 6.1 hereof to be materially
satisfied prior to the Closing, other than those of subsections 6.1(e) and
6.1(n), and Buyer shall not have waived such condition, Moss shall be entitled
to keep and retain the Initial Amount. The conditions in Section 1.6 (a) or (b)
above are hereinafter referred to as the "Conditions". In the event that Buyer
----------
does not purchase the New Shares from DSI or Rosie Subsidiary fails to purchase
the Transferred Shares and pay the Purchase Price set forth in Section 1.2 or
either Buyer or Rosie Subsidiary fails to perform their respective obligations
hereunder by the Closing Date, subject to Buyer's and Rosie Subsidiary's rights
under Section 8.12 hereof, this Agreement shall terminate without further
obligation or liability of any Party to the other Parties, except if such event
occurs because of the occurrence of any of the Conditions, then Buyer shall be
entitled immediately to be paid the Initial Amount and Moss shall promptly pay
the Initial Amount over to Buyer upon request from Buyer.
3
<PAGE>
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF BUYER AND ROSIE SUBSIDIARY
------------------------------------------------------------
Buyer and Rosie Subsidiary hereby represent and warrant to DSI and Moss as
follows:
2.1 Organization and Qualification. Rosie Acquisition, Inc. was a
------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. Buyer is a limited liability company duly organized,
validly existing and in good standing under the laws of the State of Texas
organized on November 30, 1995, and Rosie Acquisition, Inc., a Delaware
corporation was merged into Buyer on December ____, 1995. Rosie Subsidiary is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Texas. Each of Buyer and Rosie Subsidiary is duly qualified to
do business in each jurisdiction where such qualification is required and each
is in good standing in each jurisdiction required by applicable law. Each of
Buyer and Rosie Subsidiary has full authority and all authorizations, licenses
and permits necessary to carry on the business in which it is engaged in or in
which it proposes presently to engage and to own and use the properties owned
and used by it. Each of Buyer Rosie Acquisition, Inc. and Rosie Subsidiary has
delivered to DSI and Moss true, accurate and complete copies of Articles of
Organization or its Articles of Incorporation, as applicable, or other charter
documents and bylaws which reflect all amendments made thereto at any time prior
to the date of this Agreement and the Articles of Merger of Rosie Acquisition,
Inc. into Buyer. The minute book containing the records of meetings of the
shareholders and the Board of Directors of Rosie Subsidiary, and the stock
certificate book of Rosie Subsidiary is complete and correct in all material
respects. The member list of Buyer attached hereto as Exhibit "E" and
-----------
incorporated herein for all purposes is complete and correct in all respects and
accurately reflect the record ownership and beneficial ownership of all of the
outstanding interest of Buyer. All material actions taken by Buyer and Rosie
Subsidiary since their respective organization or incorporation, as applicable,
other than in the Ordinary Course of Business have been duly authorized and/or
subsequently ratified. As used in the Agreement, the term "Ordinary Course of
------------------
Business" means the usual and ordinary course of business consistent with past
- --------
custom and practices (including with respect to quantity and frequency).
Neither Buyer nor Rosie Subsidiary is in default under or in violation of any
provision of its respective Articles of Organization or Articles of
Incorporation, as applicable, or other charter documents, bylaws, or
regulations.
2.2 Capitalization. Buyer's capitalization consists of 699,000 Class A
--------------
membership units and 2,070,000 Class B membership units which represents all of
the membership units in Buyer. All of the Class A membership units are issued
and outstanding and _____ of the Class B units are issued and outstanding. All
the Membership Units of Buyer as of the Closing Date will be duly authorized and
will be validly issued. Rosie Subsidiary's entire authorized capital stock
consists of 1,000,000 shares of common stock, 1,000 shares of $0.01 par value
Common Stock, all of which are issued and outstanding and held beneficially and
of record by Buyer. The record beneficial stock ownership and capitalization of
Rosie Subsidiary will not change prior to the Closing Date. All of the issued
and outstanding shares of Rosie Subsidiary's common stock have been and, as of
the Closing Date, will be duly authorized and/or as of the Closing Date, will be
validly issued, fully paid and non-assessable and have not been and, as of the
Closing Date, will not be issued in violation of any preemptive rights. Other
than those matters disclosed to Moss in writing and those transactions
contemplated and provided for in this
4
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Agreement, there are no outstanding or authorized options, rights, warrants,
calls, convertible securities (debt or equity), rights to subscribe, conversion
rights or other agreements or commitments to which the Buyer or Rosie Subsidiary
is a party or which are binding upon Buyer or Rosie Subsidiary providing for the
issuance or transfer by Buyer or Rosie Subsidiary of any additional membership
interest or additional shares of their respective capital stock, as applicable,
and Rosie Subsidiary has not reserved any shares of its capital stock for
issuance, nor are there any outstanding stock option rights, phantom equity or
similar rights, contracts, arrangements or commitments based upon the book
value, income or other attribute of Rosie Subsidiary. Other than disclosed to
Moss in writing, there are no trust or other agreements or understandings with
respect to the voting of Buyer's membership interest or Rosie Subsidiary's
capital stock.
2.3 Authority Relative to this Agreement. Buyer and Rosie Subsidiary each
------------------------------------
have the requisite corporate power and authority to enter into this Agreement
and to carry out its obligations hereunder. The execution and delivery of this
Agreement by Buyer and Rosie Subsidiary and the consummation by Buyer and Rosie
Subsidiary of the transactions contemplated hereby have been duly authorized by
Buyer and Rosie Subsidiary, and, no other proceedings on the part of Buyer or
Rosie Subsidiary are necessary to authorize the execution, delivery and
performance of this Agreement and the transactions contemplated hereby. This
Agreement has been duly executed and delivered by Buyer and Rosie Subsidiary and
constitutes the valid and binding obligation of Buyer and Rosie Subsidiary,
enforceable against Buyer and Rosie Subsidiary in accordance with its terms,
except as such enforcement may be limited by bankruptcy, insolvency or other
similar laws affecting the enforcement of creditors' rights generally or by
general principles of equity. Assuming compliance with the Hart-Scott-Rodino
Antitrust Improvements Act (the "Hart-Scott-Rodino Act"), neither the execution
---------------------
or delivery of this Agreement by Buyer and Rosie Subsidiary, the performance by
Buyer and Rosie Subsidiary of their respective obligations hereunder, nor the
consummation of the transactions contemplated hereby will require any consent,
approval or notice under, or violate, breach, be in conflict with, or constitute
a default (or an event that, with notice or lapse of time, or both, would
constitute a default) under, or permit the termination of, or result in the
creation or imposition of any lien upon any properties, assets or business of
Buyer or Rosie Subsidiary under any note, bond, indenture, mortgage, deed of
trust, lease, franchise, permit, authorization, license, contract, instrument or
other agreement or commitment or any order, judgment or decree to which Buyer or
Rosie Subsidiary is a party or by which Buyer or Rosie Subsidiary or any of
their respective assets or properties is bound or encumbered. No authorization,
consent or approval of, or filing with, any public body, court or authority is
necessary on the part of Buyer or Rosie Subsidiary for the consummation by Buyer
or Rosie Subsidiary of the transactions contemplated by this Agreement, except
for such authorizations, consents, approvals and filings as to which the failure
to obtain or make would not, individually or in the aggregate, have a material
adverse effect on the financial condition, results of operations or business of
Buyer or Rosie Subsidiary or prevent Buyer or Rosie Subsidiary from performing
under this Agreement. No other approval will be necessary to authorize the
execution, delivery and performance of this Agreement and the transactions
contemplated hereby.
2.4 Subsidiaries. Except for Buyer's investment in the shares of the
------------
Rosie Subsidiary common stock, Buyer does not own and other than Buyer's
obligations in this Agreement, Buyer is not obligated to purchase any equity
interest in, or any other interest convertible into or
5
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exchangeable for any equity interest in any entity. Rosie Subsidiary does not
own and other than Rosie Subsidiary's obligations in this Agreement, Rosie
Subsidiary is not obligated to purchase any equity interest in or any other
interest convertible into or exchangeable for any equity interest in any entity.
2.5 Guarantees. Neither Buyer nor Rosie Subsidiary is a guarantor or
----------
otherwise liable for any indebtedness or other obligations of any other person,
firm or corporation or other endorsements for collection in the Ordinary Course
of Business other than as contemplated or provided for in this Agreement.
2.6 Legal Compliance. To the knowledge of Buyer and Rosie Subsidiary,
----------------
each of the respective directors, officers, employees and any other individuals
acting on behalf of Buyer and Rosie Subsidiary including but not limited to M.
D. Davis, Barry Conrad, J. N. Matlock, and Jack Crosby (acting only in their
capacities as representatives of Buyer or Rosie Subsidiary as applicable) have
complied with all applicable laws and regulations of foreign, federal, state and
local governments and all agencies thereof, and no claim has been filed or
stated against Buyer or Rosie Subsidiary alleging a violation of any such laws
or regulations. To the knowledge of Buyer and Rosie Subsidiary, each of Buyer
and Rosie Subsidiary holds all of the permits, licenses, certificates or other
authorizations of foreign, federal, state or local government agencies required
for the conduct of the business as presently conducted or proposed to be
conducted.
2.7 Disclosure. The representations, warranties and statements of fact
----------
made by Buyer and Rosie Subsidiary in this Agreement, and in the certificates
and other written statements or agreements delivered or to be delivered pursuant
to this Agreement in connection with the transactions contemplated herein are
accurate, correct and complete and will, except as contemplated hereby, be
accurate, correct and complete at the Closing Date, and will not contain any
untrue statement of material fact or omit to state any material fact necessary
in order to make the statements and information contained therein not
misleading. Any information actually to the knowledge of Moss with regard to
representations and warranties and statements of fact made by Buyer or Rosie
Subsidiary in this Agreement shall be deemed to have been disclosed by Buyer and
Rosie Subsidiary whether Buyer or Rosie Subsidiary actually made such
disclosure.
2.8 Consulting and Advisory Fees. Neither Buyer nor Rosie Subsidiary has
----------------------------
any obligation to pay any fees or commissions to any broker, finder or agent
with respect to the transaction contemplated by this Agreement other than an
obligation to pay those amounts set forth on Exhibit "F" attached hereto and
-----------
incorporated herein for all purposes.
2.9 Knowledge. Neither Buyer nor Rosie Subsidiary has any actual
---------
knowledge that any of the representations and warranties of DSI or Moss set out
in Article 3 are not true and correct, except as set forth in the Disclosure
Schedule, as such term is defined in Article 3 hereof.
2.10 Conduct of Business. Neither Buyer nor Rosie Subsidiary have
-------------------
conducted any material business or incurred any material debts or obligations
since their respective dates of organization or incorporation, as applicable,
other than related to their efforts to acquire DSI as
6
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contemplated or provided for in this Agreement. At Closing all conditions of
Sections 6.2 and 6.3 hereof will have been met.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF DSI AND MOSS
----------------------------------------------
Except as set forth in the correspondingly numbered section of the
disclosure schedules attached hereto as Exhibit "G" as amended and supplemented
-----------
from time to time or other numbered sections specifically relating to the same
subject matter and incorporated herein by this reference (the "Disclosure
----------
Schedule"), DSI and Moss, jointly and severally, hereby make the following
- --------
representations and warranties to Buyer and Rosie Subsidiary; provided, however,
Moss shall not be responsible for any breach or misrepresentation of any
representation or warranty of DSI which is substantiated solely by the post
closing acknowledgment of DSI in the absence of other documentation independent
of actions by DSI conclusively showing or evidencing such breach or
misrepresentation.
3.1 Organization, Qualification and Corporate Power. DSI is a corporation
-----------------------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Texas. DSI (HK) Limited and Magnifair Holdings Limited (collectively,
the "Subsidiaries") are both corporations duly organized, validly existing and
------------
in good standing under the laws of Companies Ordinance of Hong Kong. Each of DSI
and each of the Subsidiaries is duly qualified to do business as a foreign
corporation and each is in good standing in the jurisdictions specified in
Section 3.1 of the Disclosure Schedule, which are all the jurisdictions in which
the ownership of their respective properties, the employment of their respective
personnel or the conduct of their respective businesses requires that they be so
qualified except where a failure to be so qualified or licensed would not have a
material adverse effect on their respective financial condition, results of
operations or business. In the event of a breach of this representation and
warranty Moss shall not be liable either directly or indirectly for any costs
or registration fees for such qualification but DSI and Moss shall be liable for
any other losses or damages incurred by Buyer as a result of such breach to the
extent, if any, hereinafter provided. Each of DSI and its Subsidiaries has full
corporate power and authority and all authorizations, licenses and permits
necessary to carry on the business in which it is engaged or in which it
proposes presently to engage and to own and use the properties owned and used by
it. Each of DSI and its Subsidiaries has delivered to Buyer true, accurate and
complete copies of its articles of incorporation or other charter document and
bylaws which reflect all amendments made thereto at any time prior to the date
of this Agreement. The minute books containing the records of meetings of the
shareholders and Board of Directors of DSI and its Subsidiaries, and the stock
certificate books of DSI and its Subsidiaries are complete and correct in all
material respects. The stock record books of DSI and its Subsidiaries and the
shareholder lists of DSI and its Subsidiaries which have previously furnished to
Buyer are complete and correct in all respects and accurately reflect the record
ownership and the beneficial ownership of all the outstanding shares of DSI's
capital stock and all other outstanding securities issued by DSI or its
Subsidiaries. All material corporate actions taken by DSI or the Subsidiaries
since their respective incorporation other than in the Ordinary Course of
Business have been duly authorized and/or subsequently ratified as necessary;
provided, however, in the event DSI subsequently determines additional corporate
actions are necessary, Moss shall not be liable for any legal fees incurred by
DSI in documenting such
7
<PAGE>
corporate actions, but DSI and Moss shall be liable for any other losses as
damages incurred by Buyer as a result of DSI's and Moss' breach of this
representation and warranty to the extent, if any, hereinafter required. As used
in this Agreement, the term "Ordinary Course of Business" means the usual and
---------------------------
ordinary course of business consistent with past custom and practice (including
with respect to quantity and frequency). Neither DSI nor any of the Subsidiaries
is in default under or in violation of any provision of its respective articles
of incorporation or other charter document or bylaws.
3.2 Capitalization. DSI's entire authorized capital stock consists of
--------------
703,503,500 shares consisting of $0.0001 par value shares of Common Stock, of
which 3,500,000 shares are issued and outstanding on the date of this Agreement
and 3,500,000 shares will be issued and outstanding immediately prior to the
Closing Date, of which 3,500,000 shares are and will be held beneficially and of
record by Moss. DSI (HK) Limited's entire authorized capital consists of 20,000
shares of common stock par value $1.00 (U.S.) per share, 10,000 of which are
issued and outstanding and held beneficially and of record by DSI except one
share and except as set out in Section 3.2 of the Disclosure Schedule.
Magnifair Holdings Limited's entire authorized capital consists of 10,000 shares
of common stock, par value $1.00 (H.K.) per share, 10,000 of which are issued
and outstanding and held beneficially and of record by DSI (HK) Limited except
one share. The record and beneficial stock ownership and capitalization of the
Subsidiaries will not change prior to the Closing Date, and except as set out in
Section 3.2 of the Disclosure Schedule, all of the issued and outstanding shares
of DSI Common Stock have been and, as of the Closing Date, will be duly
authorized and are and, as of the Closing Date, will be validly issued, fully
paid and nonassessable and have not been and, as of the Closing Date, will not
be issued in violation of any preemptive rights except as set forth in 3.2 of
the Disclosure Schedule. There are no outstanding or authorized options, rights,
warrants, calls, convertible securities (debt or equity), rights to subscribe,
conversion rights or other agreements or commitments to which DSI or the
Subsidiaries is a party or which are binding upon DSI or the Subsidiaries
providing for the issuance or transfer by DSI or the Subsidiaries of additional
shares of their respective capital stock and neither DSI nor the Subsidiaries
has reserved any shares of their respective capital stock for issuance, nor are
there any outstanding stock option rights, phantom equity or similar rights,
contracts, arrangements or commitments based upon the book value, income or
other attribute of DSI or the Subsidiaries. There are no trusts or any other
agreements or understandings with respect to the voting of DSI's or the
Subsidiaries' capital stock. Upon sale of the New Shares, to Buyer, sale of the
Transferred Shares to Rosie Subsidiary, and the merger of Rosie Subsidiary into
DSI all as contemplated herein, Buyer will own 79.97% of the issued and
outstanding shares of Common Stock in DSI; DSI and the individual or entity
designated by Buyer with respect to one share of each Subsidiary will own the
entire equity interest in the Subsidiaries; and neither DSI nor the Subsidiaries
will have outstanding any stock or securities convertible or exchangeable for
any shares of their respective capital stock, nor will any of these companies
have outstanding any rights, warrants, options, agreements or arrangements to
subscribe for or to purchase their respective capital stock or any stock or
securities (whether debt or equity) convertible into or exchangeable for their
respective capital stock other than the warrants to be issued to Hibernia
Corporation or to Moss at Closing. All capital stock, options, warrants and
other securities issued by DSI were issued in compliance, in all respects, with
all applicable federal and state securities laws.
8
<PAGE>
3.3 Authorization of Transaction. DSI and Moss each have the requisite
----------------------------
power and authority to enter into this Agreement and perform their obligations
hereunder. No other approval will be necessary to authorize the execution,
delivery and performance of this Agreement and the transactions contemplated
hereby except as set out in Section 3.2 of the Disclosure Schedule. This
Agreement has been duly executed and delivered by DSI and Moss and constitutes
the legal, valid and binding obligation of each of DSI and Moss, enforceable
against each in accordance with its terms, except as such enforcement may be
limited by bankruptcy, insolvency or other similar laws affecting the
enforcement of creditors' rights generally or by general principles of equity.
Assuming compliance with the Hart-Scott-Rodino Act and except as set out in
Section 3.3 of the Disclosure Schedule, neither the execution or delivery of
this Agreement by DSI and Moss, the performance by DSI and Moss of their
respective obligations hereunder or the consummation of the transactions
contemplated hereby will require any consent, approval or notice under, or
violate, breach, be in conflict with or constitute a default (or an event that,
with notice or lapse of time or both, would constitute a default) under, or
permit the termination of, or result in the creation or imposition of any lien
upon any properties, assets or business of DSI or any of the Subsidiaries under
any note, bond, indenture, mortgage, deed of trust, lease, franchise, permit,
authorization, license, contract, instrument or other agreement or commitment or
any order, judgment or decree to which DSI or any of the Subsidiaries is a party
or by which DSI or any of the Subsidiaries or any of their respective assets or
properties is bound or encumbered, except those that have already been given,
obtained or filed, all as set forth in Section 3.3 of the Disclosure Schedule.
No notice to, filing with or authorization, consent or approval of any public
body or authority is necessary by DSI or its Subsidiaries for the consummation
of the transactions contemplated by this Agreement except as may be required on
behalf of Buyer.
3.4 Subsidiaries. Except for DSI's investment in the shares of the
------------
Subsidiaries' common stock, DSI does not own and is not obligated to purchase
any equity interest in or any other interest convertible into or exchangeable
for an equity interest in any entity. The Subsidiaries do not own and are not
obligated to purchase any equity interest in or any other interest convertible
into or exchangeable for an equity interest in any entity other than ownership
of a Subsidiary.
3.5 Financial Statements. Buyer and Rosie Subsidiary have been delivered
--------------------
(a) DSI's audited consolidated balance sheets as of January 31, 1995, 1994, 1993
and 1992, (b) DSI's audited consolidated statements of operations and statements
of cash flows as of the end of and for each of the years in the four-year period
ended January 31, 1995, (c) prior to Closing, DSI's unaudited consolidated
balance sheet as of September 30, 1995, (d) prior to Closing, DSI's unaudited
consolidated statements of operations and statements of cash flows for the
eight-month period ended September 30, 1995 and for the comparable period ended
September 30, 1994, as restated if appropriate to be consistent with generally
accepted accounting principles consistently applied throughout the periods
covered thereby (collectively, the "Financial Statements"). The Financial
--------------------
Statements have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods covered thereby and
present fairly the consolidated financial condition of DSI and its Subsidiaries
as of such dates and the results of its operations and changes in financial
position for such periods (and for presentation subject, in the case of the
unaudited Financial Statements, to normal, recurring year-end audit
adjustments). Since January 31, 1995, there have been no changes in DSI's
9
<PAGE>
method of accounting for tax purposes or financial accounting purposes, if any,
unless approved or required by Price Waterhouse & Company and disclosed to Buyer
in writing or other items disclosed to Buyer in writing. Based on prior
experience of DSI and to the knowledge and belief of Moss, the Financial
Statements reflect adequate reserves and allowances for product liability and
warranty claims for the periods indicated.
3.6 Events Subsequent to Financial Statements. Since January 31, 1995
-----------------------------------------
there has not been:
(a) any material adverse change in the consolidated financial
condition, results of operations, business or prospective sales (meaning the
aggregate current, open purchase orders) of DSI and its Subsidiaries;
(b) any sale, lease, conveyance, license or assignment of any material
assets, tangible or intangible, of DSI or its Subsidiaries, other than sales of
inventory in the Ordinary Course of Business;
(c) any damage, destruction or property loss in excess of $50,000.00,
individually or in the aggregate, in each instance not covered by insurance,
affecting adversely the properties or business of DSI or its Subsidiaries;
(d) any declaration or setting aside or payment of any dividend or
distribution with respect to the shares of capital stock of DSI or its
Subsidiaries or any redemption, purchase or other acquisition of any such shares
other than consummating the transactions contemplated and provided for in this
Agreement;
(e) except as set out in Section 3.6 of the Disclosure Schedule, any
mortgage or pledge of, or subjection to any lien, charge, security interest or
encumbrance of any kind on any of the assets, tangible or intangible, of DSI or
its Subsidiaries (other than liens arising by operation of law which secure
obligations which are not yet due and payable), nor any incurrence of
indebtedness or liability or assumption of obligations by DSI or its
Subsidiaries other than (i) those incurred in the Ordinary Course of Business,
which would include any working capital loans pursuant to DSI's credit line with
State Street Bank and Bank One Texas, N.A., (ii) those which do not exceed
$50,000.00 in the aggregate; and (iii) those incurred in the course of
negotiating, documenting and consummating the transactions contemplated and
provided for in this Agreement;
(f) except as set out in Section 3.6 of the Disclosure Schedule, any
cancellation or satisfaction by DSI or its Subsidiaries of any debt or claim or
advance, except for adjustments made in the Ordinary Course of Business, which
in the aggregate, are not material other than a cancellation of an obligation of
Moss to DSI in the approximate amount of $2,000,000.00 and other than
consummating the transactions contemplated or provided for in this Agreement;
(g) any waiver or release other than the cancellation of open purchase
orders by customers, by DSI or its Subsidiaries of any right of any material
value in excess of $50,000.00;
10
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(h) any sale, assignment, transfer or grant by DSI or its Subsidiaries
of any material rights under any concessions, leases, licenses, agreements,
patents, inventions, trademarks, trade names or copyrights other than sales or
gifts of products or advertising or other rights or releases thereof in the
Ordinary Course of Business;
(i) any arrangement, agreement or undertaking entered into by DSI or
its Subsidiaries not terminable on thirty (30) days or less notice without cost
or liability (including, without limitation, any payment of or promise to pay
any bonus or special compensation or any increase in compensation) with
employees or any increase in compensation or benefits to officers or directors
of DSI or its Subsidiaries, other than in the Ordinary Course of Business or
consummating the transactions contemplated or provided for in this Agreement;
(j) any change made or authorized in the articles of incorporation or
other charter document or bylaws of DSI or its Subsidiaries other than those
contemplated or provided for in this Agreement other than to amend the Articles
of Incorporation to provide for officer and director indemnity, provision for
additional stock, preemptive rights, cumulative voting, cancellation of all
Treasury or other stock of DSI held by DSI, super majority approval of 85% of
shareholders and stock split of 3,500 to 1;
(k) any issuance, sale or other disposition by DSI or its Subsidiaries
of any shares of their respective capital stock or other equity securities, or
any grant of any options, warrants or other rights to purchase or obtain
(including upon conversion or exercise) shares of their respective capital stock
or other equity securities other than assignments of capital stock of a
Subsidiary by another Subsidiary to DSI and other than those contemplated and
provided for in this Agreement;
(l) except as set forth in Section 3.6 of the Disclosure Schedule, any
loan to or other transaction with any officer, director or shareholder of DSI or
its Subsidiaries giving rise to any claim or right of DSI or its Subsidiaries
against any such person or of such person against DSI or its Subsidiaries other
than normal recurring travel and expense advances and expense accounts made in
the Ordinary Course of Business;
(m) any acceleration, termination, modification or cancellation or
threat thereof by any party of any contract, lease or other agreement or
instrument other than the cancellation or modification of open purchase orders
by customers or vendors of DSI, individually or in the aggregate in excess of
$100,000 to which DSI or its Subsidiaries is a party or by which it is bound so
as to affect, materially and adversely, the properties or business of DSI or its
Subsidiaries;
(n) any pledge or gift of any charitable or other capital contribution
outside the Ordinary Course of Business;
(o) except as disclosed in Section 3.6 of the Disclosure Schedule, any
other transaction or commitment in excess of $100,000 or transactions or
commitments other than the modifications or cancellation of open purchase orders
by customers or vendors of DSI, in the aggregate in excess of $100,000 entered
into by DSI or its Subsidiaries which would materially
11
<PAGE>
adversely affect the properties or business of DSI or its Subsidiaries, or other
than those contemplated or provided for in this Agreement; or
(p) termination, modification or cancellation of any booked open
purchase orders by customers of DSI in excess of $200,000 for any individual
order or $500,000 in the aggregate.
3.7 Undisclosed Liabilities. To Moss' knowledge there are no material
-----------------------
undisclosed liabilities or obligations of DSI or its Subsidiaries, either
accrued, absolute, or with the passage of time will become absolute except to
the extent provided for in the Financial Statements which have been delivered to
Buyer on the date hereof or on the Closing Date as applicable, or incurred in
the course of negotiating, documenting and consummating the transactions
contemplated and provided for in this Agreement.
3.8 Tax Returns and Audits. The taxable year of DSI and its Subsidiaries
----------------------
ends January 31. DSI has duly and timely filed or caused to be filed all tax
returns for the past six (6) years (collectively the "Tax Returns") required to
-----------
be filed on behalf of DSI and its Subsidiaries and has paid in full or fully
reserved against in the Financial Statements all taxes, interest, penalties,
assessments and deficiencies shown to be due or claimed in such tax returns to
be due on behalf of DSI and its Subsidiaries to foreign, federal, state or local
taxing authorities (including taxes on properties, income, franchises, licenses,
sales, use and payrolls). The Tax Returns are to Moss' knowledge correct based
on current tax law, and neither DSI nor its Subsidiaries are required to pay any
other taxes except as shown in such Tax Returns. The income tax returns filed by
DSI or its Subsidiaries have not been, and are not being, audited by the
Internal Revenue Service or other applicable taxing authorities for any period.
All taxes or estimates thereof that are shown to be due, or are claimed or
asserted by any taxing authority to be due, have been timely and appropriately
paid or contested. Except for amounts not yet due and payable, all tax
liabilities to which the properties of DSI or its Subsidiaries are known by Moss
to be subject have been paid and discharged or contested. The provisions for
income and other taxes payable reflected in the Financial Statements make
adequate provision for all then accrued and unpaid taxes of DSI and its
Subsidiaries. There are no tax liens to Moss' knowledge (other than liens for
taxes which are not yet due and payable) on any of the property of DSI or its
Subsidiaries, nor are there any pending or, to Moss' knowledge, threatened
examinations or tax claims. DSI has not granted any extensions of limitation
periods applicable to tax claims or filed a consent under Section 341(f) of the
Code relating to collapsible corporations. Except jurisdictions in which DSI and
its Subsidiaries voluntarily file tax returns, no claim has been made by a
taxing authority that either DSI or its Subsidiaries is or may be subject to
taxation by that jurisdiction. True and complete copies of all federal, foreign,
state and local income and other tax returns, of DSI or its Subsidiaries since
January 31, 1993 that are in DSI's or its Subsidiaries' possession, have been
delivered to Buyer, and the same are listed in Section 3.8 of the Disclosure
Schedule. Nether DSI nor its Subsidiaries is a party to, or bound by, any tax
indemnity, tax sharing or tax allocation agreement. Neither DSI nor its
Subsidiaries is a party to any agreement that has resulted or would result, in
the payment of any "excess parachute payments" within the meaning of Section
280G of the Code. Neither DSI nor its Subsidiaries has ever been a member of an
"affiliated group," as defined in Section 1504(a) of the Code. All positions
taken on federal Tax Returns that could give rise to a penalty for substantial
understatement pursuant to Section 6662(d) of the Code are believed to have been
disclosed on
12
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such Tax Returns. Neither DSI nor its Subsidiaries is a partner of any
partnership. No consent to the application of Section 341(f)(2) of the Code (or
any predecessor thereof) has been made or filed by or with respect to any of DSI
or its Subsidiaries or any of their assets and properties. Neither DSI nor its
Subsidiaries has agreed to or is presently required to make any adjustment
pursuant to Section 481(a) of the Code (or any predecessor provision) by reason
of any change in any accounting method of DSI or its Subsidiaries; neither DSI
or its Subsidiaries has any application pending with any taxing authority
requesting permission for any changes in any accounting method of DSI or its
Subsidiaries, and the I.R.S. has not proposed any such adjustment or change in
accounting method therefor. Neither DSI nor its Subsidiaries has been or is in
violation (or with notice or lapse of time or both, would be in violation) of
any applicable law relating to the payment of withholding of taxes. DSI and its
Subsidiaries have duly and timely withheld from salaries, wages and other
compensation and paid over to the appropriate taxing authorities all amounts
required to be so withheld and paid over for all periods under all applicable
laws.
