SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: COMMISSION FILE NUMBER:
JANUARY 31, 1999 0-22545
DSI TOYS, INC.
(Exact name of Registrant as specified in its charter)
TEXAS 74-1673513
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1100 WEST SAM HOUSTON PARKWAY NORTH
HOUSTON, TEXAS 77043
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (713) 365-9900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.01 par value Nasdaq
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April, 26, 1999 was $12,856,975. As of April 26, 1999, there
were 6,566,038 shares of common stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the registrant's 1999 Annual
Meeting of Stockholders to be held on May 24, 1999 are incorporated by reference
in Part III of this Form 10-K.
<PAGE>
TABLE OF CONTENTS
Page
Safe Harbor Statement........................................................1
Part I
Item 1. Business.............................................................1
Item 2. Properties..........................................................11
Item 3. Legal Proceedings...................................................12
Item 4. Submission of Matters to a Vote of Security Holders.................12
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters.........................................................13
Item 6. Selected Consolidated Financial Data................................14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................15
Item 8. Financial Statements and Supplementary Data.........................20
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................21
Part III
Item 10. Directors and Executive Officers of the Registrant...............22
Item 11. Executive Compensation...........................................22
Item 12. Security Ownership of Certain Beneficial Owners and Management...22
Item 13. Certain Relationships and Related Transactions...................22
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K......................................................22
Signatures..................................................................23
Index to Consolidated Financial Statements and Schedule....................F-1
Index to Exhibits..........................................................E-1
-i-
<PAGE>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995: STATEMENTS IN THIS REPORT THAT ARE NOT HISTORICAL FACTS, INCLUDING
STATEMENTS ABOUT PLANS AND EXPECTATIONS REGARDING PRODUCTS AND OPPORTUNITIES,
DEMAND AND ACCEPTANCE OF NEW AND EXISTING PRODUCTS, CAPITAL RESOURCES AND FUTURE
FINANCIAL CONDITION AND RESULTS ARE FORWARD-LOOKING. FORWARD-LOOKING STATEMENTS
INVOLVE RISKS AND UNCERTAINTIES, WHICH MAY CAUSE THE COMPANY'S ACTUAL RESULTS IN
FUTURE PERIODS TO DIFFER MATERIALLY AND ADVERSELY FROM THOSE EXPRESSED. THESE
UNCERTAINTIES AND RISKS INCLUDE CHANGING CONSUMER PREFERENCES, LACK OF SUCCESS
OF NEW PRODUCTS, LOSS OF THE COMPANY'S CUSTOMERS, LIQUIDITY OF THE COMPANY,
COMPETITION, AND OTHER FACTORS DISCUSSED IN THIS REPORT AND FROM TIME TO TIME IN
THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
EXCEPT AS OTHERWISE INDICATED, REFERENCES TO THE "COMPANY" REFER TO DSI
TOYS, INC. AND ITS WHOLLY OWNED SUBSIDIARY, DSI (HK) LTD. ("DSI(HK)"). 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 1998 IS A REFERENCE TO THE FISCAL YEAR ENDED JANUARY 31, 1999).
PART I
ITEM 1. BUSINESS
GENERAL
The Company designs, develops, markets and distributes 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-controlled 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 product line to
major toy retailers by emphasizing 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 molds and products
incorporating trademarks licensed to the Company.
Traditionally a supplier of juvenile audio products and boys' toys, the
Company has diversified its product offerings in recent years, primarily through
its expansion into the girls' toys category with the introduction of the
Rosie(R) doll in fiscal 1995, into radio-controlled vehicles with the
introduction of the Kawasaki(R) Ninja(R) Supergyro(TM) motorcycle in fiscal 1997
and the Burnin' Thunder(TM) Super Sound R/C vehicle in 1998, into action games
with the introduction of Hoppin' Poppin' Spaceballs(R) in fiscal 1997, and into
construction sets with the introduction of BlockMen(TM) in fiscal 1998.