3.9 Indebtedness. Set forth in Section 3.9 of the Disclosure Schedule is
------------
a complete and accurate list and a brief description of all outstanding
indebtedness for money borrowed by DSI or its Subsidiaries (as evidenced by
money funded by a third party to DSI or its Subsidiaries) in an amount in excess
of $10,000.00 for any one item or $25,000 in the aggregate. Except with respect
to the indebtedness described in Section 3.9 of the Disclosure Schedule, there
is no other outstanding indebtedness for money borrowed to any third parties, or
any actual or contingent liabilities under the terms of any loan agreement,
credit facility, note or other agreement for borrowed money by DSI or its
Subsidiaries.
3.10 Real Property. Set forth in Section 3.10 of the Disclosure Schedule
-------------
is a complete and accurate list and a brief description of all real property
owned or leased by DSI or its Subsidiaries. With respect to each lease so set
forth, except as contemplated by this Agreement: (a) the lease has been validly
executed and delivered by DSI or its Subsidiaries, as applicable, and, to the
knowledge of Moss, by the other party or parties thereto, and is in full force
and effect; (b) neither DSI or its Subsidiaries, as applicable, nor to the
knowledge of Moss, any other party to the lease, is in material breach or
default, and no event has occurred on the part of DSI or its Subsidiaries, as
applicable or, to the knowledge of Moss, on the part of any other party, which,
with notice or lapse of time, would constitute such a breach or default or
permit termination, modification or acceleration under the lease; (c) the lease
will continue to be binding in accordance with its terms following the Closing
and sale of the New Shares to Buyer, sale of the Transferred Shares to Rosie
Subsidiary and the merger of Rosie Subsidiary with DSI; (d) neither DSI nor its
Subsidiaries has repudiated and, to the knowledge of Moss, no other party to the
lease has repudiated, any provision thereof; (e) there are no written notices of
disputes, oral agreements or delayed payment programs in effect as to the lease;
and (f) to the knowledge of Moss all facilities leased thereunder have been
approved by all necessary governmental authorities, and are in good condition,
working order and repair.
3.11 Tangible Property. Each of DSI and its Subsidiaries has good and
-----------------
legal title to, or a valid leasehold interest in, each item of tangible
property, whether real, personal or mixed, reflected on its books and records as
owned or used by it, subject to no encumbrances, loans, security interests,
mortgages or pledges except those which arise by matter of law or in the
Ordinary Course of Business, which are inventory sold subsequent to the date of
entry on the
13
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books and which sales are not entered in the books of DSI or its Subsidiaries on
the date of this Agreement or the Closing Date, or which are set forth in
Section 3.11 of the Disclosure Schedule.
3.12 Intellectual Property. As used in this Section 3.12, the term
---------------------
"Intellectual Property" means all inventions, improvements thereto, all patents,
- ----------------------
patent applications, patent disclosures, trademarks, service marks, trade dress,
logos, trade names, and corporate names together with all translations thereof,
all copyrights, all mask works and all applications and registrations in
connection therewith. To Moss' knowledge, DSI and its Subsidiaries own or have
the right to use all Intellectual Property and all copies and tangible
embodiments thereof used in the operation of their respective businesses.
(a) Owned. Section 3.12(a) of the Disclosure Schedule sets forth a
-----
list of Intellectual Property owned by each of DSI and its Subsidiaries. Each
item of Intellectual Property used or owned by DSI or any of the Subsidiaries
immediately prior to Closing will be owned or available for use by DSI or the
Subsidiary on identical terms and conditions immediately subsequent to the
Closing. With respect to each such item of Intellectual Property:
(i) DSI or one of its Subsidiaries is the sole and exclusive owner
of registrations for each such item of Intellectual Property and, to Moss'
knowledge, DSI or its Subsidiaries have the sole and exclusive right to use such
item in the conduct of its business within the territory registered and for the
goods registered, excluding patent and trademark applications, corporate names,
unregistered marks and trade dress;
(ii) no proceedings have been instituted, are pending or to Moss'
knowledge are threatened which challenge the validity, enforceability, use or
ownership of such item of Intellectual Property except for the prosecution of
patent and trademark applications for Intellectual Property;
(iii) the item (A) to the extent it could do so, to Moss' knowledge,
does not infringe upon or otherwise violate the rights of others, (B) to Moss'
knowledge, is not being infringed upon by others and (C) is not subject to any
outstanding order, decree, judgment, stipulation or charge;
(iv) no license, sublicense or agreement pertaining to the item has
been granted by DSI or its Subsidiaries other than in the Ordinary Course of
Business;
(v) neither DSI, its Subsidiaries, nor Moss has received in
writing any charge of interference or infringement with respect to the item;
(vi) the transactions contemplated by this Agreement will have no
material adverse effect on the right, title and interest of DSI or its
Subsidiaries in the item;
(vii) DSI has taken steps to protect the rights set forth in Section
3.12(a) of the Disclosure Schedule and will continue to use such efforts, and to
the extent the exercise of such rights apply to employees of DSI, DSI will
enforce those rights within the limits and to the extent such rights are
enforceable against such employees; and
14
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(viii) DSI has supplied Buyer with true and complete copies, to
the extent such information exists, of written documentation evidencing its
ownership or its Subsidiaries' ownership of the item and of all licenses and
other contracts related thereto.
(b) Used. Section 3.12(b) of the Disclosure Schedule sets forth a
----
list describing all patents, trademarks, trade names, and service marks of
others which DSI or its Subsidiaries uses that are material to the respective
businesses of DSI or its Subsidiaries. With respect to each such item of
intellectual property:
(i) any license agreement covering the item is a valid and binding
agreement on behalf of DSI or its Subsidiaries, has been validly executed and
delivered by DSI or its Subsidiaries and, to Moss' knowledge, by the other
parties thereto and is in full force and effect as to DSI or its Subsidiaries;
(ii) no event has occurred which constitutes a breach of such
license agreement on the part of DSI or its Subsidiaries, neither DSI nor its
Subsidiaries has repudiated and, to Moss' knowledge, no other party thereto has
repudiated any provision thereof, and there are no disputes in writing, oral
arrangements or delayed payment programs in effect as to any such license
agreement;
(iii) DSI has supplied Buyer with a true and complete copy of the
license agreement;
(iv) the transactions contemplated by this Agreement will have no
material adverse effect on the ability of DSI or its Subsidiaries to continue to
use each such item in accordance with their past practices; and
(v) to Moss' knowledge no claim has been made or asserted against
DSI or its Subsidiaries that the exercise of the rights granted to DSI and/or
its Subsidiaries with respect to such item infringes upon the intellectual
property rights of any third party.
(c) Business Activity. To the knowledge of Moss Parties, neither DSI
-----------------
nor its Subsidiaries has infringed, misappropriated or otherwise violated any
intellectual property rights of any third parties, nor are Moss aware of any
infringement, misappropriation or violation which will occur as a result of the
continued operation of the business of DSI or its Subsidiaries as now conducted
or as presently proposed to be conducted.
(d) Security. DSI and its Subsidiaries have each taken some security
--------
measures to protect the security, confidentiality and value of some of the
Intellectual Property owned by them.
3.13 Contracts. Section 3.13 of the Disclosure Schedule lists the
---------
following contracts and written arrangements, true and complete copies of which
have been delivered to Buyer and Rosie Subsidiary, to which DSI or the
Subsidiaries are a party:
(a) any contract for the lease of personal property from or to third
parties providing for lease payments in excess of $25,000.00 per annum;
15
<PAGE>
(b) any contract for the purchase or sale of raw materials,
commodities, supplies, products manufactured by DSI or its Subsidiaries or other
personal property or for the furnishing or receipt of services which contract
calls for performance over a period of more than one year and which involves
more than the sum of $25,000.00;
(c) any partnership or foreign joint venture agreement;
(d) any agreement or instrument under which DSI or its Subsidiaries is
or may become indebted for borrowed money in an amount individually or in the
aggregate in excess of $50,000;
(e) any non-competition agreement;
(f) any other contract or arrangement entered into other than the
Ordinary Course of Business in which the consequences of a default or
termination would have a materially adverse effect on the financial condition of
DSI or its Subsidiaries or on the prospects or the conduct of the business of
DSI or its Subsidiaries;
Except as otherwise described in Section 3.13 of the Disclosure Schedule, all
material contracts and arrangements listed in Section 3.13 of the Disclosure
Schedule are valid and binding agreements and are in full force and effect as to
DSI and its Subsidiaries. Neither DSI nor its Subsidiaries is and, to Moss'
knowledge, no other party is in material breach or default, and no event has
occurred on the part of DSI or its Subsidiaries or, to Moss' knowledge, on the
part of any other party to any such contract or arrangement which with notice or
lapse of time would constitute a material breach or default or permit
termination under any such contract or arrangement, provided, however, that
sales of products that result in shortages of products, late shipments of
products, warranty claims on products sold or price changes on products and
supplies shall not be deemed a breach of or default under such contracts or
permit termination thereunder for purposes of this Section 3.13. Except as set
forth in Section 3.13 of the Disclosure Schedule, none of such contracts or
arrangements will be terminated or modified by the purchase of the New Shares by
Buyer, transfer of the Transferred Shares to Rosie Subsidiary or the merger of
Rosie Subsidiary into DSI and Closing of this Agreement. Neither DSI nor its
Subsidiaries is a party to any verbal contract or arrangement which, if reduced
to written form, would be required to be listed in Section 3.13 of the
Disclosure Schedule under the terms of this Section 3.13 other than with its
representatives and vendors which are set out in the Disclosure Schedule.
3.14 Suppliers and Customers. Section 3.14 of the Disclosure Schedule is a
-----------------------
true and complete list of all suppliers of DSI or the Subsidiaries to whom DSI
or its Subsidiaries made payments during the fiscal year ended January 31, 1995,
in excess of five percent (5%) of DSI and the Subsidiaries' consolidated cost of
goods sold as reflected in the Financial Statements for such year and all
customers of DSI or the Subsidiaries that paid DSI or the Subsidiaries, during
the fiscal year ended January 31, 1995, more than five percent (5%) of the
consolidated revenues of DSI and the Subsidiaries as reflected in the Financial
Statements for such year. Since January 31, 1995 and until ten (10) days prior
to the Closing Date, to the knowledge of Moss no such supplier of DSI or the
Subsidiaries has, or has indicated that it will, stop, or decrease materially
the rate of, supplying materials, products or services to DSI or the
Subsidiaries, and no such customer of DSI or the Subsidiaries has materially
decreased or ceased the business with
16
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DSI or the Subsidiaries or has indicated that it will materially decrease or
cease doing business with DSI or the Subsidiaries.
3.15 Notes; Accounts Receivable. As of the date of this Agreement there
--------------------------
are and as of the Closing Date to the extent included in the Disclosure Schedule
there will be, properly reflected on their respective books and records, all
notes receivable and accounts receivable of DSI and the Subsidiaries, each of
which are and will be valid receivables subject to no known setoffs or
counterclaims other than normal and routine credits and exchanges of products
and warranty claims. No representation is made as to the collectibility of any
specific receivable but this disclaimer shall not in any way limit the
representations contained in Paragraph 3.5 hereof. Section 3.15 of the
Disclosure Schedule is a complete list of all notes receivable and accounts
receivable (other than intercompany receivables) of DSI as of October 31, 1995.
3.16 Powers of Attorney. Other than for patent applications, trademark
------------------
applications and customs brokerage agreements and in security agreements for
current loans of DSI and its Subsidiaries, there are no outstanding powers of
attorney or similar instruments executed by DSI or the Subsidiaries.
3.17 Condition of Property. Each building, fixture, machine and piece
---------------------
of equipment (having a net book value of $25,000.00 or more) owned or used by
DSI or its Subsidiaries is listed on Section 3.17 of the Disclosure Schedule,
and to Moss' knowledge is in good operating condition and repair, subject to
normal wear and tear and except as otherwise rendered not to be in good
operating condition and repair in the Ordinary Course of Business, and in
compliance with all zoning, building and fire codes. DSI or its Subsidiaries
owns and has good and legal title to, or leases under leases which Moss believes
to be valid and not currently in default, all buildings, machinery, equipment
and other tangible assets used in the conduct of DSI's or its Subsidiaries'
business as presently conducted, reflected in the most recent Financial
Statements, free and clear of all liens, claims and encumbrances known to Moss
except (i) rental liens of which Moss has no knowledge, (ii) possessory or
statutory liens on equipment located in countries other than the United States
of America of which Moss has no knowledge without any diligent inquiry, and
(iii) as disclosed on Section 3.17 of the Disclosure Schedule.
3.18 Insurance. DSI and its Subsidiaries are insured under the policies
---------
listed in Section 3.18 of the Disclosure Schedule. Since January 31, 1995, DSI
and each of its Subsidiaries have been insured with reputable insurers in
respect of its properties, assets and businesses and all such policies are in
full force and effect.
3.19 Litigation. Section 3.19 of the Disclosure Schedule sets forth any
----------
instances in which (a) Moss, DSI or its Subsidiaries are subject to any judgment
or order (other than orders of general applicability) of any court or quasi-
judicial or administrative agency of any jurisdiction, domestic or foreign, or
where there is any charge, complaint, demand, lawsuit or governmental
investigation pending or threatened in writing against Moss, DSI or its
Subsidiaries; or (b) DSI or its Subsidiaries is a plaintiff in any action,
domestic or foreign, judicial or administrative, or any such action exists in
which a counterclaim against DSI or its Subsidiaries is pending or might be
brought. Except as shown in Section 3.19 of the Disclosure Schedule, none of the
actions, suits, proceedings or investigations set forth in Section 3.19 of the
Disclosure Schedule could result in any adverse change in the condition,
financial or
17
<PAGE>
otherwise, of DSI or its Subsidiaries, the same being fully reserved against in
the Financial Statements. There are no unsatisfied judgments, orders (other than
orders of general applicability), or decrees affecting DSI or its Subsidiaries
or to which DSI or its Subsidiaries is a party excluding any default judgments,
orders or decrees of which Moss has no knowledge. Other than set forth in
Section 3.19 of the Disclosure Schedule, there are no known unasserted claims or
any reason to believe that any such action, suit, proceeding or investigation
may be brought or, to Moss' knowledge, threatened against DSI or its
Subsidiaries. To Moss' knowledge, DSI and its Subsidiaries have each complied
with all applicable laws (including rules, regulations, and codes) of federal,
state and foreign governments (and all agencies thereof).
3.20 Employees. DSI and Moss have listed in Section 3.20 of the Disclosure
---------
Schedule and have furnished to Buyer true and complete copies of: (a) any
written employment agreements with officers and directors of DSI or its
Subsidiaries; and (b) any written employment agreements with DSI or its
Subsidiaries' employees which by their terms may not be terminated by DSI or its
Subsidiaries, as applicable, at will or which grant severance payments. Neither
DSI nor its Subsidiaries has entered into any similar oral employment agreements
which are not terminable at will or which grant severance payments, except for
one (1) month termination or payment in lieu thereof that are required in Hong
Kong. To Moss' knowledge, no key employee or group of employees has any plans to
terminate employment with DSI or its Subsidiaries. Neither DSI nor its
Subsidiaries is a party to or bound by any collective bargaining agreement, nor
has either experienced any strikes, material grievances, claims of unfair labor
practices or other collective bargaining disputes. There are no loans or other
obligations payable or owing by DSI or its Subsidiaries to any shareholder,
officer, director or employee of DSI or its Subsidiaries (except salaries, wages
and expense accounts incurred and accrued in the Ordinary Course of Business),
nor other than to Moss are there any loans or debts payable or owing by any of
such persons to DSI or its Subsidiaries (except expense account advances) or any
guarantees by DSI or its Subsidiaries of any loan or obligation of any nature to
which any such person is a party. To the knowledge of Moss, DSI and its
Subsidiaries have complied with all laws and regulations which relate to the
employment of labor, employee civil rights or equal employment opportunities.
There is no organizational effort presently being made or threatened by or on
behalf of any labor union with respect to employees of DSI or its Subsidiaries,
to the knowledge of Moss.
3.21 Employee Benefit Plans. DSI and Moss have listed in Section 3.21 of
----------------------
the Disclosure Schedule and have furnished to Buyer for the past fiscal year
true and complete copies of any of DSI's or its Subsidiaries' (a) non-qualified
deferred or incentive compensation or retirement plans or arrangements, (b)
qualified retirement plans or arrangements, (c) other employee compensation,
severance or termination pay or welfare benefit plans or programs, and (d)
related trusts, insurance contracts or other funding arrangements maintained,
established or contributed to by DSI or its Subsidiaries or to which DSI or its
Subsidiaries is a party or otherwise is bound. Except as required by law,
neither DSI nor its Subsidiaries maintains or contributes or has ever in the
past five (5) years maintained or contributed to any funded or unfunded medical,
health or life insurance plan or arrangement for retirees or terminated
employees. Neither DSI nor its Subsidiaries contributes or has any obligation to
make and has never contributed or had any obligation to make in the past five
(5) years any payment or contribution to a "Multi-Employer Plan," as that term
is defined in Section 3(37) of the
18
<PAGE>
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and DSI
-----
does not have any actual or potential liability under Section 4201 of ERISA for
any complete or partial withdrawal from a multi-employer plan. Neither DSI nor
its Subsidiaries maintains, contributes to or has any liability or has ever
maintained, contributed or had any liability in the past five (5) years with
respect to any employee pension benefit plan (as defined in Section 3(2) of
ERISA) which is intended to meet the requirements of a qualified plan under
Section 401(a) of the Code. Neither DSI nor its Subsidiaries maintains,
contributes to or has any liability or has ever maintained, contributed to or
had any liability in the past five (5) years with respect to a plan which is
subject to Title IV of ERISA or Section 412 of the Code. With respect to the
employee benefit plans listed in Section 3.21 of the Disclosure Schedule, DSI
has furnished to Buyer true and complete copies of (i) any summary plan
description or other employee communication materials, (ii) the latest financial
statements and annual reports and (iii) all documents filed with the Internal
Revenue Service or the Department of Labor since January 31, 1993. All qualified
employee benefit plans and related trusts listed in Section 3.21 of the
Disclosure Schedule and maintained or contributed to by DSI or its Subsidiaries,
or with respect to which DSI or its Subsidiaries now has or has ever had in the
past five (5) years any liability or potential liability, comply in form and in
operation with all requirements of ERISA and the Code. All required reports with
respect to such plans required by applicable law have been filed and all
contributions or payments presently anticipated hereunder have been made or
properly accrued. No applications for rulings, determination letters, advisory
opinions or prohibited transaction exemptions are currently pending before the
Internal Revenue Service, the Department of Labor or the Pension Benefit
Guaranty Corporation with respect to any such employee benefit plans or
arrangements or any related trusts. None of such employee benefit plans or
arrangements, any related trusts, the trustees of any related trusts or the
directors, officers and employees of DSI or its Subsidiaries is the subject of
any lawsuit, arbitration or other proceeding concerning any benefit claim or
other benefit-related matter (other than routine claims in the Ordinary Course
of Business), and there have been no prohibited transactions as described in
Section 406 of ERISA or as defined in Section 4975 of the Code with respect to
any such plan. Neither DSI its Subsidiaries, its directors, officers and
employees nor any other fiduciary, as such term is defined in Section 3 of
ERISA, has committed any breach of fiduciary responsibility imposed by ERISA or
any other applicable law which would subject DSI or its Subsidiaries, or their
respective directors, officers and employees to liability under ERISA or any
applicable law.
3.22 Guarantees. Neither DSI nor its Subsidiaries is a guarantor or
----------
otherwise liable for any indebtedness of any other person, firm or corporation
other than endorsements for collection in the Ordinary Course of Business and
DSI for its Subsidiaries.
3.23 Legal Compliance. To the knowledge of Moss and subject to the
----------------
limitations of Section 3.1, for the past five (5) years DSI and its Subsidiaries
and each of their respective directors, officers and employees (the individuals
only in their capacities as representatives of DSI or its Subsidiaries, as
applicable) have complied with all applicable laws and regulations of foreign,
federal, state and local governments and all agencies thereof, and no claim has
been filed against DSI or its Subsidiaries alleging a violation of any such laws
or regulations. To the knowledge of Moss, and subject to the limitations of
Section 3.1, each of DSI and its Subsidiaries holds all of the permits,
licenses, certificates or other authorizations of foreign,
19
<PAGE>
federal, state or local governmental agencies required for the conduct of its
business as presently conducted or proposed to be conducted.
3.24 Certain Business Relationships. None of the present or former
------------------------------
shareholders, directors, officers or employees of DSI or its Subsidiaries owns,
directly or indirectly, any interest in any business, corporation or other
entity (other than investments in publicly held companies) which, on the date
hereof or within the past 12 months, has been involved in any manner in any
material business arrangement or relationship with DSI or its Subsidiaries, and
none of the foregoing persons owns any property or rights, tangible or
intangible, which are used in the business of DSI or its Subsidiaries.
3.25 Disclosure. The representations and warranties and statements of fact
----------
that are material and are made by DSI and Moss in this Agreement, in the
Disclosure Schedule, and in certificates and other written statements or
agreements delivered or to be delivered pursuant to this Agreement or in
connection with the transactions contemplated herein are accurate, correct and
complete and will except as contemplated hereby, be accurate, correct and
complete at the Closing Date, and will not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements and information contained herein or therein not misleading. Any
information actually to the knowledge of Buyer with regard to the
representations and warranties and statements of fact made by DSI or Moss in
this Agreement, including the Disclosure Schedules, shall be deemed to have been
disclosed by DSI and Moss regardless of whether DSI or Moss actually made such
disclosure or identified such disclosure within the representations, warranties
or statements of fact, and regardless of whether such representations,
warranties or statements of fact, expressly or impliedly excluded or included
such knowledge of the party making such statements of fact, representations or
warranties including, but not limited to, other parts of the Disclosure
Schedule.
3.26 Documents. DSI and Moss have delivered or made available to Buyer all
---------
of the documents listed in Section 3.26 to the Disclosure Schedule hereto, and
DSI and Moss have given Buyer and Rosie Subsidiary an opportunity to examine all
such documents and Buyer and Rosie Subsidiary are believed to have examined all
such documents.
3.27 Consulting and Attorneys Fees. Except as described in Section 3.27 of
-----------------------------
the Disclosure Schedule, neither Moss nor DSI has any obligation to pay any
costs or fees with respect to the transactions contemplated by this Agreement.
3.28 Inventory. The inventory of DSI and its Subsidiaries as of the date
---------
of this Agreement and as of the Closing Date does and will consist of goods
which are merchantable and fit for the purposes for which they were procured,
and the allowance for slow-moving, obsolete, damaged or defective inventory
reflected in the Financial Statements as of January 31, 1995 and September 30,
1995, is adequate to the best of Moss' knowledge. A listing of the inventory is
set out in Section 3.28 of the Disclosure Schedule and will be updated for
Closing as of the most current date available but not prior to October 31, 1995.
This listing will not be based on a physical current inventory but is an
operating or running inventory.
3.29 Questionable Payments. DSI and its Subsidiaries have not directly or
---------------------
indirectly (i) used corporate funds for unlawful contributions, gifts,
entertainment, or for other unlawful
20
<PAGE>
expenses relating to political activity, (ii) made any unlawful payment to
foreign or domestic government officials or employees or to foreign or domestic
political parties or campaigns from corporate funds, (iii) violated or are in
violation of any provision of the Foreign Corrupt Practices Act of 1977
applicable to the conduct of their business, or (iv) established or maintained
any unlawful or unrecorded fund of corporate monies or other assets.
ARTICLE 4
CONDUCT OF BUSINESS PENDING CLOSING
-----------------------------------
4.1 Conduct of Business by DSI and its Subsidiaries Pending the Closing.
-------------------------------------------------------------------
DSI and Moss covenant and agree that upon the execution hereof and until the
Closing Date or termination of this Agreement whichever is earlier, unless Buyer
and Rosie Subsidiary shall otherwise agree in writing or as otherwise expressly
contemplated or permitted by this Agreement or caused directly by Buyer and
Rosie Subsidiary:
(a) Each of DSI and its Subsidiaries shall conduct its business and
operations, including its cash management practices, the collection of
receivables, inventory control maintenance of equipment and facilities and
payment of payables, only in the Ordinary Course of Business;
(b) Other than to consummate the transactions contemplated as provided
for in this Agreement after disclosure to Buyer, neither DSI nor its
Subsidiaries shall directly or indirectly do any of the following: (i) except as
set out in Section 4.1 of the Disclosure Schedule, sell, pledge, dispose of or
encumber any of their respective assets, except in the Ordinary Course of
Business; (ii) amend their respective articles of incorporation or other charter
documents or bylaws; (iii) split, combine or reclassify any outstanding shares
of their respective capital stock, or declare, set aside or pay any dividend or
other distribution payable in cash, stock, property or otherwise with respect to
shares of their respective capital stock; (iv) redeem, purchase or acquire or
offer to acquire any shares of their respective capital stock or other
securities except as necessary to vest eighty percent (80%) of the issued and
outstanding shares of Common Stock in DSI in Buyer; (v) create any additional
subsidiaries; or (vi) except as set out in Section 4.1 of the Disclosure
Schedule, enter into or modify any contract, agreement, commitment or
arrangement with respect to any of the matters set forth in this Section 4.1(b);
(c) Other than to consummate the transactions contemplated as provided
for in this Agreement after disclosure to Buyer, neither DSI nor its
Subsidiaries shall (i) issue, sell, pledge or dispose of, or agree to issue,
sell, pledge or dispose of, any additional shares of, or any options, warrants,
conversion privileges or rights of any kind to acquire any shares of, their
respective capital except as necessary to vest 79.97% of the issued and
outstanding shares of Common Stock in DSI in Buyer and except as set out in
Section 4.1 of the Disclosure Schedule; (ii) except the merger of Rosie
Subsidiary into DSI as contemplated herein, acquire (by merger, consolidation,
acquisition of stock or assets or otherwise) any corporation, partnership or
other business organization or division or material assets thereof; (iii) incur
any indebtedness for borrowed money other than in Ordinary Course of Business;
or (iv) and except as set out in
21
<PAGE>
Section 4.1 of the Disclosure Schedule, enter into or modify any contract,
agreement, commitment or arrangement with respect to any of the matters set
forth in this Section 4.1(c);
(d) Other than to consummate the transactions contemplated as provided
for in this Agreement after disclosure to Buyer, neither DSI nor its
Subsidiaries shall (i) enter into or modify any employment, severance or similar
agreements or arrangements with, or grant any bonus, salary increase, severance
or termination pay to, any officers or directors except to the individuals and
in the amounts as described in the Employee Payment Disclosure letter from DSI
to Buyer which is attached as Exhibit "H"; or (ii) in the case of employees who
-----------
are not officers or directors, take any action other than in the Ordinary Course
of Business with respect to the grant of any bonuses, salary increases,
severance or termination pay or with respect to any increase of benefits payable
in effect on January 31, 1995, except to the individuals and in the amounts as
described in the Employee Payment Disclosure letter from DSI to Buyer;
(e) Except as required by law, neither DSI nor its Subsidiaries shall
adopt or amend any bonus, profit-sharing, compensation, stock option, pension,
retirement, deferred compensation, employment or other employee benefit plan,
agreement, trust, fund or arrangement for the benefit or welfare of any
employee;
(f) Except as otherwise required by their respective articles of
incorporation, bylaws or appropriate charter documents, by this Agreement or by
applicable law, neither DSI nor its Subsidiaries shall call any meeting of their
respective shareholders to vote upon any proposal for the sale of all or
substantially all of the assets of DSI or the merger of DSI with any other
entity;
(g) DSI shall use its best efforts to cause its and its Subsidiaries'
current insurance (or reinsurance) policies (not including employee health
insurance) not to be canceled or terminated or any of the coverage thereunder to
lapse, unless simultaneously with such termination, cancellation or lapse,
replacement policies underwritten by insurance and reinsurance companies of
nationally recognized standing providing coverage equal to or greater than the
coverage under the canceled, terminated or lapsed policies for substantially
similar premiums are in full force and effect;
(h) Each of DSI and its Subsidiaries shall (i) use their respective
best efforts to preserve intact their respective business organization and
goodwill, keep in full force and effect all material rights, licenses, permits
and franchises relating to their respective business, keep available the
services of their respective officers and employees as a group and maintain
satisfactory relationships with suppliers, distributors, customers and others
having business relationships with it; (ii) report at least once a week at
reasonable times, to Buyer's representative, M. D. Davis, regarding operational
matters and the general status of ongoing operations; (iii) use its best efforts
not to take any action which would render, or which reasonably may be expected
to render, any representation or warranty made by it in this Agreement to be
untrue at any time made unless amended or supplemented by the Disclosure
Schedule provided to Buyer; and (iv) notify Buyer of any emergency in the
operation of their respective properties and of any tax audits, tax claims,
governmental or third party complaints (not including day to day customer
complaints or returns), investigations or hearings (or communications indicating
that the same may be contemplated) if such emergency, change,
22
<PAGE>
audit, claim, complaint, investigation or hearing would be material,
individually or in the aggregate, to the financial condition, results of
operations or business of DSI or its Subsidiaries, or to the ability of Moss or
Buyer to consummate the transactions contemplated by this Agreement;
(i) DSI and Moss shall deliver to Buyer promptly (but in any event
within five (5) business days) after the discovery or receipt of notice of any
default under any material agreement to which DSI or its Subsidiaries is a party
or any other material adverse event or circumstance affecting DSI or its
Subsidiaries (including the filing of any material litigation against DSI or its
Subsidiaries or the existence of any dispute with any person or entity which
involves a reasonable likelihood of such litigation being commenced), a
certificate of the Chief Executive Officer of DSI specifying the nature and
period of the existence thereof and what actions DSI has taken and proposes to
take with respect thereto;
(j) Each of DSI and its Subsidiaries shall maintain their respective
assets in customary repair, order and condition consistent with past customs and
practices, replace as appropriate in accordance with past customs and practices
their respective worn out or obsolete assets with assets of quality at least
comparable to the original quality of the assets being replaced and except for
notice to Buyer maintain their respective books, accounts and records in
accordance with past custom and practice as used in the preparation of the
Financial Statements;
(k) Each of DSI and its Subsidiaries shall use reasonable efforts to
maintain in full force and effect the existence of all material patents,
inventions, trademarks, service marks, trade dress, trade names, corporate
names, copyrights, mask works, trade secrets, licenses, computer software data
and other proprietary rights, which it uses or owns, except for those which
expire by their own terms or are discontinued in the Ordinary Course of
Business; and
(l) Each of DSI and its Subsidiaries shall use reasonable efforts to
comply with all legal requirements and contractual obligations applicable to
their respective operations and business and pay all applicable taxes at or
prior to when such taxes would be delinquent.