The Company offers several licensed products under the Kawasaki(R) brand
name, including musical instruments and radio-controlled vehicles. The Company
also has developed and currently is marketing products incorporating several
in-house brand names, including Tech-Link(TM) (walkie-talkies), LA Rock(R)
(musical toys and audio products), American Frontier(TM) (western role play
toys), BlockMen(TM) (construction sets), and My Music Maker(R) (musical toys and
pre-school audio products). The Company believes that it is the leading supplier
of walkie-talkies to United States toy retailers.
The Company sells primarily to retailers, including mass merchandising
discounters such as Wal-Mart, Kmart and Target, specialty toy retailers such as
Toys "R" Us, Kay-Bee Toy & Hobby, F.A.O. Schwarz, Zany Brainy, Noodle Kidoodle
and QVC, and deep discount stores such as Family Dollar Stores, Inc.,
Consolidated Stores Corporation and Value City Department Stores, Inc. Although
the
-1-
<PAGE>
Company's sales have been made primarily to customers based in the United
States, international net sales accounted for approximately 21% of the Company's
net sales during fiscal 1998.
Approximately 72% of the Company's net sales (by dollar volume) were made
FOB Asia during fiscal 1998. Products sold FOB Asia are shipped directly to
customers from the factory and are not carried by the Company in inventory. The
Company also maintains an inventory of certain products in its Houston, Texas
facilities, principally to support sales to the Company's customers of
continuous stock items that are offered by the customers on a year-round basis.
On April 15, 1999, the Company entered into a Stock Purchase and Sale
Agreement (the "Stock Purchase Agreement") with MVII, LLC, a California limited
liability company controlled by Tom Martin, which contemplates several related
transactions: (i) MVII purchased 566,038 shares of common stock from the Company
for $1.2 million on April 15, 1999; (ii) MVII commenced a tender offer to
purchase up to 1.6 million shares of the outstanding common stock of the Company
at $4.38 per share in cash (the "Offer") on April 21, 1999; and (iii) subject to
shareholder and other approvals, MVII will purchase an additional 1,792,453
shares of common stock (subject to upward adjustments not to exceed in the
aggregate 140,000 shares) from the Company for $3.8 million simultaneously with
the purchase of shares in the tender offer. Upon consummation of the
transactions, MVII will own more than 47% of the Company's outstanding shares
and will be entitled to nominate four of the six members of the board of
directors. (These transactions are described in greater detail in the Company's
Schedule 14D-9 filed with the Securities and Exchange Commission on April 22,
1999.)
PRODUCTS
The following table depicts the Company's net sales, as a percentage of
total net sales, by product category for the fiscal years indicated.
Product Category
1998 1997 1996
-------- -------- --------
Juvenile audio products .................... 72.6% 50.2% 49.5%
Girls' toys ................................ 5.8 31.0 40.8
Boys' toys ................................. 14.5 9.8 6.0
Other ...................................... 7.1 9.0 3.7
-------- -------- --------
Total ................................ 100.0% 100.0% 100.0%
======== ======== ========
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 products (i) that are
licensed from outside inventors and designers, (ii) that incorporate trademarks
licensed by the Company, (iii) that are designed in-house or (iv) for which the
Company owns the molds to manufacture the toys. 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 47%, 58%, and 59% of the Company's net sales for fiscal 1998,
1997, and 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 packaging and marketing to differentiate the product from other toys.
The Company often markets these toys under in-house brands,
-2-
<PAGE>
such as Digi-Tech(TM), My Music Maker(R), and LA Rock(R). Non-proprietary
products accounted for approximately 53%, 42%, and 41% of the Company's net
sales for fiscal 1998, 1997, and 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
Burnin' Thunder(TM) Super Sound R/C vehicle, accounted for approximately 24%,
46%, and 41% of the Company's net sales during fiscal 1998, 1997, and 1996,
respectively. The acquisition of licenses typically requires the payment of
non-refundable advances and/or guaranteed minimum royalties.
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 a complete line of electronic musical
instruments, including keyboards, and the Kawasaki(R) Ninja(R) Supergyro(TM)
Motorcycle.
Effective November 1, 1998, the Company entered into a consumer products
license agreement with Titan Sports, Inc. authorizing the Company to use the
intellectual property associated with the World Wrestling Federation(R),
including the name, the logo, and the names, nicknames and identifying indicia
of the individuals who perform at World Wrestling Federation(R) events in
connection with the sale, marketing and distribution of certain of the Company's
products.
On December 1, 1998, the Company entered into a retail license agreement
with Discovery Communications, Inc. authorizing the Company to use the Marks
Discovery Channel(R), Explore Your World(R), Discovery Facts(R), and Reality
Rules(R) as well as Discovery Channel(R) photography, images and artwork in
connection with the sale, marketing and distribution of certain of the Company's
products.
As of January 31, 1999, the Company was required to make an aggregrate of
approximately $170,000 in payments of guaranteed royalties under certain
licenses in fiscal 1999 and $590,000 thereafter through fiscal 2002.
The Company believes that by developing licensed products based
principally on popular, classic properties and trademarks, it can establish a
licensed product portfolio that is characterized by a longer product life cycle
than is typical in the toy industry. The Company intends to continue to develop
its licensed product line by targeting licensing opportunities where it can take
advantage of licensor advertising, publicity and media exposure. CUSTOMERS
The Company made sales to over 450 different customers in approximately
45 countries during fiscal 1998. The table below sets forth the Company's net
sales by geographic area as a percentage of total net sales for the specified
fiscal years.
Geographic Area 1998 1997 1996
-------- -------- --------
United States .............................. 79.0% 80.6% 81.4%
Europe ..................................... 12.8 10.8 9.2
Canada and Mexico .......................... 4.0 4.2 3.7
Australia and New Zealand .................. 2.3 2.4 2.4
South and Central America .................. 1.1 1.2 1.7
Asia ....................................... 0.5 0.3 1.4
Middle East and Africa ..................... 0.3 0.5 0.2
-------- -------- --------
Total ................................... 100.0% 100.0% 100.0%
======== ======== ========
-3-
<PAGE>
The Company's principal customers are retailers, including mass
merchandising discounters such as Wal-Mart, Kmart and Target, specialty toy
retailers such as Toys "R" Us, Kay Bee Toy & Hobby, F.A.O. Schwarz, Zany Brainy,
Noodle Kidoodle, and QVC, and deep discount stores such as Family Dollar Stores,
Inc., Consolidated Stores Corporation and Value City Department Stores, Inc. The
Company's top five customers accounted for approximately 48.1% of the Company's
net sales in fiscal 1998. Wal-Mart (18.7%) and Toys "R" Us (10.6%) each
accounted for more than 10% of the Company's net sales during fiscal 1998. For
the prior two fiscal years, the only customers that accounted for more than 10%
of the Company's net sales were Toys "R" Us (22.2%) and Wal-Mart (16.6%) for
fiscal 1997, and Wal-Mart (19.5%), Kmart (13.7%) and Toys "R" Us (12.0%) for
fiscal 1996. During fiscal 1998, 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, decreased as a percentage of the Company's net sales to 46.3%
compared to 57.3% during fiscal 1997 and 54.5% during fiscal 1996. The Company
does not have long-term contractual arrangements with its customers.
SALES AND MARKETING
The Company's selling strategy 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.
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 and sales department 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 also maintains a showroom at
its headquarters in Houston.
As is customary in the toy industry, 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 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
In recent years, the Company allocated 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 and fiscal 1997, using television commercials to promote the Rosie(R) and
Pattie(R) dolls in fiscal 1996, and Rosie(R), Baby Pick Me Up(TM), Dreamie
Sweets(R), and Hoppin Poppin' Spaceballs(R) in fiscal 1997. Although the Company
intends to continue to utilize a promotional strategy that includes advertising
of certain proprietary products, spending on television advertising in fiscal
1998 was significantly reduced. The Company will continue to expend portions of
its advertising budget to promote its products through the Internet, public
relations, special offers, retail catalogs, advertisement in trade magazines,
cooperative promotional efforts of retailers, and limited television advertising
of certain proprietary products.
-4-
<PAGE>
MANUFACTURING
The Company annually contracts with over 30 independent manufacturers
located principally in the Peoples' Republic of China (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 1998 were GMT Industrial Ltd. (29.8%), which manufactured
walkie-talkies and musical toy products for the Company and Loyal Technology Co.