4.2 Lines of Business and Capital Expenditures. Unless disclosed in
------------------------------------------
writing to Buyer, DSI and Moss covenant upon the execution of this Agreement and
until the Closing Date or termination of this Agreement, whichever is earlier,
that DSI and its Subsidiaries will not (a) enter into any new material line of
business outside their traditional toy business; (b) change their respective
investment, liability management and other material policies in any material
respect; or (c) incur or commit to any material capital expenditures,
obligations or liabilities in connection therewith other than in the Ordinary
Course of Business.
4.3 Accounting Methods. Except as previously disclosed in writing to
------------------
Buyer prior to the date hereof, Moss covenants upon the execution of this
Agreement and until the Closing Date or termination of this Agreement, whichever
is earlier, that Moss will not allow DSI or its Subsidiaries to change their
methods of accounting in effect at January 31, 1995, except as required by
changes in generally accepted accounting principles as concurred in by Price,
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<PAGE>
Waterhouse, DSI's independent accountants, if such change has a material adverse
effect on the reporting of DSI or its Subsidiaries and Moss will notify Buyer of
such changes.
4.4 Other Actions. Unless disclosed to Buyer in the Disclosure Schedule,
-------------
DSI and Moss Parties covenant upon the execution of this Agreement and until
the Closing Date or termination of this Agreement, whichever is earlier, that
neither DSI nor its Subsidiaries shall take any action that would or might
reasonably be expected to result in any of the representations and warranties of
DSI and Moss set forth in this Agreement becoming untrue after the date hereof
or any of the conditions to Closing set forth in Article 6 of this Agreement not
being satisfied, except in the event that the Disclosure Schedule is amended or
supplemented in accordance with Section 5.11 such that even if the
representations and warranties in Article 3 made in the previous Disclosure
Schedule are not true, such representations and warranties shall be true as
amended and supplemented by such Disclosure Schedule. Unless disclosed to Moss,
Buyer and Rosie Subsidiary covenant upon execution of this Agreement and until
the Closing Date or termination of this Agreement, whichever is earlier, that
neither Buyer nor Rosie Subsidiary shall take any action that would or might
reasonably be expected to result in any of the representations or warranties of
Buyer and Rosie Subsidiary set forth in the Agreement becoming untrue after the
date hereof or any of the conditions to Closing set forth in Article 6 of this
Agreement not being satisfied unless such matters are disclosed in writing to
Moss. Moss shall inform the Buyer in writing within five (5) days of any change,
or prior to the Closing Date if less than five (5) days prior to Closing, which
occurs or is threatened (or any development occurs or is threatened involving a
prospective change) in the financial condition, results of operations, business,
or prospective sales to Moss' knowledge that is or may reasonably be expected to
have a material adverse effect ($200,000) on the financial condition, results of
operations, business or prospective sales of DSI; provided, however, that should
Moss fail to give notice of such changes to Buyer within the period set out but
Moss shall before or after such period and prior to the Closing Date update the
Disclosure Schedule to reflect such notice such update shall cure any failure to
give earlier notice but shall not effect Buyer's rights under Section 6.1(j).
Buyer shall inform Moss in writing within five (5) days of any change, or prior
to the Closing Date if less than five (5) days prior to Closing, which occurs or
is threatened (or any development occurs or is threatened involving a
prospective change) in the financial condition, results of operations or
business of Buyer; provided, however, that should Buyer fail to give such notice
to Moss within the period set out, but Buyer shall before or after such period
and prior to the Closing Date, disclose such information to Moss, such notice
shall cure any failure to give earlier notice, but if Moss does not approve such
change, whether or not timely made, Moss shall be entitled to terminate this
Agreement.
ARTICLE 5
ADDITIONAL AGREEMENTS
---------------------
5.1 Expenses. Except with respect to certain bonuses or commissions
--------
payable to employees of DSI which are described in Section 6.2(l) and fees and
commissions referenced in Section 5.14 and all costs and expenses associated
with compliance with the Hart-Scott-Rodino Act and any other costs agreed to by
the parties hereto which shall be paid by Buyer or DSI, Buyer or Moss,
respectively, shall each pay all costs and expenses, including the fees and
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<PAGE>
commissions of any broker, incurred by them in connection with this Agreement
and all other agreements contemplated hereby and the transactions contemplated
hereby and thereby. Moss' costs and expenses relating to this Agreement or any
of the transactions contemplated hereby solely for the benefit of Moss shall not
be borne by DSI or its Subsidiaries. Moss and Buyer agree, subject to Buyer's
reasonable review and approval, that DSI shall be allocated certain legal and
accounting costs for services that were for the benefit of DSI even though they
were incidental to this transaction.
5.2 Notification of Certain Matters. Each Party shall give prompt notice
-------------------------------
to the others of (a) the occurrence or failure to occur of any event, which
occurrence or failure would constitute or believe to constitute a Material
Adverse Breach of any representation or warranty on its part contained in this
Agreement at any time from the date hereof to the Closing Date to the Party's
knowledge, and (b) any failure of such Party, or any officer, director, employee
or agent thereof, to materially comply with or satisfy any covenant, condition
or agreement to be complied with or satisfied hereunder to the Party's
knowledge. Notwithstanding this provision, DSI and Moss shall be required to
update all Disclosure Schedules and to disclose any breach of, inaccuracy or
untruthfulness in the representations and warranties as required by the specific
representations and warranties of Article 3, prior to Closing, which notice
shall cure any failure to give earlier notice by such update of the Disclosure
Schedule.
5.3 Access to Information. From the date hereof to the Closing Date, DSI
---------------------
and Moss shall cause DSI and its Subsidiaries and their respective officers,
directors, employees and agents to afford the officers, employees, agents and
representatives of the Buyer and Rosie Subsidiary complete access at all
reasonable times to such officers, employees and agents and their properties,
books and records (all such access to be arranged through the respective
officers of DSI and its Subsidiaries so as not to be unreasonably disruptive to
any of the DSI personnel), and shall furnish Buyer all financial, operating,
personnel compensation, tax and other data and information as Buyer, and Rosie
Subsidiary and their respective officers, employees, agents or representatives,
may request, except such information the disclosure of which would constitute a
waiver of the attorney-client privilege by Moss, DSI or its Subsidiaries. DSI
and Moss expressly grant Buyer and Rosie Subsidiary permission during the period
prior to Closing, but not more than ten (10) business days, to contact DSI's
customers and suppliers and to discuss with them the nature and existence of
their relationship and to disclose to them the fact that Buyer, Rosie
Subsidiary, DSI and Moss have entered into an agreement for the sale of the New
Shares to Buyer and sale of the Transferred Shares to Rosie Subsidiary.
5.4 Shareholder Claims. Moss shall not agree to, cause or permit DSI to
------------------
settle or compromise any claim brought by any present, former or purported
holder of any securities of DSI prior to the Closing without prior written
consent of Buyer and Rosie Subsidiary.
5.5 Taking of Necessary Action. Subject to the termination of this
--------------------------
Agreement and the terms and conditions of this Agreement, each of the Parties
agrees, subject to applicable laws, to use all reasonable efforts promptly to
take or cause to be taken all action and promptly to do or cause to be done all
things necessary, proper or advisable under applicable laws and regulations to
consummate the Closing and to make effective the transactions contemplated by
this Agreement. Without limiting the foregoing, Buyer, Rosie Subsidiary, DSI and
Moss shall use their respective best efforts to maintain and make any filings
with and obtain any consents,
25
<PAGE>
approvals, and/or assurances from third parties and appropriate governmental
agencies and authorities necessary or, in the opinion of Buyer or Moss,
advisable for the consummation of the transactions contemplated by this
Agreement. Specifically, if any filings are required to comply with the Hart-
Scott-Rodino Act in connection with the transactions contemplated hereby, each
party shall as soon as possible, but in no event later than 15 days after the
need for such filings is established by counsel to Buyer and Rosie Subsidiary or
Moss, prepare and file with the United States Department of Justice all
documents as are required to comply with the Hart-Scott-Rodino Act and shall
promptly furnish all materials thereafter requested by any of the regulatory
agencies having jurisdiction over such filings. Each party shall cooperate with
the other in good faith to help the others satisfy its obligations in this
Section 5.5. Notwithstanding the foregoing, none of the Parties shall be
required to take the action under this Section 5.5 if the cost of such action
would be in excess of $10,000 to such Party other than the costs associated with
a Hart-Scott-Rodino filing..
5.6 Notice of Changes. Moss shall inform the Buyer in writing within five
-----------------
(5) days of any change, or prior to the Closing Date if less than five (5) days
prior to Closing, which occurs or is threatened (or any development occurs or is
threatened involving a prospective change) in the financial condition, results
of operations, business, or prospective sales to Moss' knowledge that is or may
reasonably be expected to have a material adverse effect ($200,000) on the
financial condition, results of operations, business or prospective sales of
DSI; provided, however, that should Moss fail to give notice of such changes to
Buyer within the period set out but Moss shall before or after such period and
prior to the Closing Date update the Disclosure Schedule to reflect such notice
such update shall cure any failure to give earlier notice but shall not effect
Buyer's rights under Section 6.1(j). Buyer shall inform Moss in writing within
five (5) days of any change, or prior to the Closing Date if less than five (5)
days prior to Closing, which occurs or is threatened (or any development occurs
or is threatened involving a prospective change) in the financial condition,
results of operations or business of Buyer; provided, however, that should Buyer
fail to give such notice to Moss within the period set out, but Buyer shall
before or after such period and prior to the Closing Date, disclose such
information to Moss, such notice shall cure any failure to give earlier notice,
but if Moss does not approve such change, whether or not timely made, Moss shall
be entitled to terminate this Agreement and return the Initial Amount to Buyer.
5.7 Press Releases. Prior to Closing Date there shall not be any press
--------------
releases relating to the negotiations, agreements, discussions, status or plans
of the Parties with respect to the transactions contemplated hereby without the
written agreement of the Parties, and following the Closing Date, Buyer and Moss
shall consult with each other as to the form and substance of any press release
or other public disclosure of matters related to this Agreement or any of the
transactions contemplated hereby, other than disclosures made in connection with
lawsuits or arbitration.
5.8 Moss Election as Director. Following the Closing, the Buyer agrees
-------------------------
Moss shall continue to be a member of the Board of Directors of DSI if Moss so
desires as indicated in writing to DSI. If Moss so desires, Buyer will use its
best efforts to cause Moss to continue as a director of DSI for three (3) years
following the Closing or until any indebtedness to Moss is paid in full
whichever occurs later.
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<PAGE>
5.9 Consulting and Other Agreement with Moss. On or prior to Closing, DSI
----------------------------------------
and Moss will enter into a Consulting Agreement (the "Moss Consulting
---------------
Agreement") attached hereto as Exhibit "I" providing for compensation of $25,000
- --------- -----------
per month to Moss for a period of three (3) years, which shall include payment
of reasonable out-of-pocket expenses incurred by Moss in connection with work
requested by DSI. Moss shall be entitled to participate at the same cost as
employees of DSI in health, dental, and PCS insurance, disability and group life
insurance plans currently sponsored by DSI until Moss reaches the age where he
is eligible for Medicare. If benefits under Medicare are less than those
available to Moss under the current DSI health insurance program, then DSI will
provide supplemental insurance to Moss for the remainder of his life to insure
additional benefits to the Medicare benefits so that Moss shall receive benefits
equal to the current DSI health insurance program. If Moss is or becomes
ineligible for any such plan, DSI shall provide Moss with comparable benefits
for the remainder of his life (for example, DSI shall pay the cost of comparable
health insurance if Moss is ineligible to participate in DSI's health insurance
plan). During the term of Moss' Consulting Agreement, DSI shall permit Moss'
dependents (who would be qualified for coverage under DSI's insurance) to be
covered by DSI's health insurance plan at the same cost to Moss as paid by
employees of DSI.
5.10 Moss Personal Assets. Moss owns certain personal property located at
--------------------
DSI's Houston offices which is listed and described on Exhibit "J" hereof. Moss
-----------
and Buyer agree that Moss may, in his sole discretion, permit DSI to use such
personal property for such time as determined by Moss in his sole discretion by
not removing it from DSI's Houston office upon the Closing and that Moss shall
be solely responsible for all risks associated therewith, except DSI will
maintain insurance for such property so long as DSI has the use and benefit of
such furniture. In addition, Moss sold certain personal property to DSI prior to
the Closing which property shall remain the property of DSI.
5.11 Update Disclosure Schedule. Notwithstanding any other provision of
--------------------------
this Agreement to the contrary, DSI and Moss may amend or supplement the
Disclosure Schedule at any time prior to the Closing Date, subject to Buyer's
and Rosie Subsidiary's termination rights under Section 7.1(c). Such Disclosure
Schedule as properly amended or supplemented from time to time shall constitute
the Disclosure Schedule for purposes of this Agreement. For purposes of this
Agreement, business day shall mean any day except Sunday, Saturday or other day
on which commercial banks in Houston, Texas are required or authorized by law to
be closed.
5.12 Split Dollar Insurance. Until the death of Moss and his wife, Jo Beth
----------------------
Moss, Buyer shall and shall cause DSI to perform pursuant to, and to otherwise
comply in all respects with, the Split Dollar Agreements to which DSI is now a
party and attached hereto as Exhibit "K" covering life insurance on the lives of
-----------
Tommy Moss or his wife, Jo Beth Moss, or on their joint lives, including the
premium payments on the life insurance policies described in the Disclosure
Schedule as set out below. It is expressly understood and agreed that the Split
Dollar Agreements referred to in the preceding sentence have been or are in the
process of being amended in a manner so that (a) the annual net amount DSI shall
be required to pay as premiums on the policy or policies now subject to the
Split Dollar Agreements and/or on additional policies that subsequently become
subject to the Split Dollar Agreements shall not be more nor less than the net
amount DSI was required to pay pursuant to the Split Dollar Agreements during
the
27
<PAGE>
period of March 1, 1994 through February 28, 1995, and DSI shall continue to
have to pay such annual net amount as premiums on such policies until the death
of the last to die of Tommy Moss and Jo Beth Moss, (b) DSI's right to be repaid
for its prior and subsequent premium payments pursuant to the Split Dollar
Agreements shall be subject to forfeiture, at the option of the trusts that own
the policy or policies that are now or that subsequently become subject to such
Split Dollar Agreements if DSI fails for any reason to timely make the payments
it is required to make under the Split Dollar Agreements, (c) the trusts that
own the policy or policies that are now subject to the Split Dollar Agreements
will have the right to obtain additional policies on the lives of Tommy Moss or
Jo Beth Moss, or on their joint lives, in exchange for or with the cash values
of the policy or policies that are now subject to the Split Dollar Agreements,
provided such additional policy or policies are subject to the Split Dollar
Agreements and, coupled with the remaining policies subject thereto, are
adequate to assure that DSI will be able to be repaid the amounts it pays as
premiums plus accrued interest to that date on all such policies (net of
payments it receives pursuant to the Split Dollar Agreements from Tommy Moss
and/or the trusts that own the policy or policies that are now or subsequently
become subject to the Split Dollar Agreements) upon the death of the insured
under such policy or policies, (d) that the Moss Insurance Trust, or at the
election of Moss, Moss or his estate will pay interest on all premiums advanced
by DSI pursuant to the Split Dollar Agreements at the rate of seven (7%) percent
per annum simple which shall accrue and be paid at the time the death benefits
of such policy are paid, if not previously paid by Moss or his estate; and (e)
in other respects that do not increase the obligations of DSI under the Split
Dollar Agreements. The obligations of Buyer and DSI as to the Split Dollar
Agreements pursuant to the first sentence shall mean the obligations thereunder
as the Split Dollar Agreements have been or are so amended. Subject to Buyer's
approval, Moss shall have the right to attach such amended agreements hereto as
a revised and replaced Exhibit "K" at any time prior to Closing Date if such
-----------
amendments are not included in the Split Dollar Agreements originally attached
hereto as Exhibit "K". In no event shall Buyer or DSI be required to pay in the
-----------
aggregate more than $350,000 per year for all its obligations under this Section
5.12.
5.13 Insurance Maintenance. Buyer and DSI agree upon purchase of the New
---------------------
Shares, transfer of the Transferred Shares to Rosie Subsidiary and the merger of
Rosie Subsidiary into DSI as contemplated herein to maintain or cause DSI to
maintain in effect DSI's current policies of general liability (CGL), product
liability, long term disability, health, dental, PCS and life insurance or to
acquire and maintain similar insurance with comparable coverage for a period of
three (3) years from Closing Date or until any indebtedness to Moss has been
paid in full which ever occurs later.
5.14 Transaction Costs. Buyer or DSI shall pay those costs and fees with
-----------------
respect to the transactions contemplated by this Agreement and as set forth on
Exhibit "L" attached hereto and incorporated herein.
- -----------
5.15 Communication. Buyer and Rosie Subsidiary shall supply DSI and Moss
-------------
in a timely manner with information requested by Moss concerning the
transactions contemplated herein and Moss shall have the right to examine the
books of records and accounts of Buyer and Rosie Subsidiary and discuss the
affairs, finances and accounts of Buyer and Rosie Subsidiary with their
officers, accountants and creditors from the Effective Date hereof to the
Closing Date.
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<PAGE>
5.16 Merger of Rosie Subsidiary with DSI. Immediately following the sale
-----------------------------------
of the New Shares to Buyer pursuant to Section 1.1 hereof, and sale of the
Transferred Shares to Rosie Subsidiary pursuant to Section 1.2 hereof, Rosie
Subsidiary and DSI shall execute a Plan and Articles of Merger attached hereto
as Exhibit "M" and incorporated herein for all purposes and such other
-----------
documents, certificates, resolutions as necessary to merge Rosie Subsidiary into
DSI in such a manner that DSI is the surviving corporate entity and all of the
assets and liabilities of Rosie Subsidiary shall become assets and liabilities
of DSI and specifically providing that the Transferred Shares acquired by Rosie
Subsidiary are cancelled on the books of DSI. Upon completion of the merger of
Rosie Subsidiary into DSI it is the understanding and agreement of Buyer, Moss
and DSI that Buyer will be vested with 79.97% of the outstanding shares of DSI
Common Stock and Moss will be vested with 20.03% of the outstanding shares of
DSI Common Stock. Such action as necessary will be taken to insure that (i)
Moss' interest in DSI is not diluted prior to the initial public offering
contemplated in Section 5.19 or (ii) payment is made by DSI of the Moss
indebtedness pursuant to its terms. Any action by Moss pursuant to the Loan and
Security Agreement attached hereto as Exhibit "B" as a result of a default in
-----------
the Moss loan or the Moss loan documents whether by foreclosure of Moss'
security interest in the New Shares or Moss exercising other remedies available
to him as set forth in the Moss loan documents shall act as a termination of the
outstanding warrants and options issued by DSI pursuant to the transactions
contemplated under this Agreement, except the warrants to Moss pursuant to the
Warrant Agreement, attached hereto as Exhibit "N" and incorporated herein for
-----------
all purposes.
5.17 Guaranty of Buyer. Buyer acknowledges and agrees that it will
-----------------
guarantee all of the obligations of DSI as evidenced by the promissory notes in
Exhibit "A-1", "A-2" and "A-3" attached hereto in the Loan and Security
Agreement attached hereto as Exhibit "B" and as set forth in Section 5.9 and
-----------
5.12 hereof. Such Guaranty attached hereto as Exhibit "C" and incorporated
-----------
herein for all purposes. The obligations of Buyer pursuant to this paragraph
shall survive Closing.
5.18 Operations of DSI after Closing. DSI, Buyer and Rosie Subsidiary
-------------------------------
acknowledge and agree that at Closing Rosie Subsidiary shall execute those
certain promissory notes more particularly described in Exhibit "A-1", "A-2" and
"A-3" attached hereto and that as a part of the transactions contemplated
herein, those obligations will become obligations of DSI as a result of the
merger of Rosie Subsidiary into DSI. Buyer agrees as a majority shareholder of
DSI after completion of the transactions contemplated and provided for in this
Agreement, to take such action as necessary to insure that DSI does not and DSI
agrees that it will not (i) transfer or convey any assets other than in the
Ordinary Course of Business, (ii) will not make a "338" election as provided in
Section 338 of the Internal Revenue Code of 1986, as amended, (iii) will comply
with the terms and conditions of that certain Loan and Security Agreement
attached hereto as Exhibit "B" and incorporated herein for all purposes
-----------
specifically including, but not limited to, all of the representations,
warranties, covenants and obligations of DSI as set forth in such agreement as
well as comply with the terms and conditions of all loan documents associated
with the Bank One, Texas, N.A. loans, the Hibernia Corporation loan or the Moss
loan; and (iv) incur any additional indebtedness other than in the Ordinary
Course of Business or to pay the obligations of DSI as they become due and
payable.
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<PAGE>
5.19 Public Offering of DSI Stock. Buyer acknowledges that it is its
----------------------------
intention after Closing and completion of the transactions contemplated herein,
to initiate action to undertake and to complete an initial public offering of
the stock of DSI and agrees to use its best efforts to do so. DSI and Moss
acknowledge that final determination of the terms and conditions of such public
offering, if any, will be made by shareholders and Board of Directors of DSI as
they determine in their reasonable opinion and belief are appropriate, prudent
and in the best interest of DSI and its shareholders. Moss acknowledges that
Buyer has made no guaranty of undertaking a public offering of DSI stock or the
successful completion of a public offering; but rather this is a representation
of Buyer's present intentions.
5.20 Release of Moss. Closing, Buyer, Rosie Subsidiary and Members
---------------
of Buyer set forth on Exhibit "O" attached hereto and incorporated herein for
-----------
all purposes will execute a consent and release of Moss as described in Exhibit
-------
"P" attached hereto and incorporated herein for all purposes. Such release
- ---
shall contain an indemnification of Moss by Buyer, Rosie Subsidiary and DSI (but
not the Members set forth on Exhibit "O") indemnifying Moss from and against any
-----------
liability for consequential damages as a result of the initial public offering
not being successful except such indemnity shall exclude liability to Moss as
the result of Moss' willful or grossly negligent acts.
5.21 Bonus Plan. For the fiscal year ending January 31, 1996, DSI
----------
shall pay a bonus to eligible employees out of an accrued bonus pool which is
comprised of five percent (5%) of EBIT (after DSI (HK) Ltd. bonus but before any
DSI executive, director, officer or management bonus). The bonus shall be paid
to eligible employees on a pro-rata basis utilizing a formula whereby the
numerator is the employee's 2-1-95 through 1-31-96 gross wages minus the
employees FYE 1-31-95 bonus and the denominator is the 2-1-95 through 1-31-96
gross wages of all eligible employees minus the FYE 1-31-95 bonus paid to all
eligible employees. An eligible employee is defined as any employee who is
employed by DSI on 1-31-96 or any employee who was employed by DSI for three
hundred calendar days during the period from 2-1-95 through 1-31-96; however,
for the purposes of this provision neither Tommy Moss nor Richard R. Neitz will
be considered to be an eligible employee. Historically, the bonus paid to DSI
employees has been a discretionary bonus determined at the discretion of Tommy
Moss. The bonus to be paid for the fiscal year ending January 31, 1996 is NOT a
discretionary bonus, nor is it contingent on any factor other than the accrued
5% of EBIT and the outline pro-rata calculations but rather shall be paid as set
forth hereinabove. This bonus shall be due on January 31, 1996 and shall be
paid on or before April 1, 1996.
5.22 Post Closing Obligation. Neither Buyer nor Rosie Subsidiary will
-----------------------
incur any Debt as such term is defined in the Loan and Security Agreement
attached hereto as Exhibit "B" except as authorized or permitted in the Loan and
-----------
Security Agreement attached hereto as Exhibit "B" or as permitted under the loan
-----------
documents of BankOne, Texas, N.A. and Hibernia Corporation which are attached
hereto as Exhibit "DD" and incorporated herein for all purposes.
------------
5.23 Registration Rights Agreement. Buyer, Rosie Subsidiary, and DSI will
-----------------------------
perform all of their respective obligations under their Registration Rights
Agreement between DSI and Moss pursuant to the terms of the Registration Rights
Agreement attached hereto as Exhibit "Z".
-----------
30
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5.24 Actions of Buyer. Buyer acknowledges and agrees that neither Buyer
----------------
nor Rosie Subsidiary will, prior to the successful completion of the initial
public offering as contemplated in Section 5.19 hereof, allow a change of
control of Buyer or will initiate any public offering of securities by Buyer
other than the Private Placement Memorandum previously initiated by Buyer and
part of the transactions contemplated under this Agreement. For purposes of
this provision, change of control shall mean a change in excess of 51% of the
Class A Membership Units in Buyer.