Ltd. (24.4%), which manufactured walkie-talkies and radios for the Company.
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 delivery 60 to 90 days after its orders are
booked.
The Company's Hong Kong subsidiary, DSI(HK), monitors manufacturing
operations, including quality control, production scheduling and order
fulfillment from the manufacturers. DSI(HK) utilizes a quality control and
assurance staff of degreed engineers and inspectors.
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 textiles. The Company believes that an
adequate supply of materials used in the manufacture and packaging of its
products is readily available from existing and alternative sources at
reasonable prices.
DISTRIBUTION
The Company distributes its products either through FOB Asia sales or
through direct sales made from inventory maintained at its Houston facilities.
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.
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 and are stocked by the Company in Houston
for peak season back-up and continuous supply. The Company also maintains
inventory which is intended for specific customers for peak holiday season
support as well as some inventory which is available for smaller retailers and
for opportunistic selling strategies.
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 EDI programs, 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 serve
its customers.
COMPETITION
The toy industry is highly competitive. Dun & Bradstreet categorizes over
1,000 companies as toy manufacturers. Competitive factors include product
appeal, new product introductions industry wide,
-5-
<PAGE>
space allocation by the major retailers, 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. and Hasbro, Inc., and the Company considers Alaron, Inc.,
Play-By-Play Toys & Novelties, Inc., Toy Biz, Inc., KIDdesigns, Inc., and MGA
Entertainment 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 that will be shipped FOB Asia 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 three fiscal years, an average of 88% 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 three fiscal years, an average of 56% of the Company's annual Houston-based
sales have occurred during the months of August through November.
GOVERNMENT AND INDUSTRY REGULATION
The Company is subject to the provisions of the Federal Hazardous
Substances Act and the Federal Consumer Product Safety Act. Such Acts empower
the United States Consumer Products Safety Commission (the "CPSC") to protect
the public from hazardous goods. The CPSC has the authority to exclude from the
market goods that are found to be hazardous and require a manufacturer to
repurchase such goods under certain circumstances. The Company sends samples of
all of its marketed products to independent laboratories to test for compliance
with the CPSC's rules and regulations, as well as with the product standards of
the Toy Manufacturers of America, Inc. (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 meet 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 Most
Favored Nation ("MFN") countries (including the PRC). Increases in quotas,
duties, tariffs or other changes or trade restrictions which may be imposed in
the future could 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 and would
most likely adversely affect Company's financial condition and results of
operations.
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 PRC 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
-6-
<PAGE>
duties by shifting its manufacturing to other countries, but there can be no
assurance that the Company would be successful in this regard or that the
Company would not be adversely affected.
INTELLECTUAL PROPERTY
The Company has been utilizing the mark "DSI" since 1991, believes it has
common law trademark rights to the mark, and has filed a trademark application
with the United States Patent and Trademark Office. The Company believes it has
the rights to use the mark in the manner in which it is currently used.
The Company has rights to use certain United States registered trademarks
for various products and product categories currently being marketed including:
Air Guitar(R), Big Bam Boom(R), LA Rock(R), and Rosie(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 DSI Electronics(TM), American
Frontier(TM), BlockMen(TM), Tech-Link(TM), Sax-a-Boom(TM), Space Squad(TM), and
Sweet Faith(TM) in the United States. The Company believes it has the rights to
use these marks for the product lines on which they are, or will be, used.
HUMAN RESOURCES
As of January 31, 1999, the Company had a total of 70 employees, of whom
39 are employees of DSI(HK) and are based in Hong Kong and 31 are employees of
DSI and are based in Houston. Of the Houston based employees, 6 are engaged in
sales and marketing, 6 are involved in design and development, 5 are involved in
warehousing and distribution and 14 are involved in finance and administration.
Of the Hong Kong based employees, 8 are engaged in sales and merchandising, 11
are engaged in engineering, including product quality assurance and quality
control, 11 are involved in finance and administration and 9 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.
RISK FACTORS
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, if at all. There can be no assurance that (i) any of the
Company's current successful 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 is 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 1998, the Company's
five largest customers accounted for 48.1% of the Company's net sales. Sales to
Toys "R" Us, Wal-Mart and Kay-Bee Toy & Hobby, the Company's three largest
customers, aggregated 37.2% 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 a large portion of the Company's sales are concentrated in the Company's
five largest customers and these customers represent a significant share of the
market for toy sales to consumers, 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".
-7-
<PAGE>
LIQUIDITY. Effective February 2, 1999, the Company entered into an
agreement with Sunrock Capital Corp. pursuant to which Sunrock provides a
revolving line of credit for up to $10 million (the "Revolver"). Borrowings
under the Revolver are utilized by the Company to finance accounts receivable,
inventory, and other operating and capital requirements. The Revolver matures
February 2, 2002 and contains covenants relating to the condition of the
Company. If the Company fails to maintain compliance with the financial covenant
contained in the Revolver, the maturity date will be accelerated.
On April 15, 1999, the Company entered into a Stock Purchase Agreement
with MVII, LLC, a California limited liability company controlled by Tom Martin,
which contemplates several related transactions: (i) MVII purchased 566,038
shares of common stock from the Company for $1.2 million on April 15, 1999; (ii)
MVII commenced a tender offer to purchase up to 1.6 million shares of the
outstanding common stock of the Company at $4.38 per share in cash on April 21,
1999; and (iii) subject to shareholder and other approvals, MVII will purchase
an additional 1,792,453 shares of common stock (subject to upward adjustments
not to exceed in the aggregate 140,000 shares) from the Company for $3.8 million
simultaneously with the purchase of shares in the tender offer. Upon
consummation of the transactions, MVII will own more than 47% of the Company's
outstanding shares and will be entitled to nominate four of the six members of
the board of directors. (These transactions are described in greater detail in
the Company's Schedule 14D-9 filed with the Securities and Exchange Commission
on April 22, 1999.)
DEPENDENCE ON INDEPENDENT DESIGNERS, LICENSES AND OTHER PROPRIETARY
RIGHTS. For most 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 1998, net sales of
products developed and sold under the Company's license agreements accounted for
41% of the Company's net sales, including 25% of the Company's net sales
attributable to sales of products incorporating the Kawasaki(R) trademark. The
Company's existing license agreements generally have terms ranging from 2 to 30
years. The Company's license agreement with Kawasaki Motors Corp., USA was
extended in June 1998 for a four-year period, through December 31, 2002. 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 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
-8-
<PAGE>
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 also 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. As is customary in the toy industry, 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 1998, 80% 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 could
adversely affect results of operations for the full year. 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 PRC. According to reports published
by the TMA, the PRC is the world's largest producer of toys. The Company does
not have any long-term contracts with its manufacturers. 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 1998, two
manufacturers accounted for approximately 54% of the Company's purchases of
products. The loss of either of these manufacturers, or a substantial
interruption of the Company's manufacturing arrangements with either 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".
-9-
<PAGE>
Currently, the PRC has 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. 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 and would most likely adversely
affect Company's financial condition and results of operations. The imposition
of such duties could have a material adverse effect on the Company. See
"Business--Tariffs and Duties".
ACQUISITION RISKS. The Company may from time to time evaluate and pursue
acquisition opportunities on terms management considers favorable to the
Company. A successful acquisition involves an assessment of the business
condition and prospects of the acquisition target, which includes factors beyond
the Company's control. This assessment is necessarily inexact and its accuracy
is inherently uncertain. In connection with such an assessment, the Company
performs a review it believes to be generally consistent with industry
practices. This review, however, will not reveal all existing or potential
problems, nor will it permit a buyer to become sufficiently familiar with the
acquisition target to assess fully its deficiencies. There can be no assurance
that any such acquisition would be successful or that the operations of the
acquisition target could be successfully integrated with the Company's
operations. Any unsuccessful acquisition could have a material adverse effect on
the Company.
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.
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 $2.0 million per
occurrence, with a $5.0 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 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
-10-
<PAGE>
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. As of January 31, 1999, the directors and
officers of the Company and their affiliates beneficially owned, or had the
right to vote, in the aggregate approximately 35% of the outstanding common
stock. In the event the Management Shareholders (M. D. Davis, B. B. Conrad, J.