ARTICLE 6
CONDITIONS TO CLOSING
---------------------
6.1 Conditions to Buyer's and Rosie Subsidiary's Obligations. The
--------------------------------------------------------
obligations of Buyer to purchase the New Shares and pay the New Shares Purchase
Price as set forth in Section 1.1 hereof and Rosie Subsidiary to purchase the
Transferred Shares and pay the Transferred Shares Purchase Price as set forth in
Section 1.2 hereof at Closing are subject to the satisfaction of the following
conditions on or before the Closing Date:
(a) Except for breaches which do not constitute a Material Adverse
Breach (as defined in Section 8.6 of this Agreement) by DSI or Moss, the
representations and warranties set forth in Article 3 of this Agreement
(including any amendments or supplements of the Disclosure Schedule made by DSI
and Moss pursuant to Section 5.11) will be true and correct as of the Closing
Date, as though then made and as though the Closing Date were substituted for
the date of this Agreement throughout such representations and warranties and
with appropriate modifications of tense with respect to representations and
warranties made as of a specified date except as expressly noted in Article 3;
(b) DSI and Moss shall have performed, in all material respects, each
obligation and agreement and complied with each covenant to be performed and
complied with by them under this Agreement prior to the Closing Date, including,
without limitation, all of their agreements contained in Article 5 of this
Agreement;
(c) Except as otherwise disclosed on the Disclosure Schedule, all
consents by governmental or regulatory agencies or otherwise that are required
for the consummation of the transactions contemplated hereby or that are
required for Buyer to own, operate or control DSI or any portion of the assets
of DSI or to prevent a breach of or a default under or a termination of any
agreement material to DSI to which DSI is a party or to which any material
portion of the assets of DSI is subject, other than consent to transfer licenses
and real property leases will have been obtained;
(d) No action or proceeding before any court or governmental body will
be pending or threatened wherein a judgment, decree or order would prevent any
of the transactions contemplated hereby or cause such transactions to be
declared unlawful or to be rescinded or which might adversely affect the right
of Buyer to own, operate or control DSI or any material portion of the assets of
DSI or the value of the assets of DSI as of the Closing Date;
31
<PAGE>
(e) Prior to or at the Closing, Moss shall have entered into the Moss
Consulting Agreement as described in Section 5.9 hereof and each of Richard
Neitz, Thomas V. Yarnell, Dale Chen and Yau Wing Wong (Tommy Yau) (hereinafter
collectively referred to as "Key Employees") shall have agreed upon and entered
into employment agreements with DSI for a period of at least one (1) year
following the Closing Date each containing a non-competition and non-
solicitation covenant which shall remain in force for the term of employment
plus one (1) year following any termination of employment and the employment
contracts of Thomas V. Yarnell and Dale Chen shall contain a provision for six
months severance pay after the end of the employment term such employment
contracts attached hereto as Exhibit "Q" and incorporated herein for all
-----------
purposes;
(f) Buyer and Rosie Subsidiary will have received from Chamberlain,
Hrdlicka, White, Williams & Martin, counsel to DSI and Moss Parties, an opinion
addressed to Buyer, dated the Closing Date and containing the opinions set out
in Exhibit "R" attached hereto;
-----------
(g) At the Closing, DSI or Moss, as applicable, will have delivered
the following:
To Buyer and Rosie Subsidiary:
(i) a certificate executed on behalf of DSI by its Chief Executive
Officer stating that the conditions set forth in Sections 6.1(a) through 6.1(d)
of this Agreement have been satisfied;
(ii) to the extent such certificates are normally issued by the
applicable jurisdiction, existence and good standing certificates for DSI and
its Subsidiaries from the Secretary of State of the State of Texas, and from the
appropriate governmental authority in Hong Kong and from every jurisdiction
where a failure to be qualified or licensed would have a material adverse effect
on the consolidated financial condition, results of operations or business of
DSI dated not earlier than September 30, 1995, other than the Hong Kong
certificate which shall be dated April 15, 1995;
(iii) a copy of DSI's articles of incorporation certified by the
Secretary of State of the State of Texas, and a copy of both DSI (HK) Limited
and Magnifair Holdings Limited Corporate charter documents, certified by the
appropriate governmental authorities of Hong Kong;
(iv) such other documents as Buyer or Rosie Subsidiary may
reasonably request in connection with the transactions contemplated hereby;
(v) a certificate from DSI and Moss certifying that DSI has not
entered into any arrangement, agreement or undertaking as described in Section
4.1(d)(i) without Buyer's and Subsidiary's prior written consent;
To Buyer:
32
<PAGE>
(vi) stock certificate(s) in DSI representing the New Shares of
Common Stock;
(vii) stock certificate, or safekeeping receipt for the stock
certificate, or other evidence of ownership reasonably satisfactory to Buyer
representing one share of DSI (HK) not owned by DSI together with a fully
executed stock power and other corporate documentation necessary to convey such
one share of DSI (HK) to an individual or entity designated by Buyer;
(viii) stock certificate, or safekeeping receipt for the stock
certificate, or other evidence of ownership reasonably satisfactory to Buyer
representing one share of Magnifair Holdings Limited not owned by DSI together
with a fully executed stock power and other corporate documentation necessary to
convey such one share of Magnifair Holdings Limited to an individual or entity
designated by Buyer;
To Rosie Subsidiary:
(ix) stock certificate(s) in DSI representing the Transferred
Shares together with a fully executed stock power and other documentation
necessary to convey the Transferred Shares to Rosie Subsidiary.
(h) Moss shall have entered into an indemnity agreement ("Indemnity
---------
Agreement") pursuant to which Moss shall indemnify DSI and Buyer from loss or
- ---------
damage relating to any Material Adverse Breach (as defined in Section 8.6
hereof) of Moss' representations, warranties and covenants contained in this
Agreement and certain other matters described therein, substantially in the form
attached hereto as Exhibit "S";
-----------
(i) All actions to be taken by DSI and Moss in connection with the
consummation of this Agreement at the Closing, the issuance of the New Shares
and transfer of the Transferred Shares and the other transactions contemplated
hereby and all documents required to be delivered by DSI and Moss in connection
with the transactions contemplated hereby will be reasonably satisfactory in
form to Buyer and Rosie Subsidiary;
(j) Buyer and Rosie Subsidiary shall not have disapproved in writing
any submitted amended or supplemented Disclosure Schedule pursuant to Section
5.11 hereof within five (5) business days of receipt thereof or prior to
Closing, whichever is earlier;
(k) DSI and Moss shall have obtained the landlord's written approval
as evidenced by the Consent attached hereto as Exhibit "T" and incorporated
-----------
herein with regard to the change in ownership of DSI as contemplated herein in
connection with that certain Lease Agreement ("Lease") between Moss and DSI
-----
dated June 1, 1992 relating to the DSI Houston Office;
(l) Moss shall enter into that certain Non-Competition Agreement with
Buyer in the form attached hereto as Exhibit "U";
-----------
(m) This Agreement has not been terminated by any party hereto in
accordance with Section 7.1 prior to the Closing Date;
33
<PAGE>
(n) The waiting period under the Hart-Scott-Rodino Act, if applicable
to the consummation of the Closing, shall have expired and there shall not be
outstanding any order of a court restraining the transactions contemplated
hereby;
(o) Collateral assignment executed by the appropriate owner of the
policy in favor of DSI for each insurance policy covered by the Split Dollar
Agreements attached hereto as Exhibit "K" shall be delivered to Buyer, if
-----------
required by the Split Dollar Agreements, as amended;
(p) Buyer, Rosie Subsidiary, DSI and Moss shall have taken all action
and executed all documents necessary to consummate the merger of Rosie
Subsidiary into DSI.
6.2 Conditions to Moss' Obligations. The obligations of Moss to transfer
-------------------------------
the Transferred Shares to Rosie Subsidiary under this Agreement are subject to
the satisfaction of the following conditions on or before the Closing Date:
(a) Except for breaches which do not constitute a Material Adverse
Breach (as defined in Section 8.6 of this Agreement) by Buyer or Rosie
Subsidiary, the representations and warranties set forth in Article 2 of this
Agreement will be true and correct as of the date hereof and at and as of the
Closing Date, as though then made and as though the Closing Date were
substituted for the date of this Agreement throughout such representations and
warranties and with appropriate modifications of tense with respect to
representations and warranties made as of a specified date;
(b) Buyer and Rosie Subsidiary shall have performed, in all material
respects, each obligation and agreement and complied with each covenant required
to be performed and complied with by it under this Agreement prior to the
Closing Date, including, without limitation, all of its agreements contained in
Article 5 of this Agreement;
(c) No action or proceeding before any court or government body will
be pending or threatened wherein a judgment, decree or order would prevent any
of the transactions contemplated hereby or cause such transactions to be
declared unlawful or to be rescinded or which might adversely affect the right
of Buyer to own, operate or control DSI;
(d) On the Closing Date, Buyer will have delivered to Moss or DSI as
applicable the following:
(i) a certificate executed on behalf of Buyer by its President or
any Vice President stating that the conditions set forth in Sections 6.2(a)
through (d) of this Agreement have been satisfied;
(ii) certified copies of the resolutions duly adopted by Buyer's
Board of Directors and a majority in interest of Buyer's Members including the
consents to the transactions contemplated and provided for in this Agreement.
34
<PAGE>
(iii) existence and good standing certificates for the Buyer from
the Secretary of State of the State of Texas dated not earlier than fifteen (15)
days prior to the Closing Date;
(iv) a copy of the Buyer's certificate of existence certified by
the Secretary of State of the State of Texas;
(v) the New Share Purchase Price as set forth in Section 1.1,
without offset, via wire transfer or as otherwise provided herein;
(vi) such other documents as Moss may reasonably request in
connection with consummating the transactions contemplated hereby, including but
not limited to a certificate attached hereto as Exhibit "V" and incorporated
-----------
herein for all purposes from Buyer that no business other than actions related
to the acquisition of DSI as contemplated or provided for herein has been
consummated by Buyer;
(vii) Buyer, Rosie Subsidiary and those individuals listed in
Exhibit "E" attached hereto shall execute the release attached hereto as Exhibit
- ----------- -------
"W" and incorporated herein for all purposes releasing Moss from any liability
- ---
for securities laws violations or claims of investors of Buyer related to the
Private Placement Memorandum issued by Buyer;
(e) on the Closing Date, Rosie Subsidiary will have delivered to Moss
or DSI as applicable the following:
(i) a certificate executed on behalf of Rosie Subsidiary by its
President or any Vice President stating that the conditions set forth in
Sections 6.2(a) through (d) of this Agreement have been satisfied;
(ii) certified copies of the resolutions duly adopted by Rosie
Subsidiary's Board of Directors;
(iii) existence and good standing certificates for the Rosie
Subsidiary from the Secretary of State of the State of Texas dated not earlier
than fifteen (15) days prior to the Closing Date;
(iv) a copy of the Rosie Subsidiary's certificate of incorporation
certified by the Secretary of State of the State of Texas;
(v) the Transferred Shares Purchase Price as set forth in Section
1.2;
(vi) such other documents as Moss may reasonably request in
connection with the transactions contemplated hereby, including but not limited
to signed originals of all Exhibits attached hereto and incorporated herein and
a certificate from Rosie Subsidiary that no business other than actions to
consummate the transactions contemplated or provided for herein has been
consummated by Rosie Subsidiary;
(f) All actions to be taken by Buyer or Rosie Subsidiary in connection
with the consummation of this Agreement as of the Closing Date, and all
documents required to be
35
<PAGE>
delivered by Rosie Subsidiary or Buyer in connection with the transactions
contemplated hereby will be reasonably satisfactory in form to Moss;
(g) The Moss Consulting Agreement will have been executed and
delivered by DSI to Moss by the Closing Date;
(h) Buyer with DSI's cooperation as to document execution shall have
caused Moss to be released from his personal guarantee under the $5,000,000.00
acceptance line of credit with State Street Bank, the $6,000,000 line of credit
with Bank One and the guarantee for Rosie for commercials, and such other
personal guarantees or co-makings of DSI indebtedness as requested in writing
from Moss to Buyer;
(i) This Agreement is not properly terminated by any Party in
accordance with Section 7.1 hereto prior to the Closing Date;
(j) Neither Buyer nor Subsidiary shall have disapproved during the
permitted time in writing of any submitted Disclosure Schedule, pursuant to
Section 5.11 hereof, as amended or supplemented prior to the Closing Date;
(k) DSI shall at the Closing pay to Rick Neitz a bonus of $1,050,000;
(l) The waiting period under the Hart-Scott-Rodino Act, if applicable
to the consummation of the Closing, shall have expired and there shall not be
outstanding any order of a court restraining the transactions contemplated
hereby.
(m) At Closing, Buyer shall co-sign the Lease attached hereto as
Exhibit "X" and incorporated herein for all purposes for the Houston office and
- -----------
warehouse facility.
(n) Prior to or at the Closing, each of Richard Neitz, Thomas V.
Yarnell, Dale Chen and Yau Wing Wong (Tommy Yau) (hereinafter collectively
referred to as "Key Employees") shall have agreed upon and entered into
employment agreements with DSI for a period of at least one (1) year following
the Closing Date each containing a non-competition and non-solicitation covenant
which shall remain in force for the term of employment plus one (1) year
following any termination of employment such employment contracts attached
hereto as Exhibit "Q" and incorporated herein for all purposes;
-----------
(o) Moss will have received from Sinex & Stephenson, P.L.L.C., counsel
to Buyer and Rosie Subsidiary, an opinion addressed to Moss, dated the Closing
Date and containing the opinions set out in Exhibit "Y" attached hereto.
-----------
(p) DSI has entered into a registration agreement attached hereto as
Exhibit "Z" and incorporated herein for all purposes with Moss with regard to
- -----------
his shares of Common Stock in DSI.
(q) Moss, Buyer and DSI will have received a fully executed release in
the form attached hereto as Exhibit "AA" and incorporate herein for all
------------
purposes, whereby WXY Consulting Corporation, Hardy & Company and Rick Neitz,
and other entities set forth on
36
<PAGE>
Exhibit "L" attached hereto release Moss, Buyer and DSI any liability for any
- -----------
fees or commission associated with this transaction.
(r) Moss shall receive a fully executed consent in the form attached
hereto as Exhibit "BB" and incorporated herein for all purposes, whereby Bank
------------
One Texas, N.A., State Street Bank and Hibernia consent to the transactions as
contemplated and provided for in this Agreement.
6.3 Conditions to DSI's Obligations. The obligations of DSI to issue the
-------------------------------
New Shares to Buyer and to acquire Rosie Subsidiary through merger pursuant to
this Agreement are subject to satisfaction of the following conditions on or
before the Closing Date:
(a) Except for breaches which do not constitute a Material Adverse
Breach (as defined in Section 8.6 of this Agreement) by Buyer or Rosie
Subsidiary, the representations and warranties set forth in Article 2 will be
true and correct as of the date hereof and at and as of the Closing Date, as
though then made as though the Closing Date were substituted for the date of the
Agreement throughout such representations and warranties and with appropriate
modifications of the tense with respect to representations and warranties made
as of the specified date;
(b) Buyer and Rosie Subsidiary shall have performed in all material
respects, each obligation and agreement and complied with each covenant required
to be performed and complied with by it under this Agreement prior to the
Closing Date, including, without limitation, all of this agreement contained in
Article 5 of this Agreement;
(c) No action or proceeding before any court or body will be pending
or threatened wherein a judgment, decree or order would prevent any of the
transactions contemplated hereby would cause such a transaction to be declared
unlawful are to be rescinded or which might adversely effect the right of Buyer
to own the New Shares and Moss to transfer the Transferred Shares to Rosie
Subsidiary;
(d) On the Closing Date, Buyer will have delivered to DSI the
following:
(i) a certified executed on behalf of Buyer by its President, or
any Vice President stating that the conditions set forth in Section 6.2(a)
through (d) of this Agreement have been satisfied;
(ii) certified copies of the resolutions duly adopted by a
majority in interest of Buyer's members and Buyer, Rosie Subsidiary and those
individuals listed on Exhibit "E" attached hereto shall execute the release
-----------
attached hereto as Exhibit "W" and incorporated herein for all purposes
-----------
releasing Moss from any liability for securities laws violations or claims to
investors of Buyer related to the Private Placement Memorandum issued by
Buyer;
(iii) existence and good standing certificates for Buyer from the
Secretary of State from the State of Delaware dated not earlier then fifteen
(15) days prior to the Closing Date;
37
<PAGE>
(iv) a copy of Buyer's Certificate of Incorporation certified
by the Secretary of State of the State of Delaware;
(v) the New Shares Purchase Price as set forth in Section 1.1,
without offset via wire transfer;
(vi) such other documents as DSI may reasonably request in
connection with the transaction as contemplated hereby including but not
limited to signed originals of all Exhibits attached hereto and incorporated
herein and a certificate from Buyer that no business other than actions to
consummate the transactions contemplated or provided for herein has been
consummated by Buyer;
(e) On Closing Date, Rosie Subsidiary will have delivered to DSI the
following:
(i) a certified executed on behalf of Rosie Subsidiary by its
President, or any Vice President stating that the conditions set forth in
Section 6.2(a) through (d) of this Agreement have been satisfied;
(ii) certified copies of the resolutions duly adopted by Rosie
Subsidiary's Board of Directors and a majority in interest of Rosie
Subsidiary's shareholders and Buyer, Rosie Subsidiary and those individuals
listed on Exhibit "E" attached hereto shall execute the release attached
-----------
hereto as Exhibit "W" and incorporated herein for all purposes releasing Moss
-----------
from any liability for securities laws violations or claims to investors of
Buyer related to the Private Placement Memorandum issued by Buyer;
(iii) existence and good standing certificates for Rosie
Subsidiary from the Secretary of State from the State of Texas dated not
earlier then fifteen (15) days prior to the Closing Date;
(iv) a copy of Rosie Subsidiary's Certificate of Incorporation
certified by the Secretary of State of the State of Texas;
(v) evidence that the Transferred Shares Purchase Price as set
forth in Section 1.2 has been paid to Moss;
(vi) such other documents as DSI may reasonably request in
connection with the transaction as contemplated hereby including but not
limited to signed originals of all Exhibits attached hereto and incorporated
herein and a certificate from Rosie Subsidiary that no business other than
actions to consummate the transactions contemplated or provided for herein has
been consummated by Rosie Subsidiary;
(f) On the Closing Date, Moss will have delivered to DSI the
following:
38
<PAGE>
(i) a certificate executed by Moss stating the conditions set forth
in Section 6.2 (a) through (n) of this Agreement have been satisfied;
(ii) such other documents as DSI may reasonably request in
connection with the transaction contemplated hereby;
(iii) all actions to be taken by Moss in connection with the
consummation of this Agreement at the Closing, the transfer of the Transferred
Shares to Rosie Subsidiary and other transaction contemplated hereby and all
documents required to be delivered by Moss in connection with the transaction
contemplated hereby will be in reasonably satisfactory form to DSI.
(g) This Agreement is not properly terminated by any Party in
accordance with Section 7.1 hereto prior to the Closing Date;
(h) Neither Buyer nor Rosie Subsidiary shall have disapproved in
writing of any of the submitted Disclosure Schedules pursuant to Section 5.11
hereof, as amended or supplemented prior to the Closing Date;
(i) The waiting period under the Hart-Scott-Rodino Act, applicable to
the consummation of the Closing, shall have expired and there shall not be
outstanding any order of a court restraining the transactions contemplated
hereby.
(j) Bank One Texas, N.A., Hibernia Corporation and Moss loans have
been finalized and the Intercreditor Agreement agreed to and such lenders are
prepared to fund such loans on the terms and conditions as agreed to by DSI,
Buyer and Banks, such bank loan documents and Intercreditor Agreement attached
hereto as Exhibit "CC".
------------
(k) Resignation of all current Officers and Directors of DSI have been
tendered to DSI. It is contemplated that simultaneously with the transaction a
new Board of Directors for DSI and a new slate of officers will be elected as
more particularly set forth on Exhibit "DD" attached hereto and incorporated
------------
herein for all purposes.
ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
7.1 Termination. This Agreement may be terminated at any time prior to
-----------
the Closing Date only as follows: (a) by mutual consent of the Buyer and Moss;
(b) except for actions set out in Subsections (c) - (f) below, by any of the
Parties upon written notice to the others that another Party has failed to take
actions required of it hereunder or has taken an action not permitted to be
taken or done hereunder and such Party does not cure same within five (5) days,
or prior to the Closing Date if less than five (5) days, of receipt of notice of
such default; (c) by Buyer upon notice to DSI and Moss of such termination
because of Buyer's or Rosie Subsidiary's refusal to approve a proposed amendment
to the Disclosure Schedule so long as such notice is made within five (5) days
of Buyer's and Rosie Subsidiary's receipt of such proposed amendment to the
Disclosure Schedule, or prior to the Closing Date if less than five
39
<PAGE>
(5) days; (d) by Buyer upon notice to DSI and Moss that there has been a
misrepresentation or breach of a representation or warranty or a failure to
perform a covenant on the part of Moss with respect to his representations,
warranties and covenants set forth in this Agreement which breach or failure
constitutes a Material Adverse Breach, and Moss fails to cure same within thirty
(30) days of such notice or prior to Closing Date if less than thirty (30) days;
and (e) by Moss upon notice to DSI and Buyer that there has been a
misrepresentation or a breach of a representation or warranty or a failure to
perform a covenant on the part of Buyer or Rosie Subsidiary with respect to its
representations, warranties and covenants set forth in this Agreement which
breach or failure constitutes a Material Adverse Breach, and Buyer or Rosie
Subsidiary fail to cure same within thirty (30) days of such notice or prior to
the Closing Date if less than thirty (30) days. Additionally, this Agreement
shall automatically terminate if there is no Closing on or before the Closing
Date as extended as provided herein.
7.2 Amendment. This Agreement and the exhibits attached hereto may not be
---------
amended, supplemented or modified except by a written instrument signed by each
of the Parties.
7.3 Waiver. At any time prior to the Closing Date, (a) Buyer and Rosie
------
Subsidiary may (i) extend the time for the performance of any of the obligations
or other acts of the DSI or Moss or (ii) waive compliance with any of the
agreements of DSI or Moss or with any conditions to Buyer's or Rosie
Subsidiary's own obligations, and (b) DSI and Moss may (i) extend the time for
the performance of any of the obligations or other acts of Buyer, or (ii) waive
compliance with any of the agreements of Buyer and Rosie Subsidiary or with any
conditions to Moss' own obligations, in each case only to the extent such
obligations, agreements and conditions are intended for their respective
benefit, provided, such extension of time cannot be beyond the Closing Date
without consent of the other party. No such waiver shall be effective unless
made in writing and signed by the party making such waiver.
7.4 Effect of Termination. If this Agreement is terminated as provided in
---------------------
Section 7.1, this Agreement shall become void and neither Party shall have any
further obligations hereunder, except as specifically provided herein. There
shall be no liability or further obligation on the part of any Party hereto or
any of the respective shareholders, officers, or directors of Buyer or Rosie
Subsidiary, DSI or Moss except for specific performance under Section 8.11 and
the termination pursuant hereto will relieve any Party from liability of any
breach of this Agreement except the return of the Initial Amount by Moss should
such return be required under Section 1.6 of this Agreement.
7.5 Indemnification. Upon Closing, Moss shall have agreed to indemnify
---------------
and hold harmless Buyer, Rosie Subsidiary and DSI from certain liabilities,
costs, loss, damage, demand and other expenses, including attorney's fees
(liabilities) pursuant to the Indemnity Agreement attached as Exhibit "S"
-----------
hereto. Buyer and DSI shall have agreed to indemnify and hold harmless Moss from
certain liabilities, costs, loss, damage, demand and other expenses, including
attorneys' fees ("Liabilities") pursuant to the Indemnity Agreement attached
hereto as Exhibit "S" and incorporated herein for all purposes.
-----------
40
<PAGE>
ARTICLE 8
GENERAL PROVISIONS
------------------
8.1 Survival of Representations and Warranties. The representations,
------------------------------------------
warranties and covenants contained herein and in the Loan and Security Agreement
attached hereto as Exhibit "B" set forth in this Agreement shall survive the
-----------
consummation of this Agreement for a period of three (3) years or until the
indebtedness to Moss is paid whichever is longer. Any litigation arising out of
or attributable to a breach of any representation, warranty or covenant
contained herein must be commenced within such period. If not commenced within
such period, any such claim will thereafter conclusively be deemed to be waived
regardless of when such claim is or should have been discovered.
8.2 Notices. Except as otherwise provided in this Agreement, all notices
-------
and other communications hereunder shall be in writing and shall be deemed to
have been duly given if delivered personally, sent by telex, telecopy, facsimile
(in the instance of facsimile, also confirmed in writing) or overnight courier,
or mailed by registered or certified mail (postage prepaid and return receipt
requested), to the party to whom the same is so delivered, sent or mailed at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to Buyer or Rosie Subsidiary:
Rosie Acquisition, L.L.C.
c/o Sinex & Stephenson
2323 South Shepherd, 14th Floor
Houston, Texas 77019
Attention: M. D. Davis
with a copy to:
Sinex & Stephenson
2323 South Shepherd, 14th Floor
Houston, Texas 77019
Attention: James F. Stephenson, Jr.
(b) if to Moss:
Tommy Moss
906 Huntington Cove
Houston, Texas 77063
41
<PAGE>
with a copy to:
Chamberlain, Hrdlicka, White, Williams & Martin
1200 Smith Street, Suite 1400
Houston, Texas 77002-4310
Attention: David M. Ostfeld, Esq.
Fax: (713) 658-2553
Notices delivered personally or by telex, telecopy or facsimile shall be deemed
delivered as of actual receipt, mailed notices shall be deemed delivered three
(3) days after mailing and overnight courier notices shall be deemed delivered
one day after the date of sending. For purposes of this Agreement notice to
Buyer of any fact or information shall be deemed to be notice to Rosie
Subsidiary hereunder and notice to Moss of any fact or information shall be
deemed to be notice to DSI.
8.3 Interpretation. The headings contained in this agreement are for
--------------
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. References to Sections and Articles refer to
sections and articles of this Agreement unless otherwise stated. For purposes of
this Agreement, the phrase "to Moss' knowledge" and any other phrases generally
------------------
referring to the knowledge of Moss, shall mean (i) the actual knowledge of Moss,
or (ii) knowledge that would or should normally and customarily be known by an
individual after making reasonable inquiry in a similar position of authority or
responsibility as any of the Key Employees. For purposes of this Agreement, the
phrase "to the Buyer's knowledge" and any other phrases generally referring to
------------------------
the knowledge of Buyer or Rosie Subsidiary shall mean (i) the actual knowledge
of Buyer or Rosie Subsidiary or (ii) knowledge that would or should normally and
customarily be known by an individual after making reasonably inquiry in a
position of authority and responsibility as the officers and directors of Buyer
and Rosie Subsidiary.
8.4 Severability. If any term, provision, covenant or agreement is held
------------
by a court of competent jurisdiction to be invalid, void or unenforceable, the
remainder of the terms, provisions, covenants, and restrictions of this
Agreement shall remain in full force and effect and shall in no way be affected,
impaired or invalidated and the Parties shall negotiate in good faith to modify
the Agreement to preserve each Party's anticipated benefits under the Agreement.
8.5 Miscellaneous. This Agreement (together with all other documents and
-------------
instruments referred to herein): (a) constitutes the entire agreement and
supersedes all other prior agreements and undertaking both written and oral
among the Parties with respect to the subject matter hereof, (b) except as
expressly set forth herein, is not intended to confer upon any other person any
rights or remedies hereunder; (c) shall be governed in all respects, including
validity, interpretation and effect, by the internal laws of the State of Texas,
without giving effect to the principles of conflict of laws thereof, and will to
the maximum extent practicable, be deemed to call for performance in Harris
County, Texas; and (d) shall not be assigned by operation of law or otherwise
except as expressly provided in this Agreement. Courts within the State of Texas
will have jurisdiction over any and all disputes between the Parties, whether in
law or equity, arising out of or relating to this Agreement. The Parties consent
to and agree to submit to the jurisdiction of such courts. Venue in any such
dispute whether in federal or state court
42
<PAGE>
will be laid in Harris County, Texas. This Agreement may be executed in two or
more counterparts which together shall constitute a single agreement.
8.6 Material Adverse Breach. Breaches of representations, warranties and
-----------------------
covenants by either party hereto which (a) individually results in damages to
the other party in excess of $200,000 or (b) in the aggregate result in damages
to the other party in excess of $200,000, shall constitute, for purposes of this
Agreement, a "Material Adverse Breach," provided, however, that any breaches of
-----------------------
representations, warranties and covenants that individually result in damages
less than $1,000.00 shall not be counted for purposes of clause (b) above.
8.7 Limitation of Liability. Neither Buyer, Rosie Subsidiary, DSI nor
-----------------------
Moss shall have any liability for breach of the representations, warranties and
covenants made by them and contained in this Agreement unless such breach is a
Material Adverse Breach.
8.8 Confidentiality. If the transaction proposed by this Agreement is not
---------------
consummated for any reason whatsoever, Buyer, Rosie Subsidiary and Moss shall
keep confidential any information (unless required to be disclosed by
governmental authorities or ascertainable from published information or trade
sources) obtained from the other party or any of their vendors, customers,
shareholders, or manufacturers concerning DSI's, or its Subsidiaries, or Buyer's
or Rosie Subsidiary's operations or business and deliver and destroy such
written information provided by each other party upon the respective party's
written request. This agreement will survive termination of this Agreement.
8.9 Arbitration. Upon the request of any Party, whether made before or
-----------
after the institution of any legal proceedings, any and all legal proceedings,
action, dispute, controversies or claims of any kind arising out of, pertaining
to, or in connection with, or relating to this Agreement, or any related
agreement, document or instrument referred to in this Agreement, or the breach
thereof now existing or arising hereafter between the Parties shall be
determined solely and exclusively by binding arbitration in accordance with the
Rules of, and shall be administered by, the American Arbitration Association
under the Federal Arbitration Act, and judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof. Any Party
to this Agreement may, by any proceeding, bring an action in court to compel
such arbitration. Each Party shall select one arbitrator, and the two so
designated shall select a third arbitrator. If any Party shall fail to designate
an arbitrator within ten (10) days after arbitration is requested, or if the two
(2) arbitrators shall fail to select a third arbitrator within fourteen (14)
days after arbitration is requested, then an arbitrator shall be selected by the
American Arbitration Association under its rules upon application of either
party. Arbitration proceedings shall be conducted in accordance with the
Commercial Arbitration Rules then prevailing of the American Arbitration
Association, or the closest appropriate rules determined by the American
Arbitration Association. Any award rendered by a majority of the arbitrators
shall be binding, and, notwithstanding the provisions of the following sentence,
judgment thereon may be entered in any court of competent jurisdiction. All
arbitration hearings conducted hereunder shall be held in Harris County, Texas.
All costs of such arbitration, other than attorneys' fees, shall be borne
equally by the Parties. All statutes of limitation that would otherwise be
applicable shall apply to any arbitration proceedings.