R. Crosby, J. N. Matlock and D. A. Smith) do not tender any shares owned by them
into the Offer and the minimum tender condition is otherwise met, there is a
possibility that, upon consummation of the transactions contemplated by the
Stock Purchase Agreement, including the Offer, MVII will be the beneficial owner
of, or have the right to vote, up to 68%, and Tom Martin, through his control of
MVII will beneficially own, or have the right to vote, up to 70% of the total
number of shares of common stock then outstanding (assuming (i) there are upward
adjustments in the aggregate of 140,000 shares, and (ii) no other shares are
issued), by virtue of MVII's and Martin's right to vote shares held by the
Management Shareholders pursuant to certain agreements and irrevocable proxies.
To the best of the Company's knowledge, all of the Management Shareholders
currently intend to tender Shares owned by them into the Offer. As a result of
such persons' ownership and/or control of common stock and their directorship
and management positions, they have significant influence over all matters
requiring approval by the shareholders of the Company, including the election of
directors.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the common stock
has been and may continue to be highly volatile and has been 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 Company's common stock will be
materially adversely affected. General market fluctuations may adversely affect
the market price of the Company's common stock.
ITEM 2. PROPERTIES
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 pursuant to a
lease that terminates on August 31, 2002. The base rental for this lease is
currently $18,433 per month ($4.81 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.
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.
-11-
<PAGE>
The Company leases 7,178 square feet of office and showroom space in Hong
Kong under a lease that commenced on March 23, 1998 and terminates in March
2001. The base rental for the lease term is $26,034 per month based on current
currency exchange rates ($43.52 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 expires May
31, 1999. The base rental for this lease is currently $993 per month ($11.03 per
square foot on an annual basis). The Company has renewed this lease for an
additional three-year term from June 1, 1999 through May 31, 2002. The base
rental for the first year of the renewal term is $1033 per month ($11.47 per
square foot on an annual basis).
The Company leases a small storage facility in Hong Kong. From time to
time, the Company rents short-term warehouse space in Houston to accommodate
fluctuating storage needs.
ITEM 3. LEGAL PROCEEDINGS
Effective August 28, 1998 the Company entered into a confidential
agreement which settled all claims in the lawsuit brought by a former
independent sales representative for the Company (Anderson-Crawford Associates,
Inc., et al vs. DSI Toys, Inc., et al., CA. No. 286,815-401, Probate Court No. 3
of Harris County, Texas). The settlement did not have a material adverse effect
on either the Company's financial position or results of operations.
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. ITEM 4. SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of fiscal 1998.
-12-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is traded on The Nasdaq Stock Market's SmallCap
Market under the symbol "DSIT". Prior to August 17, 1998, the Company's common
stock was traded on The Nasdaq National Market. The table sets forth, for the
periods indicated, the reported high and low close sale prices of the Company's
common stock since May 29, 1997, the date of the Company's initial public
offering, as reported on The Nasdaq National Market and The Nasdaq SmallCap
Market:
HIGH LOW
-------- --------
Fiscal Year 1997:
2nd Quarter ....................... 8-1/16 7-1/16
3rd Quarter ....................... 9-7/8 4-7/16
4th Quarter ....................... 4-9/16 1-1/2
Fiscal Year 1998:
1st Quarter ....................... 1-5/8 2-7/8
2nd Quarter ....................... 15/16 2
3rd Quarter ....................... 13/16 1-3/4
4th Quarter ....................... 1-1/16 1-13/16
STOCKHOLDERS
According to the records of the Company's transfer agent, as of April
26, 1999, there were 91 holders of record of the Company's common stock. The
Company believes that a substantially larger number of beneficial owners hold
such shares in depository or nominee form.
DIVIDENDS AND DISTRIBUTIONS
The Company has never declared nor paid cash dividends to date on its
common stock and does not anticipate paying any cash dividends on its common
stock in the near future. In addition, the Company's credit facility prohibits
the payment of dividends.