43
<PAGE>
8.10 No Third Party Beneficiaries. This Agreement shall not confer any
----------------------------
rights or remedies upon any person or entity other than the Parties and their
respective successors and permitted assigns.
8.11 Specific Performance. Each of the Parties acknowledges and agrees
--------------------
that no other remedies are available to Buyer and Rosie Subsidiary and Buyer and
Rosie Subsidiary would be irreparably harmed in the event DSI or Moss fail to
consummate the transaction contemplated herein. Accordingly, provided Buyer and
Rosie Subsidiary have fulfilled its obligations as set forth in Section 6.2 and
6.3 hereof, Buyer or Rosie Subsidiary are not in breach or default of any other
provision of this Agreement, the Agreement has not been previously terminated
pursuant to the terms hereof and Buyer and Rosie Subsidiary are prepared to
perform all of their respective post closing obligations and tenders such
performance to DSI or Moss ("Purchase Conditions"), then Buyer and Rosie
Subsidiary shall be entitled to enforce specifically this Agreement and the
terms and provisions hereof upon waiving any default by DSI or Moss of their
obligations herein other than any default which is the result of an intentional
and willful action or inaction on the part of DSI or Moss for the primary
purpose of causing Buyer and Rosie Subsidiary not to complete the transaction,
in which event Buyer and Rosie Subsidiary shall be entitled to force DSI or Moss
to cure such intentional and willful default or breach and specifically enforce
Buyer's and Rosie Subsidiary's rights under this Agreement so long as such
Purchase Conditions remain satisfied.
8.12 Assignment by Moss. Moss shall be entitled to assign all or any
------------------
portion of its rights under this agreement without Buyer's consent; provided,
however, such assignment shall not in any way limit or modify Moss' obligations
under this Agreement.
44
<PAGE>
STOCK PURCHASE AGREEMENT
Signature Page
--------------
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
on the date first written above.
ROSIE ACQUISITION, L.L.C.
By: /s/ M. D. Davis
------------------------------
M. D. Davis, President
DSI ACQUISITION, INC.
By: /s/ M. D. Davis
------------------------------
M. D. Davis, President
/s/ Tommy Moss
---------------------------------
TOMMY MOSS
DIVERSIFIED SPECIALISTS, INC.
By: /s/ Richard R. Neitz
------------------------------
Name: Richard R. Neitz
----------------------------
President
45
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement ("Agreement") is hereby made and entered into
this 2nd day of January, 1996 by and between Diversified Specialists, Inc, a
Texas corporation, whose principal business address is 1100 West Sam Houston
Parkway, Houston, Texas 77043 (hereinafter referred to as "Employer" or
"Company"), and M. D. Davis, an individual residing at 13606 Taylorcrest,
Houston, Texas 77079 (hereinafter referred to as "Employee").
W I T N E S S E T H:
-------------------
ARTICLE 1
GENERAL
-------
1.1 Employment. The Employer hereby employs Employee and Employee hereby
----------
accepts such employment with the Employer upon the terms and conditions
hereinafter set forth, Employee shall perform such duties and responsibilities
and exercise such powers for the Employer as may from time to time be assigned
or delegated to him by the Employer including such duties as may be customary
for a Chairman of the Board and Chief Executive Officer in the toy manufacturing
and marketing industry. Employee acknowledges that the Company shall be
dependent upon the Employee for its continued ongoing business operations and
that the provisions hereof are necessary for the successful conduct of the
business and affairs of the Company.
1.2 Position. Employee shall be employed in the capacity and hold the
--------
position of Chairman of the Board and Chief Executive Officer. In such
capacity, Employee agrees to, at all times, exercise his best efforts for the
benefit of the Company and to thereby undertake to use and implement the
management, organizational, intellectual, technical and other skills of Employee
to the best of his ability on the Company's behalf. Employee shall be
responsible to and report to the Board of Directors of the Company.
1.3 Term. Subject to the provisions provided for and relating to
----
termination set forth herein, the term of Employee's employment, pursuant to
this Agreement, shall be for a period beginning on December 12, 1995, and ending
in December 31, 1998, (said period being hereinafter referred to as the
"Employment Term").
ARTICLE 2
REMUNERATION AND BENEFITS
-------------------------
2.1 Base Salary. For all services rendered by Employee during the
-----------
Employment Term, the Employer shall pay to Employee a salary of One Hundred
Fifty Thousand Dollars ($150,000) per year
<PAGE>
("Base Salary") during the Employment Term. Employee's Base Salary may be
raised during the Employment Term at the discretion of the Board of Directors of
Employer.
The Base Salary shall begin to accrue and be paid on the Effective Date of
this Agreement and shall be distributed in semi-monthly installments in arrears
through the Employment Term. For any period during which the Base Salary is
unpaid the Base Salary shall accrue.
2.2 Benefits. Employee may be eligible to participate in any and all
--------
benefit plans which Employer may from time to time make generally available to
all employees of the Company, however, the extent to which Employee shall be
entitled to participate in such benefit plans shall be determined at the sole
discretion of the Company's Board of Directors. Employee shall be entitled to
medical insurance in such manner as commensurate with the Company's existing
medical insurance.
2.3 Extent of Service. During the Employment Term, Employee agrees to
-----------------
devote such amount of time as Employee and the Board of Directors may mutually
agree is necessary to further the business of the Employer consistent with
services performed by a Chairman of the Board and Chief Executive Officer of a
toy manufacturing and marketing company. Further, during the Employment Term,
Employee shall not be engaged in any other business activity pursued for gain,
profit or other pecuniary advantage if such activity interferes with Employee's
duties and responsibilities as set forth herein. However, the foregoing
limitations shall not be construed as prohibiting Employee from making personal
investments in any business enterprise not competitive with that of Employer in
such form or manner as will neither require his services in the operating and
affairs of enterprises in which such investments are made nor otherwise violate
the terms hereof, or investing in toy companies that are "publicly traded"
companies. Employer and Employee acknowledge and agree that it is not the
contemplation or intent of either party to this Agreement that the services of
Employee required under this Agreement shall constitute the full time of
Employee but rather that the Employee shall devote such time as Employer and
Employee may mutually agree and both parties acknowledge that the amount of time
required will vary depending on the time of year and the needs of the Company.
If for any reason the time requirements on Employee under this Agreement
constitute more than approximately one-half of the time that Employee would
normally devote to business, Employer and Employee shall renegotiate the Base
Salary provision of this Agreement.
2.4 Offices. The Employer shall provide office space for the Employee,
-------
said arrangement to include provisions for secretarial and other support
services necessary to the maintenance and operating of such office and the
performance of Employee's duties.
2.5 Expense Allowance. The Employer shall promptly reimburse Employee for
-----------------
all approved deductible business expenses reasonably incurred in the performance
of his duties, including reasonable expenditures for entertainment. The
Employer will pay Employee $____________________ per month as an entertainment
allowance. In addition upon approval of the Board of Directors, Employee may
from time to time receive advances necessary to cover deductible business
expenses and shall promptly file necessary expense reports to substantiate such
advances.
-2-
<PAGE>
2.6 Vacations and Holidays. Employee shall be entitled to three (3) weeks
----------------------
vacation in accordance with Employer policies established by the Board of
Directors, as well as those public holidays duly observed by the Employer,
however, no more than two (2) weeks vacation shall be taken at one time.
2.7 Life Insurance. Employee shall be provided individual life insurance
--------------
and disability insurance coverage with benefits at least equal to those
presently in force on the existing group life and health insurance coverages for
all employees.
2.8 Business Travel. Employee shall be entitled to travel portal to
---------------
portal via first class on all international travel performed for the Company.
ARTICLE 3
TERMINATION
-----------
3.1 Death. In the event of the Employee's death during the Employment
-----
Term, the Employer shall pay to Employee's executor(s), administrator(s) or
personal representative(s) an amount equal to the installment of his Base Salary
payable for the month in which he dies and for no period thereafter. Employer
shall have no other liabilities or other obligations of any kind or character
under this Agreement to Employee's executor(s), administrator(s) or personal
representative(s) except such accrued benefits that Employee is entitled at the
time of death.
It is expressly understood and agreed that the Company may maintain Key Man
Term Life Insurance for the benefit of the Company on the life of Employee.
Additionally, the Company may maintain such other life insurance for the benefit
of Employer, the Company's shareholders, as from time to time the Board of
Directors of the Company deems reasonable and appropriate.
Upon the death of the Employee, all employee benefits accrued for the
benefit of the Employee shall be distributed in accordance with the provisions
set forth in the plan agreement or arrangement providing the applicable benefits
and otherwise distributed in accordance with applicable laws.
3.2 Disability, Failure to Perform Duties. In the event of the Employee's
-------------------------------------
failure to perform his duties for a continuous period equal to or in excess of
ninety (90) consecutive days during the Employment Term by reason of some
illness or disability, the Employer shall have the option to terminate this
Agreement by giving thirty (30) days written notice of termination to Employee.
Upon such notice of termination, the Employer shall pay to Employee an amount
equal to the installments of his Base Salary payable up to the time this
Agreement is terminated with no further obligations regarding the Base Salary,
and shall distribute all accrued employee benefits, as of the date of
termination, to Employee in accordance with the provision of the plan, agreement
or arrangement giving rise to the applicable benefits. Upon the termination of
this Agreement as a result of such "disability", Employer shall have no other
liabilities or obligations of any kind or character to the Employee under this
Agreement, except Employee shall be entitled to a prorated Performance bonus
based on a portion
-3-
<PAGE>
of the fiscal year in which Employee was employed prior to notification of
termination pursuant to this Section 3.2 hereof.
3.3 By Employer for Cause. An Employee may be terminated "for cause" if
---------------------
Employee after thirty (30) days written notice to Employee specifying the
details of Employee's default of his obligations under this Paragraph and the
actions necessary to cure such default, Employee fails to cure such "cause."
"For cause" shall be if Employee
(a) intentionally and willfully neglects the performance of his duties
established by the Board of Directors which he is reasonably required to perform
under the terms of this Agreement to the economic detriment of the Company; or
(b) intentionally and willfully fails or refuses in the opinion of the
Board of Directors to comply with the reasonable policies, standards and
regulations of the Company which from time to time may be established;
(c) is convicted of committing a felony against the Company; or
(d) the material breach by Employee of any of the terms and conditions
of this Agreement.
Upon such determination, the Employer may, at its option, terminate this
Agreement by giving thirty (30) days written notice of such termination to
Employee, without prejudice to any other remedy to which the Employer may be
entitled either at law or in equity, or under this Agreement. In such event,
any of the obligations of the employer under this Agreement shall be terminated
as of the date given in the notice of termination referred to hereinabove,
following payment by the Employer to Employee of that portion of the Base Salary
then accrued, due and owing in accordance with Section 2.1 hereof and a pro
rated Performance bonus based on a portion of the fiscal year prior to the time
Employee was terminated hereunder. Notwithstanding the foregoing, in the event
that Employee is terminated "for cause" based on actions of the Employee to the
material economic detriment of the Company, or Employee enters into competition
with Company in its line of business, then Employee shall only be entitled to
his accrued Base Salary due at the time of notification of termination and shall
not be entitled to any Performance Bonus for the portion of the fiscal year
currently employed. Employee shall remain entitled in such event to any
Performance Bonus for such prior fiscal year for which he was employed that was
earned pursuant to this Agreement but which has not been paid as of the date of
termination pursuant to Section 3.3. Any future Performance Bonuses to be
earned under this Agreement shall also be deemed to have been waived and
forfeited.
3.4 Termination Without Cause. (a) Without cause, Company may terminate
-------------------------
this Agreement upon thirty (30) days' prior written notice to Employee. In such
event, Employee shall be paid his regular Base Salary from the date of
termination for a period of six (6) months but no other severance shall be paid
to the Employee. Further, upon payment by the Employer to Employee of the six
(6) months Base Salary, Employee shall have no further rights and Employer no
other liabilities or other
-4-
<PAGE>
obligations of any kind or nature under this Agreement except for accrued
employee benefits to which Employee is already entitled.
(b) The Employee may terminate this Agreement upon thirty (30) days written
notice to the Company if at any time prior to the completion of a public
offering of Employer's stock, Rosie Acquisition, L.L.C.'s ownership interest in
Employer is terminated or Rosie Acquisition, L.L.C. is no longer the controlling
shareholder of Employer. In such event, Employee shall be paid his regular Base
Salary for two weeks from the date of termination, but shall not be entitled to
any Performance bonus for such portion of the fiscal year in which he was
employed prior to termination. Additionally the non-competition provision of
Section 4.2 and the non-solicitation provision of Section 4.3 shall be void and
unenforceable against Employee.
(c) Without cause, the Employee may terminate this Agreement upon thirty
(30) days written notice to the Company. In such event, Employee shall be paid
his regular Base Salary for two weeks from the date of termination.
ARTICLE 4
COVENANTS
---------
4.1 Disclosure of Information. Employee recognizes and acknowledges that
-------------------------
he has and will have access to certain confidential information, proprietary
data and trade secrets of the Employer, and of entities and individuals
controlling, controlled by or under common control with Employer ("affiliates"),
including but not limited to, contracts, patterns, devices, calculations,
drawings, productions, plans, specifications, records, compilations of
information, and other confidential information and data either compiled by
employer or received from its customers or Employee and that such information is
not generally available to the public and constitutes valuable, special and
unique property of the Employer, provided, however, that the names of the
Company's customers shall not be deemed confidential information pursuant to
this Agreement. Employee shall not, during or after the term of this Agreement,
undertake in any fashion, to take commercial or proprietary advantage of or
profit from any of such confidential information, proprietary data and/or trade
secretes, directly or indirectly, or disclose any of such information to any
person or firm, corporation, association or other entity for any reason or
purpose whatsoever, except to authorized representatives of the Employer and as
otherwise may be proper in the course of performing his employment hereunder.
Further, Employee shall maintain the confidentiality of all such information of
the Employer, its affiliates or its customers for the sole use and benefit of
the Employer. All files, records, documents, drawings, plans, specifications,
contract, products, equipment or similar items relating to the business of the
Employer and/or its affiliates, whether prepared by Employee or otherwise coming
into his possession during the Employment Term or hereafter, shall remain the
exclusive property of the Employer and/or the affiliates, as applicable, and
shall not be removed from the premises of the Employer and/or its affiliates
without the prior written consent of the Employer and/or its affiliates, as
applicable.
-5-
<PAGE>
Employee covenants and agrees to promptly return and deliver to the
Employer all documents, drawings, information, or other material or property of
any kind or character which in any way relate to the business of the Company or
any of its affiliates or customers, whether or not asserted to be the exclusive
property of the Company, and, further, Employee shall not attempt to retain
copies or duplicates of any such property. In the event of a breach or a
threatened breach by Employee, Employer and/or its affiliates, in addition to
all other remedies made available hereby or as a matter of law or in equity, may
seek an injunction restraining Employee from disclosing, in whole or in part,
such confidential information. In addition to any other damages sustained by
Employer, Employee shall pay to Employer all profits, payments, earnings
compensation or other emoluments paid or accruing to Employee, directly or
indirectly, by reason of Employee's disclosure of information as provided by
this Article 4. Nothing herein shall be construed as prohibiting the Employer
and/or its affiliates from pursuing any other remedies available to it or them
for such breach or threatened breach, including the recovery of damages from
Employee.
4.2 Non-Competition. During the Employment Term, and if this Agreement is
---------------
terminated in accordance with Section 3.3 or 3.4 and Employer has not breached
it obligation hereunder, for a period of one year thereafter, except in the
course of his employment hereunder, Employee shall not directly or indirectly,
either for himself, or as an employer, employee, owner, manager, independent
contractor, consultant, agent, principal, partner, co-venturer, shareholder,
director, officer or in any other capacity, engage or have any indirect interest
in any person that is engaged, or to the knowledge of Employee is planning to
engage, in competition in any manner whatsoever with the business of Employer
within the United States, including, without limitation, any person that
manufactures, markets, imports, sells or distributes toys. If the Employment
Term is terminated by Employer pursuant to Section 3.4(a) and Employer elects to
enforce the provisions of this Section 4.2., Employer shall be obligated to pay
Employee as additional consideration on or before the fifteenth (15th) day of
each month during the one year period following termination of the Employment
Term an amount equal to one-twelfth (1/12) of the annual salary set forth in
Section 2.1. If the Employment Term is terminated by Employee pursuant to
Section 3.4(c) and Employer elects to enforce the provisions of this Section
4.2, Employer shall be obligated to pay Employee a one time payment of
$50,000.00 as additional consideration within thirty (30) days of Employee's
termination.
4.3 Agreement Not to Solicit. During the Employment Term, and if this
------------------------
Agreement is terminated in accordance with Sections 3.3 and 3.4 for a period of
one (1) year thereafter, Employee will not, either directly or indirectly, on
his own or in the service of other:
(a) knowingly call upon, solicit, divert or attempt to solicit or divert
any of the business contacts of Employer except on behalf of a business
which is not competitive with Employer or in the same or a similar
business as Employer;
(b) knowingly employ any employee of Employer or solicit, divert, recruit
or induce any employee of Employer to leave the employ of Employer,
whether or not such employment is at will; and/or
-6-
<PAGE>
(c) knowingly induce or advise any service provider or representative of
Employer to terminate or materially alter its relationship with
Employer.
ARTICLE 5
MISCELLANEOUS PROVISIONS
------------------------
5.1 Notices. Any notice required or permitted to be given under this
-------
Agreement shall be in writing and shall be deemed to have been given when hand
delivered or when deposited in the mails, by registered or certified first class
mail, postage prepaid, return receipt required addressed, at the respective
addresses first written above, or at such other address as either party shall
designate by written notice to the other given in accordance with the foregoing.
Any notice so given shall be deemed to have been given as of the date mailed.
5.2 Successors Bounds, Survival of Covenants. The rights and obligations
----------------------------------------
of the parties hereunder shall inure to the benefit of and shall be binding upon
the successors of each respective party. The representations, warranties,
covenants, and agreements of the parties, as well as any rights and benefits of
the parties, shall survive the execution hereof and following the employment
Term to the extent so provided herein.
5.3 Governing Law. The laws of the State of Texas applicable to contracts
-------------
to be performed within such state shall govern all questions related to the
execution, construction, validity, interpretation and performance of this
Agreement and to all other issues or claims arising hereunder.
5.4 Arbitration. All disputes, controversies or differences which may
-----------
arise between the parties out of or in relation to or in connection with this
Agreement, or for the breach thereof, shall be finally settled by arbitration in
accordance with the Rules of the American Arbitration Association, the said
arbitration to be convened and to take place in Houston, Texas and such
arbitration shall be absolute and binding upon the parties.
5.5 Waiver. Failure to insist upon strict compliance with any provisions
------
hereof shall not be deemed to a waiver of such provisions or any other provision
hereof.
5.6 Amendment. This Agreement may not be modified except by mutual
---------
agreement in writing duly executed by the parties hereto and approved by the
Board of Directors of the Company.
5.7 Severability and Invalid Provisions. If any provision of this
-----------------------------------
Agreement (including, without limitation, any provision relating to the
activities covered by, time period of, or geographical area of the covenants
contained in Article 4 of this Agreement is held to be illegal, invalid, or
unenforceable under present or future laws effective during the term thereof,
such provision shall be fully severable and this Agreement shall be construed
and enforced as if such illegal, invalid, or unenforceable provision had never
comprised a part hereof; and the remaining provisions hereof shall remain in
full force and effect and shall not be effected by the illegal, invalid, or
unenforceable
-7-
<PAGE>
provision or by its severance herefrom. Furthermore, in lieu of such illegal,
invalid, or unenforceable provision, there shall be added automatically as a
part of this Agreement a provision as similar in terms to such illegal, invalid,
or unenforceable provision as may be possible and legal, valid, and enforceable
and that shall not be more restrictive than the one severed herefrom.
5.8 Assignment. The Employee may not assign his rights or obligations
----------
hereunder. The rights and obligations of the Company hereunder shall inure to
the benefit of and shall be binding upon the successors and assigns of the
Employer.
5.9 Attorneys' Fees. In any claim or cause of action pursued hereunder,
---------------
each party shall pay its own attorney's fees and legal costs.
5.10 Time Is Of The Essence. All parties agree that time is of the essence
----------------------
in the performance of their respective obligations hereunder.
Executed as of the Effective Date stated above. Employee by his execution
below has read all terms and conditions of this Agreement and has had ample
opportunity to ask questions regarding this Agreement and seek legal and tax
advice concerning the effects to Employee.
EMPLOYEE:
-----------------------------------
Name: M. D. Davis
EMPLOYER:
DIVERSIFIED SPECIALISTS, INC.,
a Texas corporation
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
-8-
<PAGE>
EXHIBIT 10.9
LETTER LOAN AGREEMENT
---------------------
December 11th, 1995
Bank One, Texas, NA
910 Travis
Houston, Texas 77002
Attention - Corporate Banking Group
Gentlemen:
The undersigned, DIVERSIFIED SPECIALISTS, INC., a Texas corporation
("Borrower"), duly organized and existing under the laws of the State of Texas,
- ----------
has requested that BANK ONE, TEXAS, NA ("Lender") lend to Borrower the sum of
------
$20,400,000. Borrower and Lender previously entered into a Letter Loan
Agreement dated April 26, 1995, which was amended by a First Amendment to Letter
Loan Agreement dated July 31, 1995. Borrower and Lender have agreed to further
modify the terms of their agreement to include a term note and to amend certain
other terms and provisions of the Loan Agreement. For the convenience and
mutual benefit of all parties, Lender, Borrower and ROSIE ACQUISITION, L.L.C.
("Guarantor") have entered into this amended and fully restated Letter Loan
- -----------
Agreement (the "Agreement"), and do hereby agree as follows.
---------
1. Loan and Letters of Credit.
--------------------------
(a) On the terms and subject to the conditions set forth in this
letter loan agreement (the "Agreement"), Lender agrees to lend to Borrower up to
---------
$20,400,000 (the "Loan"). The Loan shall be evidenced by (i) a Revolving
----
Promissory Note (the "Revolving Note") in a form satisfactory to Lender, duly
--------------
executed by Borrower in the principal amount of $6,000,000 and made payable to
the order of Lender and (ii) a Promissory Note (the "Term Note") in a form
---------
satisfactory to Lender duly executed by Borrower in the principal amount of
$14,400,000 and made payable to the order of Lender. Principal and interest on
the Revolving Note shall be due and payable in the manner and at the times set
forth in the Revolving Note with final maturity on May 31, 1997 (the "Revolving
---------
Termination Date"). The total outstanding advances by Lender under the
- ----------------
Revolving Note will not exceed at any one time the lesser of (i) $6,000,000, or
(ii) the Borrower's Loan Limit, as defined on Schedule "A" annexed hereto.
------------
Principal and interest (including any prepayment fee) on the Term Note shall be
due and payable in the manner and at the times set forth in the Term Note with
final maturity on December ____, 2000. The Revolving Note and the Term Note are
hereinafter collectively referred to as the "Notes".
-----
(b) On the terms and subject to the conditions hereinafter set forth,
Lender agrees to make advances on the Revolving Note to Borrower for the
issuance of one or more working capital letters of credit the total aggregate
face amount of which shall not exceed at any one time the lesser of (i) $500,000
or (ii) the Borrower's Loan Limit. Each of the working capital letters of
credit shall be evidenced by an Application and Agreement for Letter of Credit
(the "Application") in a form satisfactory to Lender. Each of these working
-----------
capital letters of credit and any renewals, extensions and modifications thereof
are collectively referred to herein as the "Working Capital Letter of Credit".
--------------------------------
Repayment of drafts against the
<PAGE>
Working Capital Letter of Credit shall be governed by this Agreement and the
Application, and shall be and is secured by the collateral and guaranties
provided herein.
(c) On the terms and subject to the conditions hereinafter set forth,
Lender agrees to issue on behalf of Borrower a Letter of Credit (the "Seller
------
Letter of Credit") in the face amount of $14,400,000 to facilitate the purchase
- ----------------
of Moss' (hereinafter defined) stock in the Borrower. The Seller Letter of
Credit shall be evidenced by an Application and Agreement for Standby Letter of
Credit (the "Application") in a form satisfactory to Lender. Repayment of
-----------
drafts against the Seller Letter of Credit shall be governed by this Agreement,
the Application, and the Term Note. Unless specified otherwise, the Seller
Letter of Credit, the Working Capital Letters of Credit and any renewals,
extensions and modifications thereof are collectively referred to as the "Letter
------
of Credit". To the extent the equity infusion described in Paragraph 3(a)(iii)
- ---------
below is less than $3,800,000 (the "Equity Shortfall"), the amount of such
----------------
Equity Shortfall shall be unavailable to the beneficiary of the Seller Letter of
Credit until such Equity Shortfall has been received by Borrower as equity and
deposited into the Deposit Account with Lender.
2. Revolving Credit Advances. Subject to the terms hereof, Borrower may
-------------------------
borrow, pay, reborrow and repay under the Revolving Note, provided, however, the
maximum principal outstanding under the Revolving Note shall not exceed at any
one time the lesser of (i) $6,000,000, or (ii) the Borrower's Loan Limit.
Borrower's requests for advances (whether for cash or Working Capital Letter of
Credit) under the Loan shall specify the aggregate amount of the advance and the
date of such advance. Borrower shall furnish to Lender a request for borrowing
in a form satisfactory to Lender. Lender shall make the requested funds or
Working Capital Letter of Credit available to Borrower at Lender's principal
banking office in Houston, Texas. If at any time prior to the Revolving
Termination Date, the outstanding advances under the Revolving Note exceed
Borrower's Loan Limit as shown on any reports delivered to Lender under
Paragraph 5(c) or as indicated by Lender's own records, Borrower shall, on the
date of the delivery of such report to Lender or on the date of notice from
Lender as to Lender's records, prepay on the Revolving Note such amount as may
be necessary to eliminate such excess.
3. Conditions Precedent.
--------------------
(a) The obligation of Lender to (i) make the initial advance under
either of the Notes or (ii) issue the Letters of Credit, is subject to the
condition precedent that Lender receive the following:
(i) Duly executed copies of each document listed on the last page
hereof relating to the Loan, in form and substance acceptable to Lender and
its legal counsel (all the documents listed on the last page hereof,
together with this Agreement and any other security documents relating to
the Loan, and any modifications thereof, are hereinafter collectively
referred to as the "Loan Documents");
--------------
(ii) An origination fee of $76,000.00;
-2-
<PAGE>
(iii) Confirmation that Borrower has received from Guarantor an
equity infusion of at least $3,000,000.00 as payment of Guarantor's
purchase of stock in Borrower and such amount is deposited into the Deposit
Account with Lender;
(iv) Confirmation that Borrower has received $3,000,000.00 in
subordinated debt from Hibernia Corporation ("Hibernia"), the terms and
--------
conditions of which are approved by Lender and such amount is deposited
into the Deposit Account with Lender;
(v) Confirmation that DSI Acquisition, Inc. (a wholly owned
subsidiary of Guarantor) has executed a $14,400,000 promissory note, a
$6,000,000 promissory note, a $1,000,000 promissory note, and a $1,300,000
promissory note, each of which are payable to Tommy Moss ("Moss") to
----
finance the purchase of Moss' stock in Borrower, the terms and conditions
of which loan (i) shall become a debt of Borrower upon the merger of DSI
Acquisition, Inc. into Borrower, and (ii) are subordinate to the Loan, and
in all respects are approved by Lender;
(vi) An executed copy of the Agreement for Sale of Stock (the
"Stock Purchase Agreement") between Borrower, DSI Acquisition, Inc.,
-------------------------
Guarantor, and Moss, and all amendments thereto; and
(vii) Confirmation that Borrower has deposited an additional
$1,600,000 into the Deposit Account with Lender.
(b) Lender's obligation to (i) make any advances under the Loan or
(ii) issue the Letters of Credit, shall be subject to the additional conditions
precedent that, as of the date of such advance and after giving effect thereto:
(i) all representations and warranties made by Borrower to Lender in the Loan
Documents are true and correct, as if made on such date, (ii) all documents and
proceedings shall be reasonably satisfactory to legal counsel for Lender, (iii)
no condition or event exists which constitutes an Event of Default (as
hereinafter defined) or which, with the lapse of time and/or giving of notice,
would constitute an Event of Default, and (iv) all conditions precedent set
forth in subparagraph (a) above shall have been satisfied.
4. Representations and Warranties. In order to induce Lender to make the
------------------------------
Loan, Borrower represents and warrants to Lender that:
(a) The Loan Documents are the legal and binding obligations of
Borrower, enforceable in accordance with their respective terms, except as
limited by bankruptcy, insolvency or other laws of general application relating
to the enforcement of creditors' rights.
(b) All financial statements delivered by Borrower to Lender prior to
the date hereof are true and correct in all material respects, fairly present
the financial condition of Borrower and have been prepared in accordance with
generally accepted accounting principles, consistently applied; as of the date
hereof, there are no obligations, liabilities or indebtedness (including
contingent and indirect liabilities) which are material to Borrower and not
reflected in such financial statements; and no material adverse changes have
occurred in the financial condition or business of Borrower since the date of
the most recent financial statements which Borrower have delivered to Lender.
All financial statements of Guarantor
-3-
<PAGE>
delivered to Lender prior to the date hereof are true and correct, and fairly
present the financial condition of Guarantor. There are no obligations,
liabilities or indebtedness (including contingent and indirect liabilities)
which are material to Guarantor and not reflected in such financial statements;
and no material adverse changes have occurred in the financial condition or
business of Guarantor since the date of such financial statements.
(c) Neither the execution and delivery of this Agreement and the other
Loan Documents, nor consummation of any of the transactions herein or therein
contemplated, nor compliance with the terms and provisions hereof or thereof,
will contravene or conflict with any provision of law, statute or regulation to
which Borrower is subject or any judgment, license, order or permit applicable
to Borrower or any indenture, mortgage, deed of trust or other instrument to
which Borrower may be subject; no consent, approval, authorization or order of
any court, governmental authority or third party is required in connection with
the execution and delivery by Borrower of this Agreement or transactions
contemplated herein or therein.
(d) No litigation (except as previously disclosed in writing to
Lender), investigation, or governmental proceeding is pending, or, to the
knowledge of any of Borrower's officers, threatened against or affecting
Borrower, which may result in any material adverse change in Borrower's
business, properties or operations.
(e) There is no specific fact known to Borrower that Borrower has not
disclosed to Lender in writing which is likely to result in any material adverse
change in Borrower's business, properties or operations.
(f) Borrower owns all of the assets reflected on its balance sheet
(most recently submitted to Lender), free and clear of all liens, security
interests or other encumbrances, except as (i) provided in the Stock Purchase
Agreement, and (ii) previously disclosed in writing to Lender.
(g) The principal office, chief executive office and principal place
of business of Borrower is in Houston, Texas.
(h) All taxes required to be paid by Borrower have in fact been paid,
except for taxes being contested in good faith by appropriate proceedings for
which adequate reserves have been established.
(i) No written certificate or written statement herewith or heretofore
delivered by Borrower to Lender in connection herewith, or in connection with
any transaction contemplated hereby, contains any untrue statement of a material
fact or fails to state any materi al fact necessary to keep the statements
contained therein from being misleading.
(j) Borrower is not in violation of any law, ordinance, governmental
rule or regulation to which it is subject, or in default under any material
agreement, contract or understanding to which it is a party, which violation or
default would result in any material adverse change in Borrower's business,
properties or operations.
-4-
<PAGE>
(k) Borrower's design, manufacture or distribution of any of the
Collateral (hereinafter defined) is not in violation of any law, ordinance,
governmental rule or regulation to which it is subject.
(l) Borrower has taken all steps necessary to determine and has
determined that no hazardous substances, or other substances known or suspected
to pose a threat to health or the environment which are in violation of
Applicable Environmental Laws ("Hazard[s]") exist with respect to the Collateral
---------
(hereinafter defined). No prior use, either by Borrower or, to Borrower's
knowledge, the prior owners of the Collateral, has occurred, which violates any
laws pertaining to health or the environment ("Applicable Environmental Laws"),
-----------------------------
including, without limitation, the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ("CERCLA"), the Resource
------
Conservation and Recovery Act of 1976, as amended ("RCRA"), the Texas Water Code
----
and the Texas Solid Waste Disposal Act. Borrower's handling and maintenance of
the Collateral does not and will not result in the disposal or release of any
hazardous substance or Hazard on, in or to the Collateral. The terms "hazardous
substance" and "release" shall each have the meanings specified in CERCLA, and
the terms "solid waste" and "disposal" (or "disposed") shall each have the
meanings specified in RCRA; provided, however, that in the event either CERCLA
or RCRA is amended so as to broaden the meaning of any term defined thereby,
such broader meaning shall apply subsequent to the effective date of such
amendment; and provided further that, to the extent that the laws of the State
of Texas establish a meaning for "hazardous substance", "release", "solid
waste", or "disposal" which is broader than that specified in either CERCLA or
RCRA, such broader definition shall apply.
(m) Borrower is not a party to any inventory repurchase agreements
with respect to a material amount of inventory (as determined by Lender) with
any of Borrower's customers.
(n) Borrower has delivered to Lender a true, complete and correct copy
of the duly executed and delivered Stock Purchase Agreement, and such document
is in full force and effect, and has not been amended, supplemented or modified
since the date of execution thereof.
(o) Borrower will receive a reasonably equivalent value in exchange
for the obligations of Borrower under this Agreement, the Note and the Loan
Documents. The execution and performance of this Agreement, the Note and the
Loan Documents by the Company (i) are not being made with any intent to hinder,
delay or defraud any entity to which Borrower is indebted; (ii) will not result
in Borrower having an unreasonably small capital for the business in which it is
engaged; and (iii) will not cause Borrower to incur debts that would be beyond
the ability of Borrower to pay as such debts mature. Any property transferred,
concealed or removed with intent to hinder, delay or defraud Borrower's
creditors and property which may be exempted from the debtor's estate under the
Federal Bankruptcy Code shall be excluded from the assets of Borrower for
purposes of determining insolvency. Borrower has never been adjudicated a
bankrupt or filed a case under the Federal Bankruptcy Code or had an order for
relief entered against it under the Federal Bankruptcy Code.
-5-
<PAGE>
(p) No proceeds of the Loan will be used to acquire any security in
any transaction which is subject to Sections 13 or 14 of the Securities Exchange
Act of 1934, including particularly (but without limitation) Sections 13(d) and
14(d) thereof.
5. Affirmative Covenants. Until payment in full of the Notes and all
---------------------
other obligations and liabilities of Borrower hereunder, Borrower agrees and
covenants that (unless Lender shall otherwise consent in writing):
(a) As soon as available, and in any event within thirty (30) days
after the end of each calendar month, Borrower shall deliver to Lender unaudited
financial statements showing the consolidating financial condition of Borrower
at the close of each such month and the results of operations during such
calendar month, which financial statements shall include, but shall not be
limited to, a profit and loss statement, balance sheet, Borrower's computations
showing compliance with the covenants in subparagraphs 6(a), (b), (c) and (d)
hereinbelow, and such other matters as Lender may reasonably request; such
statements shall be prepared in accordance with generally accepted accounting
principles and certified on the face thereof by the chief financial officer of
Borrower, or any person acceptable to Lender, and shall be forwarded to Lender
with a letter of transmittal from such officer in which such officer shall
certify that Borrower is in compliance with all of the affirmative covenants
contained in this Paragraph and further stating that no Event of Default exists
in the performance by Borrower of any of the other terms, conditions and
covenants required under this Agreement to be performed by Borrower.
(b) As soon as available, and in any event within one hundred twenty
(120) days after the end of each fiscal year of Borrower, Borrower shall deliver
to Lender a copy of the annual audited consolidated financial statement of
Borrower prepared in conformity with generally accepted accounting principles,
certified (with no material qualifications or exceptions) by independent public
accountants selected by Borrower and acceptable to Lender, which show the
financial condition of Borrower at the close of such fiscal year and the results
of operations during such fiscal year, and shall include, but not be limited to,
a profit and loss statement, balance sheet, cash flow statement and such other
matters as Lender may reasonably request.
(c) As soon as available, and in any event within thirty (30) days
after the end of each month, and upon each request for an advance Borrower shall
deliver to Lender a Borrowing Base Report and Compliance Certificate in the form
of Schedule "B" attached hereto together with such other information as may be
------------
deemed necessary or appropriate by Lender; and as soon as available, and in any
event within thirty (30) days after the end of each month, an aging and listing
of all accounts receivable and inventory of Borrower in a form acceptable to
Lender.
(d) Borrower shall conduct their business in an orderly and efficient
manner consistent with good business practices and in accordance with all valid
regulations, laws and orders of any governmental authority and will act in
accordance with customary industry standards in maintaining and operating its
assets, properties and investments, and shall not change the nature or type of
their basic business.
-6-
<PAGE>
(e) Borrower shall maintain complete and accurate books and records of
its transactions in accordance with generally accepted accounting principles,
and will give Lender access during reasonable business hours to all books,
records and documents of Borrower and permit Lender to make and take away copies
thereof.
(f) Borrower shall furnish to Lender, immediately upon becoming aware
of the existence of any condition or event constituting an Event of Default or
event which, with the lapse of time and/or giving of notice, would constitute an
Event of Default, written notice specifying the nature and period of existence
thereof and any action which Borrower is taking or propose to take with respect
thereto.
(g) Borrower shall maintain or cause to be maintained insurance from
responsible and reputable companies in such amounts and covering such risks as
is acceptable to Lender, is prudent and is usually carried by companies engaged
in businesses similar to that of Borrower including, without limitation,
casualty insurance coverage; Borrower shall furnish Lender, on request, with
certified copies of insurance policies or other appropriate evidence of
compliance with the foregoing covenant.
(h) Borrower shall promptly notify Lender of (i) any material adverse
change in their financial condition or business; (ii) any default under any
material agreement, contract or other instrument to which Borrower are a party
or by which any of its properties are bound, or any acceleration of any maturity
of any indebtedness owing by Borrower, (iii) any material adverse claim against
or affecting Borrower or any of their properties; and (iv) any litigation, or
any claim or controversy which might become the subject of litigation, against
Borrower or affecting any of Borrower's property, if such litigation or
potential litigation might, in the event of an unfavorable outcome, have a
material (which for purposes hereof shall mean $100,000 or more) adverse effect
on Borrower's financial condition or business or might cause an Event of
Default.
(i) Borrower shall preserve and maintain all licenses, privileges,
franchises, certificates and the like necessary for the operation of their
business.
(j) Borrower shall promptly furnish to Lender, at Lender's request,
such additional financial or other information concerning assets, liabilities,
operations and transactions of Borrower and each of Borrower's subsidiaries as
Lender may from time to time reasonably request.
(k) Borrower shall give notice to Lender immediately upon acquiring
knowledge of the presence of any Hazards relating to the Collateral, which is in
a condition that is resulting or could reasonably be expected to result in any
adverse environmental impact, with a full description thereof; promptly comply
with all Applicable Environmental Laws requiring the notice, removal, treatment,
or disposal of such hazardous substances; and provide Lender, within thirty (30)
days after demand by Lender, with financial assurance evidencing to Lender's
satisfaction that sufficient funds are available to pay the cost of removing,
treating and disposing of any such known Hazards and discharging any liens or
assessments that may be established relating to the Collateral.
-7-
<PAGE>
(l) Borrower shall at all times maintain a special depository account
(the "Deposit Account") with Lender, which account and proceeds thereof shall be
---------------
subject to the terms of a Security Agreement from Borrower for the benefit of
Lender. Borrower shall deposit in the Deposit Account (i) $250,000 on the first
day of each and every March, June, September, and December and (ii) all other
principal payments required to be paid as set forth in the Term Note (including
the Excess Cash Flow Payments, as defined in the Term Note), while the Seller
Letter of Credit is outstanding, and the proceeds of the Deposit Account shall
be applied towards payment of the Term Note upon the funding of the Seller
Letter of Credit.
(m) Borrower will cause each landlord of all premises leased by
Borrower to execute and deliver to Lender instruments, in form and substance
satisfactory to Lender, by which such landlord waives its rights, if any, to all
personal property and fixtures in which Lender has a security interest. All
such instruments shall be delivered to Lender within thirty (30) days of the
date hereof.
(n) Borrower shall indemnify, defend, and hold harmless Lender and its
directors, officers, agents, attorneys and employees (collectively, the
"Indemnitee") from and against: (i) any and all claims, demands, actions, or
- -----------
causes of action that are asserted against any Indemnitee by any person if the
claim, demand, action or cause of action directly or indirectly relates to a
claim, demand, action, or cause of action that the person asserts or may assert
against Borrower, or any officer, director or shareholder of Borrower, (ii) any
and all claims, demands, actions or causes of action that are asserted against
any Indemnitee if the claim, demand, action or cause of action directly or
indirectly relates to this Agreement, the Stock Purchase Agreement, the use of
proceeds of the Notes, or the relationship of Borrower and Lender under this
Agreement or any transaction contemplated pursuant to this Agreement or the
Stock Purchase Agreement, (iii) any administrative or investigative proceeding
by any governmental authority directly or indirectly related to a claim, demand,
action or cause of action described in clauses (i) or (ii) above, and (iv) any
and all liabilities, losses, costs, or expenses (including attorneys' fees and
disbursements) that any Indemnitee suffers or incurs as a result of any of the
foregoing; PROVIDED, HOWEVER, THAT ALTHOUGH THE FOREGOING INDEMNITY SHALL
INCLUDE CLAIMS, DEMANDS, ACTIONS OR CAUSES OF ACTION BASED UPON LENDER'S
NEGLIGENCE, BORROWER SHALL HAVE NO OBLIGATION UNDER THIS SECTION TO LENDER WITH
RESPECT TO ANY OF THE FOREGOING ARISING OUT OF THE GROSS NEGLIGENCE OR WILFUL
MISCONDUCT OF LENDER OR THE BREACH BY LENDER OF THIS AGREEMENT.
(o) Borrower shall provide Lender with confirmation that Borrower has
received from Guarantor the Equity Shortfall within thirty (30) days of the date
hereof.
6. Negative Covenants. Until payment in full of the Notes and all other
------------------
obligations and liabilities of Borrower hereunder, Borrower covenants that it
shall not (unless Lender shall otherwise consent in writing):
(a) Permit its Net Worth to be less than (i) ($2,000,000) from the
date hereof until July 31, 1996, (ii) $100,000 from August 1, 1996 through
January 30, 1998, and (iii) for each annual period thereafter beginning January
31, 1998, $1,500,000 plus the Net
----
-8-
<PAGE>
Worth required for the previous annual period; as used herein, the term "Net
---
Worth" shall mean the total consolidated assets of Borrower, plus all
- -----
subordinated debt, minus its total consolidated liabilities (including
contingent liabilities), all notes receivable from shareholders and affiliates,
and other items deducted in arriving at net worth;
(b) Permit, at any time, its ratio of Funded Debt to EBITDA to be more
than (i) 3.75 to 1.00 from the date hereof through September 30, 1996, (ii) 3.50
to 1.00 from October 1, 1996 through January 30, 1998, and (iii) for each annual
period thereafter beginning January 31, 1998, the required ratio of Funded Debt
to EBITDA for the previous annual period minus 0.25; as used herein, the term
-----
"Funded Debt" shall mean, as of any date, all interest-bearing indebtedness of
- ------------
Borrower and its consolidated subsidiaries, including subordinated debt, less
the amount of cash in the Deposit Account; as used herein, "EBITDA" shall mean,
------
with respect to any period, consolidated earnings before interest expense,
income taxes, depreciation and amortization of Borrower and its consolidated
subsidiaries for such period, (plus $3,400,000 for the initial twelve months
hereof for the one time costs associated with the Stock Purchase Agreement
transaction), but excluding (i) any extraordinary gains or losses and (ii) any
non-recurring items, determined in accordance with generally accepted accounting
principles, calculated for the preceding twelve months;
(c) Permit, at any time, its ratio of consolidated current assets to
consolidated current liabilities to be less than 1.00 to 1.00;
(d) Permit its Debt Service Coverage ratio for the twelve-month period
ending on the last day of each calendar month to be less than 1.20 to 1.00; as
used herein, the term "Debt Service Coverage" shall mean the ratio of Borrower's
---------------------
EBITDA to the sum of all scheduled current maturities of long term senior and
subordinated debt plus interest expense, plus cash taxes;
(e) Incur or assume (or permit its subsidiaries to incur or assume)
any indebtedness or borrow any money, except for (i) the Loan, (ii) debt
(including accounts payable) incurred in the ordinary course of business, (iii)
Borrower's consolidated indebtedness to State Street Bank which shall not exceed
an aggregate amount of $8,000,000, and (iii) the Subordinated Indebtedness
(hereinafter defined);
(f) Endorse, guarantee, or otherwise become liable for the obligations
of any person, firm or corporation, except for (i) endorsements of negotiable
instruments by Borrower in the ordinary course of business, and (ii) the
existing guaranty in favor of State Street Bank on behalf of DSI (HK), Ltd.;
(g) Mortgage, assign, encumber, incur, assume or grant a security
interest in or lien upon any of Borrower's assets, except to Lender (provided,
however, that the foregoing shall not apply to [i] an inchoate lien for taxes
which are not delinquent or which are being contested in good faith, or [ii] the
subordinate security interest granted to Hibernia and Moss as contemplated in
the Stock Purchase Agreement);
(h) Liquidate, dissolve or reorganize; or merge or consolidate with,
or acquire all or substantially all of the assets of, any other company, firm or
association; or
-9-
<PAGE>
make or permit any substantial change in its capitalization or its business
(except as provided in the Stock Purchase Agreement);
(i) Declare or pay any dividends on any of Borrower's outstanding
stock;
(j) Sell any of its tangible assets, except in the ordinary course of
business; or sell any of its assets to any other person, firm or corporation
with the agreement that such assets shall be leased back to Borrower, unless
replaced with assets of equal value;
(k) Own, purchase or acquire, directly or indirectly, any promissory
notes, stock or securities of any other person, firm or corporation, other than
securities guaranteed as to the principal and interest by the United States
government; or make any loans or advances, except advances to employees in an
aggregate amount exceeding $50,000.00, and the loans to Moss described
hereinabove;
(l) Expend or enter into any commitment to expend any amount for the
acquisition or lease of tangible, fixed or capital assets, including repairs,
replacements and improvements, which are capitalized under proper accounting
practice, and which exceeds, in the aggregate, $1,000,000 during any twelve
month period;
(m) Directly or indirectly, engage in any business other than those in
which Borrower is presently engaged, or discontinue any of its existing lines of
business or substantially alter its method of doing business;
(n) (i) Pay any installments of principal of or interest on any
Subordinated Indebtedness, after the occurrence and during the continuance of
any Event of Default, or the payment of which would result in the occurrence of
an Event of Default, (ii) directly or indirectly make any payments upon the
Subordinated Indebtedness other than regular installments of principal and
interest, or (iii) alter, amend, modify or otherwise change the terms,
conditions and provisions of the Subordinated Indebtedness, except as may be
permitted in the Intercreditor Agreement of even date herewith of which Lender
is a party (the "Intercreditor Agreement"); as used herein, the term
-----------------------
"Subordinated Indebtedness" shall mean (i) those certain $14,400,000,
- --------------------------
$6,000,000, $1,000,000 and $1,300,000 promissory notes payable to Moss described
in Paragraph 3(a) hereof, and (ii) that certain $3,000,000 promissory note
payable to Hibernia described in Paragraph 3(a) hereof;
(o) Enter into or be a party to any transaction or arrangement,
including, without limitation, the purchase, sale, exchange or use of any
property or asset, or any interest therein, whether real, personal or mixed, or
tangible or intangible, or the rendering of any service, with any "Affiliate"
(as hereafter defined), except transactions in the ordinary course of and
pursuant to the reasonable requirements of Borrower's business and upon fair and
reasonable terms no less favorable to Borrower than Borrower would obtain in an
arm's length transaction with a non-Affiliate. For purposes of this subsection
the term "Affiliate" means any person, firm, corporation or other entity which
---------
directly or indirectly controls, is controlled by or is under common control
with Borrower. A person, firm, corporation or other entity shall be deemed to
control another if it owns ten percent (10%) or more of the equity interest of
such other person, firm, corporation or other entity or if it possesses,
directly or indirectly, the power to direct or cause the direction of the
management or policies
-10-
<PAGE>
of such other person, firm, corporation or other entity, whether through
ownership or stock, by contract or otherwise; or
(p) Permit any change in the senior management of Borrower, except as
may be provided otherwise in the Intercreditor Agreement with respect to Moss,
individually.
7. Default. An "Event of Default" shall exist if any one or more of the
------- ----------------
following events (herein collectively called "Events of Default") shall occur:
-----------------
(a) Borrower shall fail to pay when due any principal of, or interest
on, the Note or any other fee or payment due hereunder or under any of the Loan
Documents;
(b) Any representation or warranty made in any of the Loan Documents
shall prove to be untrue or inaccurate in any material respect as of the date on
which such representation or warranty is made;
(c) Default shall occur in the performance of any of the covenants or
agreements of Borrower contained herein or in any of the other Loan Documents;
(d) Borrower shall (i) apply for or consent to the appointment of a
receiver, custodian, trustee, intervenor or liquidator of it or of all or a
substantial part of its assets, (ii) voluntarily become the subject of a
bankruptcy, reorganization or insolvency proceeding or be insolvent or admit in
writing that it is unable to pay debts as they become due, (iii) make a general
assignment for the benefit of creditors, (iv) file a petition or answer seeking
reorganization or an arrangement with creditors or to take advantage of any
bankruptcy or insolvency laws, (v) file an answer admitting the material
allegations of, or consent to, or default in answering, a petition filed against
it in any bankruptcy, reorganization or insolvency proceeding, (vi) become the
subject of an order for relief under any bankruptcy, reorganization or
insolvency proceeding, (vii) fail to pay any money judgment against it before
the expiration of thirty (30) days after such judgment becomes final and no
longer subject to appeal, or (viii) settle or compromise any claim or
controversy or suffer a final non-appealable judgement which has a material
(which for purposes hereof shall mean $500,000.00 or more) adverse effect on
Borrower's financial condition or business or might cause an Event of Default;
(e) An order, judgment or decree shall be entered by any court of
competent jurisdiction or other competent authority approving a petition
appointing a receiver, custodian, trustee, intervenor or liquidator of Borrower
or of all or substantially all of its assets, and such order, judgment or decree
shall continue unstayed and in effect for a period of sixty (60) days; or a
complaint or petition shall be filed against Borrower seeking or instituting a
bankruptcy, insolvency, reorganization, rehabilitation or receivership
proceeding of Borrower, and such petition or complaint shall not have been
dismissed within sixty (60) days;
(f) Borrower shall default in the payment of any indebtedness
(including without limitation the Subordinated Indebtedness) or in the
performance of any of their obligations and such default shall continue for more
than any applicable period of grace; or
-11-
<PAGE>
(g) Any transfer, pledge or other change in the ownership of the stock
of Borrower during the term of the Loan, except for (i) such pledges to the
Lender, (ii) the stock transfers contemplated in the Stock Purchase Agreement,
(iii) stock transfer to Moss as described in the Intercreditor Agreement, and
(iv) an initial public stock offering to which Lender has consented in writing.
8. Remedies Upon Event of Default. If an Event of Default shall have
------------------------------
occurred and be continuing, then Lender, at its option, after complying with the
------------------------
notice provisions (if applicable) set forth in the Intercreditor Agreement, may
- --------------------------------------------------------------------------
(i) declare the principal of, and all interest then accrued on, the Notes and
any other liabilities of Borrower to Lender to be forthwith due and payable,
whereupon the same shall forthwith become due and payable without notice,
presentment, demand, protest, notice of intention to accelerate, or other notice
of any kind, all of which Borrower hereby expressly waives, anything contained
herein or in the Notes to the contrary notwithstanding, (ii) reduce any claim to
judgment, and/or (iii) without notice of default or demand, pursue and enforce
any of Lender's rights and remedies under the Loan Documents or otherwise
provided under or pursuant to any applicable law or agreement.
9. Collateral and Guaranties.
-------------------------
(a) Repayment of the Notes, drafts against the Letters of Credit and
performance of the obligations described herein shall be secured, directly or
indirectly, by (i) a first priority perfected security interest in all of
Borrower's accounts, general intangibles, equipment, fixtures and inventory,
(ii) a first priority perfected security interest in sixty-five percent (65%) of
the issued and outstanding shares of stock of DSI (HK), Ltd., (iii) a first
priority perfected security interest in 77.68% of the issued and outstanding
shares of stock of Borrower, and (iv) a first priority security interest in the
Deposit Account (collectively, the "Collateral").
----------
(b) Repayment of the Notes, drafts against the Letters of Credit and
performance of Borrower's obligations described herein shall be guaranteed by
the Guarantor to the extent provided in the guaranty agreement.
(c) Notwithstanding the foregoing, so long as (i) there is no Event of
Default or event which with the passage of time or notice would become an Event
of Default, and (ii) the Term Note has been paid in full, Lender agrees to
release the security interest in the stock of Borrower that has been pledged to
secure the Loan.
10. Letter of Credit Fees.
---------------------
(a) For each Working Capital Letter of Credit, Borrower shall pay to
Lender a fee equal to the greater of (i) $150 or (ii) one percent (1%)
(determined on a per annum basis) of the dollar amount of the Letter of Credit;
such fee shall be payable at the time a Working Capital Letter of Credit is
issued and upon any renewal or extension thereof. Additionally, Borrower agrees
to reimburse Lender for all actual out-of-pocket expenses incurred by Lender,
such as advising or confirming bank fees, telex charges and the like, and to pay
those fees customarily charged by Lender for any amendments to such Letter of
Credit.
-12-
<PAGE>
(b) For the Seller Letter of Credit, Borrower shall pay to Lender a
fee equal to (i) one-half of one percent (1/2%) (determined on a per annum
basis) of the dollar amount of that portion of the Seller Letter of Credit,
which is adequately secured by cash (i.e., on a dollar for dollar basis) in the
Deposit Account (hereinafter defined), and (ii) three percent (3%) (determined
on a per annum basis) of the dollar amount of that portion of the Seller Letter
of Credit, which is not adequately secured by cash (i.e., on a dollar for dollar
basis) in the Deposit Account. The Seller Letter of Credit Fees shall be due
and payable quarterly, in arrears, on the same date that cash deposit payments
to the Deposit Account are due. Additionally, Borrower agrees to reimburse
Lender for all actual out-of-pocket expenses incurred by Lender, such as
advising or confirming bank fees, telex charges and the like, and to pay those
fees customarily charged by Lender for any amendments to the Seller Letter of
Credit.
(c) Borrower acknowledges and agrees that the fees set forth
hereinabove are bona fide commitment fees in that it is in consideration of (i)
Lender's holding monies in readiness for Borrower in support of these Letters of
Credit, and (ii) Lender's extension of its creditworthiness in connection with
the issuance of these Letters of Credit on behalf of Borrower.
11. Miscellaneous.
-------------
(a) Waiver. No failure to exercise, and no delay in exercising, on
------
the part of Lender, any right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right. The rights of Lender
hereunder and under the other Loan Documents shall be in addition to all other
rights provided by law. No notice or demand given in any case shall constitute a
waiver of the right to take other action in the same, similar or other instances
without such notice or demand.
(b) Notices. Any notices or other communications required or
-------
permitted to be given by any of the Loan Documents must be given in writing and
must be personally delivered, sent by facsimile transmission or mailed by
prepaid certified or registered mail to the party to whom such notice or
communication is directed at the address of such party as follows:
(i) Borrower: Diversified Specialists, Inc.
1100 West Sam Houston Parkway, Suite A
Post Office Box 430848
Houston, Texas 77043
Attention: Mr. M. D. Davis
Telecopy No.: (713) 526-5049
With a copy to: James F. Stephenson
Sinex & Stephenson
2323 S. Shepherd, 14th Floor
Houston, Texas 77019
Telecopy No.: (713) 523-8694
-13-
<PAGE>
(ii) Lender: Bank One, Texas, NA
910 Travis
Houston, Texas 77002
Attn: Corporate Banking Group
Telecopy No.: (713) 751-6199
(iii) Guarantor: Rosie Acquisition, L.L.C.
1100 West Sam Houston Parkway, Suite A
Post Office Box 430848
Houston, Texas 77043
Attention: Mr. M. D. Davis
Telecopy No.: (713) 526-5049
Any such notice or other communication shall be deemed to have been given
(whether actually received or not) on the day it is personally delivered or
telecopied as aforesaid, or, if mailed, on the third day after it is mailed as
aforesaid. Any party may change its address for purposes of this Agreement by
giving notice of such change to all other parties pursuant to this Paragraph.
(c) Governing Law. This Agreement and the other Loan Documents are
-------------
being executed and delivered, and are intended to be performed, in the State of
Texas, and the substantive laws of Texas shall govern the validity,
construction, enforcement and interpretation of this Agreement and all other
Loan Documents, except to the extent: (i) otherwise specified therein; (ii) the
federal or state laws governing national banking associations expressly
supersede and have contrary application; or (iii) federal laws governing maximum
interest rates shall provide for rates of interest higher than those permitted
under the laws of the State of Texas.
(d) Invalid Provisions. If any provision of this Agreement is held to
------------------
be illegal, invalid or unenforceable under present or future laws effective
during the term of this Agreement, such provision shall be fully severable and
this Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part of this Agreement, and the
remaining provisions of this Agreement shall remain in full force and effect and
shall not be affected by the illegal, invalid or unenforceable provision or by
its severance from this Agreement.
(e) Entirety and Amendments. The Loan Documents embody the entire
-----------------------
agreement between the parties and supersede all prior agreements and
understandings, if any, relating to the subject matter hereof and thereof, and
this Agreement and the other Loan Documents may be amended only by an instrument
in writing executed by the party, or an authorized officer of the party, against
whom such amendment is sought to be enforced.
(f) Headings. Paragraph and section headings are for convenience of
--------
reference only and shall in no way affect the interpretation of this Agreement.
(g) Construction and Conflicts. The provisions of this Agreement
--------------------------
shall be in addition to those of the Notes, the Loan Documents and any guaranty,
pledge or security agreement, note or other evidence of liability held by
Lender, all of which shall be construed
-14-
<PAGE>
as complementary to each other. Nothing herein contained shall prevent Lender
from enforcing the Notes, the Loan Documents and any and all other notes,
guaranty, pledge or security agreements in accordance with their respective
terms. To the extent of any conflict or contradiction between the terms hereof
and the terms of the Notes, the Loan Documents or any other document executed in
connection herewith, the terms hereof shall control.
(h) Hazardous Substances; Indemnification. Borrower shall protect,
-------------------------------------
indemnify and hold Lender, its directors, officers, employees and agents, and
any immediate successors to Lender's interest in the Collateral and any other
person who acquires any portion of the Collateral at a foreclosure sale or
otherwise through the exercise of Lender's rights and remedies under the Loan
Documents, and all directors, officers, employees and agents of all of the
aforementioned indemnified parties, harmless from and against any and all actual
or potential claims, proceedings, lawsuits, liabilities, damages, losses, fines,
penalties, judgments, awards, costs and expenses (including, without limitation,
attorneys' fees and costs and expenses of investigation) which arise out of or
relate in any way to any use, handling, production, transportation, disposal or
storage of any hazardous substance or solid waste whether by Borrower or any
tenant or any other person during the ownership of the Collateral by Borrower,
including, without limitation, (i) all foreseeable and all unforeseeable
consequential damages directly or indirectly arising out of (A) the use,
generation, storage, discharge or disposal of the Collateral by Borrower or (B)
any residual contamination affecting any natural resource or the environment,
and (ii) the cost of any required or necessary repair, cleanup, or
detoxification of the Collateral and the preparation of any closure or other
required remedial plans. In addition, Borrower agrees that in the event the
Collateral is assigned an identification number by the Environmental Protection
Agency, the Collateral shall be solely in the name of Borrower or other
responsible person and, as between Borrower and Lender, Borrower shall assume
any and all liability for such removed Collateral. All such costs, damages, and
expenses referred to herein shall hereinafter be referred to as "Expenses".
--------
Borrower understands and agrees that its liability to the aforementioned
indemnified parties shall arise upon the earlier to occur of (a) discovery of
any violation of the Applicable Environmental Laws or (b) the institution of any
Hazardous Materials Claim, and not upon the realization of loss or damage, and
Borrower agrees to pay to Lender from time to time, immediately upon Lender's
request, an amount equal to such Expenses, as reasonably determined by Lender.
In addition, Borrower agrees that any Expenses incurred by Lender and not paid
by Borrower shall be additional indebtedness of Borrower and shall be secured by
the Loan Documents and shall accrue interest at the Maximum Rate. The agreements
contained herein shall survive the repayment of the Note and the termination of
the Loan Documents. As used herein, "Hazardous Materials Claims" shall mean any
---------------------------
and all enforcement, clean-up, removal or other governmental or regulatory
actions or orders threatened, instituted or completed pursuant to any Applicable
Environmental Laws, together with all claims made or threatened by any third
party against Borrower or the Collateral relating to damage, contribution, cost
recovery compensation, loss or injury resulting from any hazardous substance or
solid waste. Notwithstanding anything to the contrary contained in this
subparagraph or in the Loan Documents, it is hereby expressly agreed and
understood that Borrower's obligation to protect, indemnify and hold Lender and
the other aforementioned indemnified parties harmless from and against any and
all Hazardous Materials Claims and Expenses pursuant to this subparagraph shall
not apply to Hazardous Materials Claims or Expenses arising out of or relating
in any way to any use, handling, production, transportation, disposal or storage
of the Collateral directly caused by
-15-
<PAGE>
Lender or any such other indemnified party during the management, operation,
possession or ownership of the Collateral by Lender or any such other
indemnified party, and not resulting from a condition existing prior to the
commencement of such management, operation, possession or ownership of the
Collateral by Lender or any such other indemnified party.
(i) Financial Terms. As used in this Agreement, all financial and
---------------
accounting terms not otherwise defined herein shall be defined and calculated in
accordance with generally accepted accounting principles consistently applied.
(j) Expenses of Lender. Guarantor and Borrower will, on demand,
------------------
reimburse Lender for all expenses except as otherwise provided herein, including
the reasonable fees and expenses of legal counsel for Lender, incurred by Lender
in connection with the preparation, administration, amendment, modification or
enforcement of this Agreement, the Notes and the Loan Documents and the
collection or the attempted collection of the Notes.
(k) Maximum Interest Rate. It is the intention of the parties hereto
---------------------
to comply with the usury laws of the State of Texas and the United States;
accordingly, it is agreed that notwithstanding any provision to the contrary in
the Notes, or in any of the documents securing payment hereof or otherwise
relating hereto, no such provision shall require the payment or permit the
collection of interest in excess of the maximum permitted by applicable state or
Federal law. If any excess of interest in such respect is provided for, or
shall be adjudicated to be so provided for, in the Notes or in any of the
documents securing payment hereof or otherwise relating hereto, or in the event
the maturity of the indebtedness evidenced by the Notes is accelerated in whole
or in part, or in the event that all or part of the principal or interest of the
Notes shall be prepaid, so that under any of such circumstances the amount of
interest contracted for, charged or received under the Notes or under any of the
instruments securing payment hereof or otherwise relating hereto, on the amount
of principal actually outstanding from time to time under the Notes shall exceed
the maximum amount of interest permitted by the usury laws of the State of Texas
and the United States, then, in any such event, (i) the provisions of this
paragraph shall govern and control, (ii) neither Borrower nor its heirs, legal
representatives or assigns or any other party liable for the payment hereof
shall be obligated to pay the amount of such interest to the extent that it is
in excess of the maximum amount permitted by applicable state or Federal law,
(iii) any such excess which may have been collected shall be, at the holder's
option (at maturity or in the Event of Default hereunder), either applied as a
credit against the then unpaid principal amount hereof or refunded to Borrower,
and (iv) the effective rate of interest shall be automatically subject to
reduction to the maximum lawful contract rate allowed under the usury laws of
the State of Texas or the United States as now or hereafter construed by the
courts having jurisdiction. It is further agreed that without limitation of the
foregoing, all calculations of the rate of interest contracted for, charged or
received under the Notes or under such other documents which are made for the
purpose of determining whether such rate exceeds the maximum lawful rate of
interest, shall be made, to the extent permitted by the laws of the State of
Texas and the United States, by amortizing, prorating, allocating and spreading
in equal parts during the period of the full stated term of the Loans, all
interest at any time contracted for, charged or received from Borrower or
otherwise by the holder of the Notes in connection with such Loans.
-16-
<PAGE>
11. NO ORAL AGREEMENTS. THE WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL
------------------
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
If Lender agrees to the foregoing, Lender should execute this Agreement in
the space indicated below.
"BORROWER"
DIVERSIFIED SPECIALISTS, INC.
By: /s/ M.D. Davis
--------------------------
Name: M.D. Davis
------------------------
Title: CEO
-----------------------
By: /s/ Thomas V. Yarnell
--------------------------
Name: Thomas V. Yarnell
------------------------
Title: Secretary
-----------------------
"GUARANTOR"
ROSIE ACQUISITION, L.L.C.
By: /s/ M.D. Davis
--------------------------
Name: M.D. Davis
------------------------
Title: President
-----------------------
ACCEPTED:
"LENDER"
BANK ONE, TEXAS, NA
By: /s/ Barry A. Kelly
--------------------
Name: Barry A. Kelly
------------------
Title: V.P.
-----------------
-17-
<PAGE>
<TABLE>
<CAPTION>
List of Loan Documents
- ----------------------
<C> <S>
1. Letter Loan Agreement
2. $6,000,000 Master Revolving Credit Note
3. $14,400,000 Term Promissory Note
4. Security Agreement from Borrower
5. UCC-1 Financing Statement from Borrower
6. Security Agreement and Pledge (Borrower's Stock)
7. Blank Stock Powers
8. Security Agreement and Pledge (DSI [HK], Ltd. Stock)
9. Blank Stock Powers
10. Security Agreement - Deposit Account
11. Guaranty from Guarantor
12. Corporate Resolutions for Borrower
13. Company Resolutions for Guarantor
14. Intercreditor Agreement - Hibernia Corporation and Tommy Moss
15. Landlord Subordination Agreement(s)
16. Opinion of Counsel
<CAPTION>
List of Schedules
- -----------------
A - Definitions
B - Borrowing Base Report & Compliance Certificate
</TABLE>
-18-
<PAGE>
SCHEDULE "A"
DEFINITIONS
-----------
"BORROWER'S LOAN LIMIT", as used herein, shall mean the Borrowing Base (as
defined below) less the sum of (i) the total principal amount outstanding under
the Loan and (ii) the face amount of all outstanding Letters of Credit,
determined at the time of calculation.
"BORROWING BASE", as used herein, shall mean the sum of: (i) eighty percent
(80%) of Borrower's Eligible Accounts (as defined below) outstanding on the date
of a request for a Loan advance; plus (ii) fifty percent (50%) of Borrower's Net
----
Security Value of Domestic Inventory (as defined below); provided, however,
during the period from April 1st through September 30th of each year, advances
exceeding the Borrowing Base (the "Over-Advance") will be allowed provided that
------------
the aggregate amount of the Over-Advance does not exceed the lesser of (i) the
sum of eighty percent (80%) of Eligible Accounts plus one hundred percent (100%)
----
of Domestic Eligible Inventory, or (ii) $1,000,000.
An "ELIGIBLE ACCOUNT" shall mean an account which is and shall at all times
continue to be acceptable to Lender in all reasonable respects. In general, an
account which continuously meets each of the following requirements is an
Eligible Account: (i) it is lawfully owned by Borrower, and Borrower has the
right to transfer any interest therein; (ii) it arises from the sale or lease of
goods, the goods have been shipped or delivered to the person who is obligated
on the account (the "account debtor"); (iii) it arises from the performance of
services, such services have been fully rendered, to the extent of the billing;
(iv) it is a valid obligation of the account debtor, enforceable in accordance
with its terms and free and clear of all liens, security interests,
restrictions, retainages, buy-back or repurchase agreements, setoffs, adverse
claims, assessments, defaults, prepayments, defenses and conditions precedent
other than the security interest created by this Agreement; (v) it is rendered
to the account debtor and is not evidenced by any instrument or chattel paper;
(vi) it is not aged more than sixty (60) days from the original due date
determined at the time of sale; (vii) the aggregate amount of all accounts owing
by an account debtor if more than twenty-five percent (25%) of the balance owing
by such account debtor is ineligible; (viii) it is not owed by any account
debtor closely affiliated with, related to or employed by Borrower or domiciled
outside of the United States (unless, in the case of an account debtor domiciled
outside of the United States, such account is secured by a sight domestic
irrevocable letter of credit in form acceptable to Lender issued by a federally
insured bank acceptable to Lender); (ix) it is discounted by the amount of all
discounts, allowances, rebates, credits and adjustments to such accounts; (x) it
is discounted by the amount billed by the account debtor or representing
retainage or a "hold back" of such account debtor; and (xi) problem accounts.
"NET SECURITY VALUE OF DOMESTIC INVENTORY" shall mean the net value of all
Borrower's finished goods inventory (excluding raw materials) physically located
in the United States and all such inventory in transit to the United States
which is fully insured and for which adequate proof of shipment has been
provided to Lender, less liens and security interests of all kinds against
----
inventory (other than those held by Lender and the holders of the Hibernia
Subordinated Indebtedness and without implying the consent of Lender thereto),
the value of work in process, and all processing and other handling charges
affecting the value thereof, all as determined by Lender in its sole discretion.
<PAGE>
SCHEDULE "B"
BORROWING BASE REPORT
---------------------
AND COMPLIANCE CERTIFICATE
--------------------------
<TABLE>
<C> <S> <C>
I. Total Accounts Receivable of Borrower: $ _____________
Less: Ineligible Accounts (as detailed on
attachment) - $ _____________
Eligible Accounts Receivable = $ _____________
II. Total Inventory: $ _____________
Less: Inventory Deductions - $ _____________
Eligible Inventory: = $ _____________
III. 80% x Domestic Eligible Accounts Receivable $ _____________
50% x Domestic Eligible Inventory: + $ _____________
Borrower's Loan Limit: = $ _____________
(maximum $6,000,000)
IV. Current Principal Balance: $ _____________
V. Available Funds: $ _____________
VI. Advance Request: $ _____________
VII. Over-Advance (maximum $1,000,000) + $ _____________
VIII. Total Outstanding After Advance (Maximum $6,000,000) $ _____________
------------------------------------------------
I. Current Ratio
II. Tangible Net Worth $ _____________
III. Debt to Worth Ratio _____________
-
IV. Debt Service Coverage _____________
</TABLE>
------------------------------------------------
The undersigned officer of Borrower, hereby certifies to Lender that (i)
the computations set forth above are true, correct and complete as of the date
set forth above or as of the date of execution hereof, as the case may be, (ii)
such computations have been made in full compliance with and conformity to the
Letter Loan Agreement (the "Loan Agreement") between Borrower and Lender, (iii)
--------------
the matters set forth in Paragraph 3 of the Loan Agreement are true and correct,
and (iv) Borrower is not in default under the Loan Agreement.
All capitalized terms used herein which have been defined in the Loan
Agreement have been used in accordance with the definitions ascribed to them in
the Loan Agreement.
EXECUTED this ____ day of _____________, 19___.
DIVERSIFIED SPECIALISTS, INC.
By:
-------------------------
Name:
-----------------------
Title:
----------------------
<PAGE>
EXHIBIT 10.10
FIRST AMENDMENT TO LETTER LOAN AGREEMENT
THIS FIRST AMENDMENT TO LETTER LOAN AGREEMENT ("Amendment") is made and
---------
entered into effective the 31st day of January, 1996, by and between DSI TOYS,
INC. f/k/a DIVERSIFIED SPECIALISTS, INC., a Texas corporation (herein called
"Borrower"), and BANK ONE, TEXAS, NA, with offices in Houston, Texas (herein
called "Lender").
------
R E C I T A L S:
- - - - - - - -
WHEREAS, Borrower and Lender entered into a Letter Loan Agreement dated
December 11, 1995 (the "Loan Agreement"); the terms defined therein being used
--------------
herein as therein defined unless otherwise defined herein); and
WHEREAS, Borrower and Lender desire to amend certain terms and provisions
of the Loan Agreement.
A G R E E M E N T:
- - - - - - - - -
NOW, THEREFORE, in consideration of the mutual promises herein contained
and other good and valuable consideration, the receipt of which is hereby
acknowledged, Borrower and Lender hereby agree to amend the Loan Agreement as
hereinafter set forth.
1. Amendments to Loan Agreement. The Loan Agreement is, effective the
----------------------------
date hereof, and subject to the satisfaction of the conditions precedent set
forth in Section 2 hereof, amended as follows:
(a) All references in the Loan Documents to "Diversified Specialists,
Inc." are hereby amended to read "DSI Toys, Inc."
(b) Subparagraph 6(a) of the Loan Agreement is hereby amended by
deleting such subparagraph in its entirety and substituting therefor the
following:
"(a) Permit its Net Worth to be less than (i) ($2,500,000) from
the date hereof until July 31, 1996, (ii) $100,000 from August 1, 1996
through January 30, 1998, and (iii) for each annual period thereafter
beginning January 31, 1998, $1,500,000 plus the Net Worth required for the
----
previous annual period; as used herein, the term "Net Worth" shall mean the
---------
total consolidated assets of Borrower, plus all subordinated debt, plus all
notes and accounts receivable from Tommy Moss (collectively, the "Moss
----
Note"), minus (A) its total consolidated liabilities (including contingent
---- -----
liabilities), (B) all notes receivable from shareholders and affiliates
(other than the Moss Note), and (C) other items deducted in arriving at net
worth";
(c) Subparagraph 6(c) of the Loan Agreement is hereby amended by
deleting such subparagraph in its entirety and substituting therefor the
following:
<PAGE>
"(c) Permit, at any time, its ratio of consolidated current
assets to consolidated current liabilities to be less than 1.00 to
1.00; for purposes hereof only, the phrase "current liabilities" shall
exclude all scheduled current maturities of long term senior and
subordinated debt plus the outstanding balance on the Revolving Note";
(d) The second paragraph of Schedule "A" of the Loan Agreement is
------------
hereby amended by deleting such paragraph in its entirety and substituting
therefor the following:
"'BORROWING BASE', as used herein, shall mean the sum of: (i)
eighty percent (80%) of Borrower's Eligible Accounts (as defined
below) outstanding on the date of a request for a Loan advance; plus
----
(ii) fifty percent (50%) of Borrower's Net Security Value of Domestic
Inventory (as defined below); provided, however, during the period
from April 1st through September 30th of each year, advances exceeding
the Borrowing Base (the "Over-Advance") will be allowed provided that
------------
the aggregate amount of the Over-Advance does not exceed the lesser of
(i) the sum of eighty percent (80%) of Eligible Accounts plus one
----
hundred percent (100%) of Domestic Eligible Inventory, or (ii)
$1,500,000."
(e) The reference to "$1,000,000" in Section VII. of Schedule "B" of
------------
the Loan Agreement is amended by deleting such reference and substituting
"$1,500,000" therefor.
2. Conditions of Effectiveness. This Amendment shall become effective
---------------------------
when, and only when, Lender shall have received counterparts of this Amendment
executed by Borrower, and Section 1 hereof shall become effective when, and only
when, Lender shall have additionally received all of the following documents:
(a) Certificates of the Boards of Directors of Borrower and Rosie
Acquisition, L.L.C. ("Guarantor") authorizing the execution, delivery and
---------
performance of this Amendment, and the matters contemplated hereby; and
(b) Counterparts of the consent appended hereto (the "Consent of
----------
Guarantor") executed by Guarantor.
---------
3. Representations and Warranties of Borrower. Borrower represents and
------------------------------------------
warrants as follows:
(a) Borrower is duly authorized and empowered to execute, deliver and
perform this Amendment and all other instruments referred to or mentioned
herein to which it is a party, and all action on its part requisite for the
due execution, delivery and the performance of this Amendment has been duly
and effectively taken. This Amendment, when executed and delivered, will
constitute valid and binding obligations of Borrower enforceable in
accordance with its terms. This Amendment does not violate any provisions
of Borrower's Articles of Incorporation, By-Laws, or any contract,
agreement, law or regulation to which Borrower is subject, and does not
require the consent or approval of any regulatory authority or governmental
body of the United States or any state.
-2-
<PAGE>
(b) The representations and warranties made by Borrower in the Loan
Agreement are true and correct as of the date of this Amendment.
(c) No event has occurred and is continuing which constitutes an Event
of Default or would constitute an Event of Default but for the requirement
that notice be given or time elapse or both.
4. Reference to and Effect on the Security Instruments.
---------------------------------------------------
(a) Upon the effectiveness of Section 1 hereof, on and after the date
hereof each reference in the Loan Agreement to "this Agreement",
"hereunder", "hereof", "herein" or words of like import, and each reference
in the other Security Instruments (hereinafter defined) to the Loan
Agreement, shall mean and be a reference to the Loan Agreement as amended
hereby.
(b) Except as specifically amended above, the Loan Agreement and all
other instruments securing or guaranteeing Borrower's obligations to Lender
(the "Security Instruments") shall remain in full force and effect and are
--------------------
hereby ratified and confirmed. Without limiting the generality of the
foregoing, the Security Instruments and all collateral described therein do
and shall continue to secure the payment of all obligations of Borrower
under the Loan Agreement, as amended hereby, and under the other Security
Instruments.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of Lender under any of the Security Instruments, nor
constitute a waiver of any provision of any of the Security Instruments.
5. Waiver. As additional consideration for the execution, delivery and
------
performance of this Amendment by the parties hereto and to induce Lender to
enter into this Amendment, Borrower and Guarantor warrant and represent to
Lender that no facts, events, statuses or conditions exist or have existed
which, either now or with the passage of time or giving of notice, or both,
constitute or will constitute a basis for any claim or cause of action against
Lender or any defense to (a) the payment of any obligations and indebtedness
under the Notes and/or the Security Instruments or (b) the performance of any of
their obligations with respect to the Notes and/or the Security Instruments, and
in the event any such facts, events, statuses or conditions exist or have
existed, Borrower and Guarantor unconditionally and irrevocably waive any and
all claims and causes of action against Lender and any defenses to their payment
and performance obligations in respect to the Notes and the Security
Instruments.
6. Costs and Expenses. Borrower agrees to pay on demand all costs and
------------------
expenses of Lender in connection with the preparation, reproduction, execution
and delivery of this Amendment and the other instruments and documents to be
delivered hereunder, including the reasonable fees and out-of-pocket expenses of
counsel for Lender. In addition, Borrower shall pay any and all fees payable or
determined to be payable in connection with the execution and delivery, filing
or recording of this Amendment and the other instruments and documents to be
delivered hereunder, and agrees to save Lender harmless from and against any and
all liabilities with respect to or resulting from any delay in paying or
omission to pay such fees.
-3-
<PAGE>
7. Execution in Counterparts. This Amendment may be executed in any
-------------------------
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute but one and the same
instrument.
8. Governing Law. This Amendment shall be governed by and construed in
-------------
accordance with the laws of the State of Texas.
9. Final Agreement. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL
---------------
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
duly executed in multiple counterparts, each of which is an original instrument
for all purposes, all as of the day and year first above written.
BORROWER:
DSI TOYS, INC.
By: /s/ M.D. Davis
-------------------------------
Name: M.D. Davis
-----------------------------
Title: C.E.O.
----------------------------
LENDER:
BANK ONE, TEXAS, NA
By: /s/ John E. Elam Jr.
-------------------------------
Name: John E. Elam Jr.
-----------------------------
Title: AVP
----------------------------
GUARANTOR:
ROSIE ACQUISITION, L.L.C.
By: /s/ M.D. Davis
-------------------------------
Name: M.D. Davis
-----------------------------
Title: President
----------------------------
to evidence its acknowledgment of the waiver set
forth in Paragraph 5 hereof
-4-
<PAGE>
CONSENT OF GUARANTOR
Dated effective as of January 31, 1996
The undersigned, ROSIE ACQUISITION, L.L.C., as the Guarantor referred to in
the foregoing Amendment, hereby consents to the foregoing Amendment and hereby
confirms and agrees that (i) the guaranty in effect on the date hereof to which
it is a party is, and shall continue to be, in full force and effect and is
hereby confirmed and ratified in all respects except that, upon the
effectiveness of, and on and after the date of, the Amendment, all references in
the guaranty to the Loan Agreement shall mean the Loan Agreement as amended by
the Amendment and (ii) the guaranty does, and shall continue to, guarantee the
payment by the Borrower of its obligations under the Loan Agreement as amended
by the Amendment.
ROSIE ACQUISITION, L.L.C.
By: /s/ M.D. Davis
-------------------------------
Name: M.D. Davis
-----------------------------
Title: President
----------------------------
<PAGE>
EXHIBIT 10.11
SECOND AMENDMENT TO LETTER LOAN AGREEMENT
THIS SECOND AMENDMENT TO LETTER LOAN AGREEMENT ("Amendment") is made and
---------
entered into effective the 1st day of August, 1996, by and between DSI TOYS,
INC. f/k/a DIVERSIFIED SPECIALISTS, INC., a Texas corporation (herein called
"Borrower"), and BANK ONE, TEXAS, N.A., with offices in Houston, Texas (herein
called "Lender").
------
R E C I T A L S:
- - - - - - - -
WHEREAS, Borrower and Lender entered into a Letter Loan Agreement dated
December 11, 1995, as amended by First Amendment to Letter Loan Agreement dated
January 31, 1996 (collectively, the "Loan Agreement"); the terms defined therein
--------------
being used herein as therein defined unless otherwise defined herein); and
WHEREAS, Borrower and Lender desire to amend certain terms and provisions
of the Loan Agreement.
A G R E E M E N T:
- - - - - - - - -
NOW, THEREFORE, in consideration of the mutual promises herein contained
and other good and valuable consideration, the receipt of which is hereby
acknowledged, Borrower and Lender hereby agree to amend the Loan Agreement as
hereinafter set forth.
1. Amendment to Loan Agreement. Subparagraph 6(a) of the Loan Agreement
---------------------------
is, effective the date hereof, and subject to the satisfaction of the conditions
precedent set forth in Section 2 hereof, hereby amended by deleting such
subparagraph in its entirety and substituting therefor the following:
"(a) Permit its Net Worth to be less than (i) ($2,500,000) from the
date hereof until July 31, 1996, (ii) ($1,500,000) from August 1, 1996 through
September 30, 1996, (iii) $100,000 from October 1, 1996 through January 30,
1998, and (iv) for each annual period thereafter beginning January 31, 1998,
$1,500,000 plus the Net Worth required for the previous annual period; as used
----
herein, the term 'Net Worth' shall mean the total consolidated assets of
---------
Borrower, plus all subordinated debt, plus all notes and accounts receivable
from Tommy Moss (collectively, the 'Moss Note'), minus (A) its total
--------- -----
consolidated liabilities (including contingent liabilities), (B) all notes
receivable from shareholders and affiliates (other than the Moss Note), and (C)
other items deducted in arriving at net worth";
2. Conditions of Effectiveness. This Amendment shall become effective
---------------------------
when, and only when, Lender shall have received counterparts of this Amendment
executed by Borrower, and Section 1 hereof shall become effective when, and only
when, Lender shall have additionally received all of the following documents:
<PAGE>
(a) Certificates of the Boards of Directors of Borrower and Rosie
Acquisition, L.L.C. ("Guarantor") authorizing the execution, delivery and
---------
performance of this Amendment, and the matters contemplated hereby; and
(b) Counterparts of the consent appended hereto (the "Consent of
----------
Guarantor") executed by Guarantor.
---------
3. Representations and Warranties of Borrower. Borrower represents and
------------------------------------------
warrants as follows:
(a) Borrower is duly authorized and empowered to execute, deliver and
perform this Amendment and all other instruments referred to or mentioned
herein to which it is a party, and all action on its part requisite for the
due execution, delivery and the performance of this Amendment has been duly
and effectively taken. This Amendment, when executed and delivered, will
constitute valid and binding obligations of Borrower enforceable in
accordance with its terms. This Amendment does not violate any provisions
of Borrower's Articles of Incorporation, By-Laws, or any contract,
agreement, law or regulation to which Borrower is subject, and does not
require the consent or approval of any regulatory authority or governmental
body of the United States or any state.
(b) The representations and warranties made by Borrower in the Loan
Agreement are true and correct as of the date of this Amendment.
(c) No event has occurred and is continuing which constitutes an Event
of Default or would constitute an Event of Default but for the requirement
that notice be given or time elapse or both.
4. Reference to and Effect on the Security Instruments.
---------------------------------------------------
(a) Upon the effectiveness of Section 1 hereof, on and after the date
hereof each reference in the Loan Agreement to "this Agreement",
"hereunder", "hereof", "herein" or words of like import, and each reference
in the other Security Instruments (hereinafter defined) to the Loan
Agreement, shall mean and be a reference to the Loan Agreement as amended
hereby.
(b) Except as specifically amended above, the Loan Agreement and all
other instruments securing or guaranteeing Borrower's obligations to Lender
(the "Security Instruments") shall remain in full force and effect and are
--------------------
hereby ratified and confirmed. Without limiting the generality of the
foregoing, the Security Instruments and all collateral described therein do
and shall continue to secure the payment of all obligations of Borrower
under the Loan Agreement, as amended hereby, and under the other Security
Instruments.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of Lender under any of the Security Instruments, nor
constitute a waiver of any provision of any of the Security Instruments.
-2-
<PAGE>
5. Waiver. As additional consideration for the execution, delivery and
------
performance of this Amendment by the parties hereto and to induce Lender to
enter into this Amendment, Borrower and Guarantor warrant and represent to
Lender that no facts, events, statuses or conditions exist or have existed
which, either now or with the passage of time or giving of notice, or both,
constitute or will constitute a basis for any claim or cause of action against
Lender or any defense to (a) the payment of any obligations and indebtedness
under the Notes and/or the Security Instruments or (b) the performance of any of
their obligations with respect to the Notes and/or the Security Instruments, and
in the event any such facts, events, statuses or conditions exist or have
existed, Borrower and Guarantor unconditionally and irrevocably waive any and
all claims and causes of action against Lender and any defenses to their payment
and performance obligations in respect to the Notes and the Security
Instruments.
6. Costs and Expenses. Borrower agrees to pay on demand all costs and
------------------
expenses of Lender in connection with the preparation, reproduction, execution
and delivery of this Amendment and the other instruments and documents to be
delivered hereunder, including the reasonable fees and out-of-pocket expenses of
counsel for Lender. In addition, Borrower shall pay any and all fees payable or
determined to be payable in connection with the execution and delivery, filing
or recording of this Amendment and the other instruments and documents to be
delivered hereunder, and agrees to save Lender harmless from and against any and
all liabilities with respect to or resulting from any delay in paying or
omission to pay such fees.
7. Execution in Counterparts. This Amendment may be executed in any
-------------------------
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute but one and the same
instrument.
8. Governing Law. This Amendment shall be governed by and construed in
-------------
accordance with the laws of the State of Texas.
9. Final Agreement. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL
---------------
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
duly executed in multiple counterparts, each of which is an original instrument
for all purposes, all as of the day and year first above written.
BORROWER:
DSI TOYS, INC.
By: /s/ M.D. Davis
-------------------------------------
Name: M.D. Davis
-----------------------------------
Title: C.E.O.
----------------------------------
-3-
<PAGE>
LENDER:
BANK ONE, TEXAS, N.A.
By: /s/ John E. Elam
-------------------------------------
Name: John E. Elam
-----------------------------------
Title: Vice President
----------------------------------
GUARANTOR:
ROSIE ACQUISITION, L.L.C.
By: /s/ M.D. Davis
-------------------------------------
Name: M.D. Davis
-----------------------------------
Title: President
----------------------------------
to evidence its acknowledgment of the waiver set
forth in Paragraph 5 hereof
-4-
<PAGE>
CONSENT OF GUARANTOR
Dated effective as of August 1, 1996
The undersigned, ROSIE ACQUISITION, L.L.C., as the Guarantor referred to in
the foregoing Amendment, hereby consents to the foregoing Amendment and hereby
confirms and agrees that (i) the guaranty in effect on the date hereof to which
it is a party is, and shall continue to be, in full force and effect and is
hereby confirmed and ratified in all respects except that, upon the
effectiveness of, and on and after the date of, the Amendment, all references in
the guaranty to the Loan Agreement shall mean the Loan Agreement as amended by
the Amendment and (ii) the guaranty does, and shall continue to, guarantee the
payment by the Borrower of its obligations under the Loan Agreement as amended
by the Amendment.
ROSIE ACQUISITION, L.L.C.
By: /s/ M.D. Davis
-------------------------------------
Name: M.D. Davis
-----------------------------------
Title: President
----------------------------------
<PAGE>
EXHIBIT 10.12
THIRD AMENDMENT TO LETTER LOAN AGREEMENT
THIS THIRD AMENDMENT TO LETTER LOAN AGREEMENT ("Amendment") is made and
---------
entered into effective the 14th day of November, 1996, by and between DSI TOYS,
INC. f/k/a DIVERSIFIED SPECIALISTS, INC., a Texas corporation (herein called
"Borrower"), and BANK ONE, TEXAS, N.A., with offices in Houston, Texas (herein
- ---------
called "Lender").
------
R E C I T A L S:
- - - - - - - -
WHEREAS, Borrower, Lender and Guarantor entered into a Letter Loan
Agreement dated December 11, 1995, as amended by First Amendment to Letter Loan
Agreement dated January 31, 1996, and Second Amendment to Letter Loan Agreement
dated effective August 1, 1996 (collectively, the "Loan Agreement"); the terms
--------------
defined therein being used herein as therein defined unless otherwise defined
herein); and
WHEREAS, Borrower and Lender desire to amend certain terms and provisions
of the Loan Agreement to modify and increase the stated amount of the Revolving
Note by $3,000,000.00.
A G R E E M E N T:
- - - - - - - - -
NOW, THEREFORE, in consideration of the mutual promises herein contained
and other good and valuable consideration, the receipt of which is hereby
acknowledged, Borrower and Lender hereby agree to amend the Loan Agreement as
hereinafter set forth.
1. Amendment to Loan Agreement. Paragraphs 1(a) and 2 of the Loan
---------------------------
Agreement are, effective the date hereof, and subject to the satisfaction of the
conditions precedent set forth in Section 2 hereof, hereby amended by deleting
such in its entirety and substituting therefor the following:
1. Loan and Letters of Credit.
---------------------------
(a) On the terms and subject to the conditions set forth in this
letter loan agreement (the "Agreement"), Lender agrees to lend to Borrower up to
---------
$23,400,000 (the "Loan"). The Loan shall be evidenced by (i) a Modification
----
Revolving Promissory Note (the "Revolving Note") in a form satisfactory to
--------------
Lender, duly executed by Borrower in the principal amount of $9,000,000 and made
payable to the order of Lender and (ii) a Promissory Note (the "Term Note") in a
---------
form satisfactory to Lender duly executed by Borrower in the principal amount of
$14,400,000 and made payable to the order of Lender. Principal and interest on
the Revolving Note shall be due and payable in the manner and at the times set
forth in the Revolving Note with final maturity on May 31, 1997 (the "Revolving
---------
Termination Date"). The total outstanding advances by Lender under the
- ----------------
Revolving Note will not exceed at any one time the lesser of (i) $9,000,000, or
(ii) the Borrower's Loan Limit, as defined on Schedule "A" annexed hereto.
------------
Principal and interest (including any prepayment fee) on the Term Note shall be
due and payable in the manner and at the times set forth in the Term Note with
final maturity on December 11,
<PAGE>
2000. The Revolving Note and the Term Note are hereinafter collectively referred
to as the "Notes".
-----
2. Revolving Credit Advances. Subject to the terms hereof, Borrower may
-------------------------
borrow, pay, reborrow and repay under the Revolving Note, provided, however, the
maximum principal outstanding under the Revolving Note shall not exceed at any
one time the lesser of (i) $9,000,000, or (ii) the Borrower's Loan Limit.
Borrower's requests for advances (whether for cash or Working Capital Letter of
Credit) under the Loan shall specify the aggregate amount of the advance and the
date of such advance. Borrower shall furnish to Lender a request for borrowing
in a form satisfactory to Lender. Lender shall make the requested funds or
Working Capital Letter of Credit available to Borrower at Lender's principal
banking office in Houston, Texas. If at any time prior to the Revolving
Termination Date, the outstanding advances under the Revolving Note exceed
Borrower's Loan Limit as shown on any reports delivered to Lender under
Paragraph 5(c) or as indicated by Lender's own records, Borrower shall, on the
date of the delivery of such report to Lender or on the date of notice from
Lender as to Lender's records, prepay on the Revolving Note such amount as may
be necessary to eliminate such excess.
In addition, Schedule "B" of the Loan Agreement is hereby replaced by that which
is attached hereto indicating that the maximum available under the Revolving
Note is increased to $9,000,000.00.
2. Conditions of Effectiveness. This Amendment shall become effective
---------------------------
when, and only when, Lender shall have received counterparts of this Amendment
executed by Borrower, and Section 1 hereof shall become effective when, and only
when, Lender shall have additionally received all of the following documents:
(a) $9,000,000.00 Modification Revolving Promissory Note executed by
Borrower;
(b) Certificates of the Boards of Directors of Borrower and Rosie
Acquisition, L.L.C. ("Guarantor") authorizing the execution, delivery and
---------
performance of this Amendment, and the matters contemplated hereby;
(c) Counterparts of the consent appended hereto (the "Consent of
----------
Guarantor") executed by Guarantor; and
---------
(d) Any and all other documentation as Lender may reasonably require.
3. Representations and Warranties of Borrower. Borrower represents and
------------------------------------------
warrants as follows:
(a) Borrower is duly authorized and empowered to execute, deliver and
perform this Amendment and all other instruments referred to or mentioned
herein to which it is a party, and all action on its part requisite for the
due execution, delivery and the performance of this Amendment has been duly
and effectively taken. This Amendment, when executed and delivered, will
constitute valid and binding obligations of Borrower enforceable in
accordance with its terms. This Amendment does not violate any provisions
of Borrower's Articles of Incorporation, By-Laws, or any contract,
agreement, law or regulation to which Borrower is subject, and does not
require the
-2-
<PAGE>
consent or approval of any regulatory authority or governmental body of the
United States or any state.
(b) The representations and warranties made by Borrower in the Loan
Agreement are true and correct as of the date of this Amendment.
(c) No event has occurred and is continuing which constitutes an
Event of Default or would constitute an Event of Default but for the
requirement that notice be given or time elapse or both.
4. Reference to and Effect on the Security Instruments.
---------------------------------------------------
(a) Upon the effectiveness of Section 1 hereof, on and after the date
hereof each reference in the Loan Agreement to "this Agreement",
"hereunder", "hereof", "herein" or words of like import, and each reference
in the other Security Instruments (hereinafter defined) to the Loan
Agreement, shall mean and be a reference to the Loan Agreement as amended
hereby.
(b) Except as specifically amended above, the Loan Agreement and all
other instruments securing or guaranteeing Borrower's obligations to Lender
(the "Security Instruments") shall remain in full force and effect and are
--------------------
hereby ratified and confirmed. Without limiting the generality of the
foregoing, the Security Instruments and all collateral described therein do
and shall continue to secure the payment of all obligations of Borrower
under the Loan Agreement, as amended hereby, (including the increased
Revolving Note) and under the other Security Instruments.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of Lender under any of the Security Instruments, nor
constitute a waiver of any provision of any of the Security Instruments.
5. Waiver. As additional consideration for the execution, delivery and
------
performance of this Amendment by the parties hereto and to induce Lender to
enter into this Amendment, Borrower and Guarantor warrant and represent to
Lender that no facts, events, statuses or conditions exist or have existed
which, either now or with the passage of time or giving of notice, or both,
constitute or will constitute a basis for any claim or cause of action against
Lender or any defense to (a) the payment of any obligations and indebtedness
under the Notes and/or the Security Instruments or (b) the performance of any of
their obligations with respect to the Notes and/or the Security Instruments, and
in the event any such facts, events, statuses or conditions exist or have
existed, Borrower and Guarantor unconditionally and irrevocably waive any and
all claims and causes of action against Lender and any defenses to their payment
and performance obligations in respect to the Notes and the Security
Instruments.
6. Costs and Expenses. Borrower agrees to pay on demand all costs and
------------------
expenses of Lender in connection with the preparation, reproduction, execution
and delivery of this Amendment and the other instruments and documents to be
delivered hereunder, including the reasonable fees and out-of-pocket expenses of
counsel for Lender. In addition, Borrower shall pay any and all fees payable or
determined to be payable in connection with the execution and delivery, filing
or recording of this Amendment and the other instruments and documents to be
-3-
<PAGE>
delivered hereunder, and agrees to save Lender harmless from and against any and
all liabilities with respect to or resulting from any delay in paying or
omission to pay such fees.
7. Execution in Counterparts. This Amendment may be executed in any
-------------------------
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute but one and the same
instrument.
8. Governing Law. This Amendment shall be governed by and construed in
-------------
accordance with the laws of the State of Texas.
9. Final Agreement. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL
---------------
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
duly executed in multiple counterparts, each of which is an original instrument
for all purposes, all as of the day and year first above written.
BORROWER:
DSI TOYS, INC.
By: /s/ M.D. Davis
------------------------------------
Name: M.D. Davis
----------------------------------
Title: CEO
---------------------------------
LENDER:
BANK ONE, TEXAS, N.A.
By: /s/ John E. Elam
------------------------------------
Name: John E. Elam
----------------------------------
Title: Vice President
---------------------------------
-4-
<PAGE>
GUARANTOR:
ROSIE ACQUISITION, L.L.C.
By: /s/ M.D. Davis
------------------------------------
Name: M.D. Davis
----------------------------------
Title: President
---------------------------------
to evidence its acknowledgment of the waiver set
forth in Paragraph 5 hereof
-5-
<PAGE>
CONSENT OF GUARANTOR
Dated effective as of November 14, 1996
The undersigned, ROSIE ACQUISITION, L.L.C., as the Guarantor referred to in
the foregoing Amendment, hereby consents to the foregoing Amendment and hereby
confirms and agrees that (i) the guaranty in effect on the date hereof to which
it is a party is, and shall continue to be, in full force and effect and is
hereby confirmed and ratified in all respects except that, upon the
effectiveness of, and on and after the date of, the Amendment, all references in
the guaranty to the Loan Agreement shall mean the Loan Agreement as amended by
the Amendment and (ii) the guaranty does, and shall continue to, guarantee the
payment by the Borrower of its obligations under the Loan Agreement as amended
by the Amendment (including the increased Revolving Note).
ROSIE ACQUISITION, L.L.C.
By: /s/ M.D. Davis
------------------------------------
Name: M.D. Davis
----------------------------------
Title: President
---------------------------------
<PAGE>
SCHEDULE "B"
BORROWING BASE REPORT
---------------------
AND COMPLIANCE CERTIFICATE
--------------------------
<TABLE>
<C> <S> <C>
I. Total Accounts Receivable of Borrower: $ _____________________
Less: Ineligible Accounts (as detailed on
attachment) - $ _____________________
Eligible Accounts Receivable = $ _____________________
II. Total Inventory: $ _____________________
Less: Inventory Deductions - $ _____________________
Eligible Inventory: = $ _____________________
III. 80% x Domestic Eligible Accounts Receivable $ _____________________
50% x Domestic Eligible Inventory: + $ _____________________
Borrower's Loan Limit: = $ _____________________
(maximum $9,000,000)
IV. Current Principal Balance: $ _____________________
V. Available Funds: $ _____________________
VI. Advance Request: $ _____________________
VII. Over-Advance (maximum $1,000,000) + $ _____________________
VIII. Total Outstanding After Advance (Maximum $9,000,000) $ _____________________
------------------------------------------------
I. Current Ratio
II. Tangible Net Worth $ _____________________
-
III. Debt to Worth Ratio _____________________
IV. Debt Service Coverage _____________________
</TABLE>
------------------------------------------------
The undersigned officer of Borrower, hereby certifies to Lender that (i)
the computations set forth above are true, correct and complete as of the date
set forth above or as of the date of execution hereof, as the case may be, (ii)
such computations have been made in full compliance with and conformity to the
Letter Loan Agreement (the "Loan Agreement") between Borrower and Lender, (iii)
--------------
the matters set forth in Paragraph 3 of the Loan Agreement are true and correct,
and (iv) Borrower is not in default under the Loan Agreement.
All capitalized terms used herein which have been defined in the Loan
Agreement have been used in accordance with the definitions ascribed to them in
the Loan Agreement.
EXECUTED this ____ day of _____________, 19___.
DIVERSIFIED SPECIALISTS, INC.
By:_______________________________________
Name:_____________________________________
Title:______________________________________
<PAGE>
EXHIBIT 10.13
FOURTH AMENDMENT TO LETTER LOAN AGREEMENT
THIS FOURTH AMENDMENT TO LETTER LOAN AGREEMENT ("Amendment") is made and
---------
entered into effective the 31st day of January, 1997, by and between DSI TOYS,
INC. f/k/a DIVERSIFIED SPECIALISTS, INC., a Texas corporation (herein called
"Borrower"), and BANK ONE, TEXAS, N.A., with offices in Houston, Texas (herein
- ---------
called "Lender").
------
R E C I T A L S:
- - - - - - - -
WHEREAS, Borrower, Lender and Guarantor entered into a Letter Loan
Agreement dated December 11, 1995, as amended by First Amendment to Letter Loan
Agreement dated January 31, 1996, a Second Amendment to Letter Loan Agreement
dated effective August 1, 1996, and a Third Amendment to Letter Loan Agreement
dated effective November __, 1996 (collectively, the "Loan Agreement"; the terms
--------------
defined therein being used herein as therein defined unless otherwise defined
herein); and
WHEREAS, Borrower and Lender desire to amend certain terms and provisions
of the Loan Agreement to modify and increase the allowable inventory
overadvances from $1,500,000.00 to $2,000,000.00, and to move up the date under
which overadvances are allowed from February 1st through September 30th.
A G R E E M E N T:
- - - - - - - - -
NOW, THEREFORE, in consideration of the mutual promises herein contained
and other good and valuable consideration, the receipt of which is hereby
acknowledged, Borrower and Lender hereby agree to amend the Loan Agreement as
hereinafter set forth.
1. Amendment to Loan Agreement. The Loan Agreement is, effective the
---------------------------
date hereof, and subject to the satisfaction of the conditions precedent set
forth in Section 2 hereof, hereby amended as follows:
(a) Section 6(a) is deleted in its entirety and the following is
substituted therefor:
"(a) Permit its Net Worth to be less than (i) ($2,500,000) from
the date hereof until July 31, 1996, (ii) ($1,500,000) from August 1, 1996
through September 30, 1996, (iii) $100,000 from October 1, 1996 through
January 30, 1998, and (iv) for each annual period thereafter beginning
January 31, 1998, $1,500,000 plus the Net Worth required for the previous
----
annual period; as used herein, the term "Net Worth" shall mean the total
---------
consolidated assets of Borrower, plus all subordinated debt, plus all notes
and accounts receivable from Tommy Moss (collectively, the "Moss Note"),
---------
minus (A) its total consolidated liabilities (including contingent
-----
liabilities), (B) all notes receivable from shareholders and affiliates
(other than the Moss Note), and (C) other items deducted in arriving at net
worth; provided, however, upon Borrower's delivery to Hibernia of the
-----------------
January 31, 1997 scheduled $1,500,000 payment on the Hibernia portion of
the Subordinated Indebtedness, the foregoing Net Worth requirements shall
thereafter be reduced by such $1,500,000."
<PAGE>
(b) Schedule A, Definition of "Borrowing Base" is deleted in its
entirety and the following is substituted therefor:
"A. "Borrowing Base", as used herein, shall mean the sum of: (i)
eighty percent (80%) of Borrower's Eligible Accounts (as defined below)
outstanding on the date of a request for a Loan advance; plus (ii) fifty
----
percent (50%) of Borrower's Net Security Value of Domestic Inventory (as
defined below); provided, however, during the period from February 1st
through September 30th of each year, advances exceeding the Borrowing Base
(the "Over-Advance") will be allowed provided that the aggregate amount of
------------
the Over-Advance does not exceed the lesser of (i) the sum of eighty
percent (80%) of Eligible Accounts plus one hundred percent (100%) of
----
Domestic Eligible Inventory, or (ii) $2,000,000."
(c) Schedule "B" is hereby replaced by that which is attached hereto
indicating that the Over-advance (maximum) available under the Revolving Note is
increased to $2,000,000.00.
2. Conditions of Effectiveness. This Amendment shall become effective
---------------------------
when, and only when, Lender shall have received counterparts of this Amendment
executed by Borrower, and Section 1 hereof shall become effective when, and only
when, Lender shall have additionally received all of the following:
(a) $5,000.00 loan modification fee;
(b) Certificates of the Boards of Directors of Borrower and Rosie
Acquisition, L.L.C. ("Guarantor") authorizing the execution, delivery and
---------
performance of this Amendment, and the matters contemplated hereby;
(c) Counterparts of the consent appended hereto (the "Consent of
----------
Guarantor") executed by Guarantor; and
- ---------
(d) Any and all other documentation as Lender may reasonably require.
3. Representations and Warranties of Borrower. Borrower represents and
------------------------------------------
warrants as follows:
(a) Borrower is duly authorized and empowered to execute, deliver and
perform this Amendment and all other instruments referred to or mentioned herein
to which it is a party, and all action on its part requisite for the due
execution, delivery and the performance of this Amendment has been duly and
effectively taken. This Amendment, when executed and delivered, will constitute
valid and binding obligations of Borrower enforceable in accordance with its
terms. This Amendment does not violate any provisions of Borrower's Articles of
Incorporation, By-Laws, or any contract, agreement, law or regulation to which
Borrower is subject, and does not require the consent or approval of any
regulatory authority or governmental body of the United States or any state.
(b) The representations and warranties made by Borrower in the Loan
Agreement are true and correct as of the date of this Amendment.
-2-
<PAGE>
(c) No event has occurred and is continuing which constitutes an Event
of Default or would constitute an Event of Default but for the requirement that
notice be given or time elapse or both.
4. Reference to and Effect on the Security Instruments.
---------------------------------------------------
(a) Upon the effectiveness of Section 1 hereof, on and after the date
hereof each reference in the Loan Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import, and each reference in the other
Security Instruments (hereinafter defined) to the Loan Agreement, shall mean and
be a reference to the Loan Agreement as amended hereby.
(b) Except as specifically amended above, the Loan Agreement and all
other instruments securing or guaranteeing Borrower's obligations to Lender (the
"Security Instruments") shall remain in full force and effect and are hereby
- ---------------------
ratified and confirmed. Without limiting the generality of the foregoing, the
Security Instruments and all collateral described therein do and shall continue
to secure the payment of all obligations of Borrower under the Loan Agreement,
as amended hereby, and under the other Security Instruments.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of Lender under any of the Security Instruments, nor constitute
a waiver of any provision of any of the Security Instruments.
5. Waiver. As additional consideration for the execution, delivery and
------
performance of this Amendment by the parties hereto and to induce Lender to
enter into this Amendment, Borrower and Guarantor warrant and represent to
Lender that no facts, events, statuses or conditions exist or have existed
which, either now or with the passage of time or giving of notice, or both,
constitute or will constitute a basis for any claim or cause of action against
Lender or any defense to (a) the payment of any obligations and indebtedness
under the Notes and/or the Security Instruments or (b) the performance of any of
their obligations with respect to the Notes and/or the Security Instruments, and
in the event any such facts, events, statuses or conditions exist or have
existed, Borrower and Guarantor unconditionally and irrevocably waive any and
all claims and causes of action against Lender and any defenses to their payment
and performance obligations in respect to the Notes and the Security
Instruments.
6. Costs and Expenses. Borrower agrees to pay on demand all costs and
------------------
expenses of Lender in connection with the preparation, reproduction, execution
and delivery of this Amendment and the other instruments and documents to be
delivered hereunder, including the reasonable fees and out-of-pocket expenses of
counsel for Lender. In addition, Borrower shall pay any and all fees payable or
determined to be payable in connection with the execution and delivery, filing
or recording of this Amendment and the other instruments and documents to be
delivered hereunder, and agrees to save Lender harmless from and against any and
all liabilities with respect to or resulting from any delay in paying or
omission to pay such fees.
7. Execution in Counterparts. This Amendment may be executed in any
-------------------------
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute but one and the same
instrument.
-3-
<PAGE>
8. Governing Law. This Amendment shall be governed by and construed in
-------------
accordance with the laws of the State of Texas.
9. Final Agreement. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL
---------------
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
duly executed in multiple counterparts, each of which is an original instrument
for all purposes, all as of the day and year first above written.
BORROWER:
DSI TOYS, INC.
By: /s/ M. D. Davis
-------------------------------------
Name: M. D. Davis
-----------------------------------
Title: CEO
----------------------------------
LENDER:
BANK ONE, TEXAS, N.A.
By: /s/ John Elam
-------------------------------------
Name: John Elam
-----------------------------------
Title: VP
----------------------------------
GUARANTOR:
ROSIE ACQUISITION, L.L.C.
By: /s/ M. D. Davis
-------------------------------------
Name: M. D. Davis
-----------------------------------
Title: President
----------------------------------
to evidence its acknowledgment of the
waiver set forth in Paragraph 5 hereof
-4-
<PAGE>
CONSENT OF GUARANTOR
Dated effective as of January 31, 1997
The undersigned, ROSIE ACQUISITION, L.L.C., as the Guarantor referred to in
the foregoing Amendment, hereby consents to the foregoing Amendment and hereby
confirms and agrees that (i) the guaranty in effect on the date hereof to which
it is a party is, and shall continue to be, in full force and effect and is
hereby confirmed and ratified in all respects except that, upon the
effectiveness of, and on and after the date of, the Amendment, all references in
the guaranty to the Loan Agreement shall mean the Loan Agreement as amended by
the Amendment and (ii) the guaranty does, and shall continue to, guarantee the
payment by the Borrower of its obligations under the Loan Agreement as amended
by the Amendment.
ROSIE ACQUISITION, L.L.C.
By: /s/ M. D. Davis
-------------------------------------
Name: M. D. Davis
-----------------------------------
Title: President
----------------------------------
<PAGE>
SCHEDULE "B"
------------
BORROWING BASE REPORT
---------------------
AND COMPLIANCE CERTIFICATE
--------------------------
<TABLE>
<CAPTION>
<C> <S> <C>
I. Total Accounts Receivable of Borrower: $______________
Less: Ineligible Accounts (as detailed on
attachment) - $______________
Eligible Accounts Receivable = $______________
II. Total Inventory: $______________
Less: Inventory Deductions - $______________
Eligible Inventory: = $______________
III. 80% x Domestic Eligible Accounts Receivable $______________
50% x Domestic Eligible Inventory: + $______________
Borrower's Loan Limit: = $______________
(maximum $9,000,000)
IV. Current Principal Balance: $______________
V. Available Funds: $______________
VI. Advance Request: $______________
VII. Over-Advance (maximum $2,000,000) + $______________
VIII. Total Outstanding After Advance (Maximum $9,000,000) $______________
------------------------------------------
I. Current Ratio
II. Tangible Net Worth $______________
III. Debt to Worth Ratio _______________
IV. Debt Service Coverage _______________
------------------------------------------
</TABLE>
The undersigned officer of Borrower, hereby certifies to Lender that (i)
the computations set forth above are true, correct and complete as of the date
set forth above or as of the date of execution hereof, as the case may be, (ii)
such computations have been made in full compliance with and conformity to the
Letter Loan Agreement (the "Loan Agreement") between Borrower and Lender, (iii)
--------------
the matters set forth in Paragraph 3 of the Loan Agreement are true and correct,
and (iv) Borrower is not in default under the Loan Agreement.
All capitalized terms used herein which have been defined in the Loan
Agreement have been used in accordance with the definitions ascribed to them in
the Loan Agreement.
EXECUTED this ____ day of _____________, 19___.
DSI TOYS, INC.
By:_____________________________
Name:___________________________
Title:__________________________
<PAGE>
EXHIBIT 11
DSI TOYS, INC. AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Primary earnings per
share:
Net income (in
thousands)............ $ 907 $ 362 $ 969 $ 2,327 $ 2,151
Average common shares
outstanding during the
period................ 3,500,000 3,500,000 3,500,000 3,500,000 3,500,000
Add incremental shares
from assumed exercise
of warrants using the
treasury stock method
at average price...... 239,146
---------- ---------- ---------- ---------- ----------
3,500,000 3,500,000 3,500,000 3,500,000 3,739,146
---------- ---------- ---------- ---------- ----------
Earnings per common
share-primary......... $ 0.26 $ 0.10 $ 0.28 $ 0.66 $ 0.58
========== ========== ========== ========== ==========
Fully diluted earnings
per share:
Net income (in
thousands)............ $ 907 $ 362 $ 969 $ 2,327 $ 2,151
Average common shares
outstanding during the
period................ 3,500,000 3,500,000 3,500,000 3,500,000 3,500,000
Add incremental shares
from assumed exercise
of warrants using the
treasury stock method
at ending price....... 294,376
---------- ---------- ---------- ---------- ----------
3,500,000 3,500,000 3,500,000 3,500,000 3,794,376
---------- ---------- ---------- ---------- ----------
Earnings per common
share-fully-diluted... $ 0.26 $ 0.10 $ 0.28 $ 0.66 $ 0.57
========== ========== ========== ========== ==========
Supplemental earnings
per share:
Earnings used in
primary EPS
calculation (in
thousands)............ $ 2,151
Add back interest on
debt to be repaid from
proceeds
(in thousands)........ 1,768
Less - income tax
effect at 36% (in
thousands)............ (636)
----------
Earnings used in
supplemental EPS
calculation (in
thousands)............ 3,283
----------
Shares used in primary
EPS calculation....... 3,739,146
Plus shares issued to
retire debt........... 1,821,192
----------
Shares used in
supplemental EPS
calculation........... 5,560,338
----------
Supplemental earnings
per share............. $ 0.59
==========
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES
Subsidiary Jurisdiction of Organization
- ---------- ----------------------------
DSI (HK) Ltd. Hong Kong
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated March 21, 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
March 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENT INCLUDED ELSEWHERE IN THE PROSPECTUS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JAN-31-1996 JAN-31-1997
<PERIOD-START> FEB-01-1995 FEB-01-1996
<PERIOD-END> JAN-31-1996 JAN-31-1997
<CASH> 2,810,455 1,651,992
<SECURITIES> 0 0
<RECEIVABLES> 5,291,923 4,988,155
<ALLOWANCES> (68,477) (104,781)
<INVENTORY> 3,409,962 4,615,087
<CURRENT-ASSETS> 13,744,152 12,974,642
<PP&E> 3,769,064 4,031,755
<DEPRECIATION> (2,254,968) (2,841,257)
<TOTAL-ASSETS> 17,389,603 16,303,901
<CURRENT-LIABILITIES> 10,233,977 10,354,254
<BONDS> 18,187,702 14,203,108
0 0
0 0
<COMMON> 3,505,283 3,505,283
<OTHER-SE> (15,087,346) (12,927,744)
<TOTAL-LIABILITY-AND-EQUITY> 17,389,603 16,303,901
<SALES> 63,146,080 63,219,212
<TOTAL-REVENUES> 63,146,000 63,219,212
<CGS> 43,428,075 42,023,044
<TOTAL-COSTS> 43,428,075 42,023,044
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 700,986 2,599,942
<INCOME-PRETAX> 3,776,301 3,371,273
<INCOME-TAX> 1,449,677 1,220,000
<INCOME-CONTINUING> 2,326,624 2,151,273
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,326,624 2,151,273
<EPS-PRIMARY> .66 .58
<EPS-DILUTED> .66 .57
</TABLE>