-13-
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
the Company. The selected consolidated financial data were derived from the
Company's consolidated financial statements. All dollar amounts are stated in
thousands, except for per share data:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
--------------------------------------------------------
Statement of Operations Data: 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales ....................... $ 52,723 $ 73,624 $ 63,219 $ 63,146 $ 45,219
Income (loss) before income
taxes and extraordinary item .. (1,071) (7,034) 3,371 3,776 1,473
Income (loss) before
extraordinary item ............ (738) (4,705) 2,151 2,327 969
Net income (loss) ............... (738) (5,186) 2,151 2,327 969
Basic earnings (loss) per
share before extraordinary
item .......................... $ (.12) $ (.91) $ .61 $ .66 $ .28
Basic earnings (loss) per share . $ (.12) $ (1.00) $ .61 $ .66 $ .28
Diluted earnings (loss) per share
before extraordinary item ..... $ (.12) $ (.91) $ .58 $ .66 $ .28
Diluted earnings (loss)
per share .................... $ (.12) $ (1.00) $ .58 $ .66 $ .28
<CAPTION>
JANUARY 31,
--------------------------------------------------------
Balance Sheet Data: 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Working capital ................. $ 391 $ 6,265 $ 2,621 $ 3,510 $ 2,121
Total assets .................... 12,955 21,207 15,316 16,402 9,822
Long-term debt, including
capital leases ................ 2,541 7,495 14,203 18,188 17
Total liabilities ............... 10,549 18,049 24,738 27,984 4,675
Shareholders' equity (deficit) .. 2,405 3,159 (9,422) (11,582) 5,147
</TABLE>
-14-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
the financial statements and related notes contained elsewhere herein.
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. Historically, the
majority of the Company's sales have been made to customers based in the United
States. All of the Company's international sales are denominated in United
States dollars. Therefore, the Company is not subject to exchange rate risk with
respect to international sales.
In December 1995, a series of transactions (the "Recapitalization") was
consummated whereby the Company repurchased 77.7% of the then outstanding common
stock from the then sole shareholder of the Company for $22.2 million and issued
2,719,000 shares of common stock to a group of new investors for $3.8 million.
The Recapitalization resulted in the incurrence of an aggregate of $17.9 million
of additional indebtedness. The stock purchased by the Company from its former
sole shareholder is held as treasury stock. On June 3, 1997, the Company
completed its initial public offering of 2,500,000 shares of its common stock,
which resulted in net proceeds to the Company of $17.7 million. All of the net
proceeds were used to repay debt of the Company.
On April 15, 1999, the Company entered into a Stock Purchase Agreement
with MVII, LLC, a California limited liability company controlled by Tom Martin,
which contemplates several related transactions: (i) MVII purchased 566,038
shares of common stock from the Company for $1.2 million on April 15, 1999; (ii)
MVII commenced a tender offer to purchase up to 1.6 million shares of the
outstanding common stock of the Company at $4.38 per share in cash on April 21,
1999; and (iii) subject to shareholder and other approvals, MVII will purchase
an additional 1,792,453 shares of common stock (subject to upward adjustments
not to exceed in the aggregate 140,000 shares) from the Company for $3.8 million
simultaneously with the purchase of shares in the tender offer. Upon
consummation of the transactions, MVII will own more than 47% of the Company's
outstanding shares and will be entitled to nominate four of the six members of
the board of directors. (These transactions are described in greater detail in
the Company's Schedule 14D-9 filed with the Securities and Exchange Commission
on April 22, 1999.) All of the net proceeds of the purchase of 566,038 shares of
common stock from the Company were used to repay debt of the Company.
-15-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the Company's results of operations as a
percentage of net sales for the fiscal years indicated:
1998 1997 1996
------ ------ ------
Net sales ..................................... 100.0% 100.0% 100.0%
Cost of goods sold ............................ 79.8 75.1 66.5
------ ------ ------
Gross profit .................................. 20.2 24.9 33.5
Selling, general and administrative expenses .. 20.8 32.9 24.6
------ ------ ------
Operating income (loss) ....................... (0.6) (8.0) 8.9
Interest expense .............................. 1.6 1.8 4.1
Other income .................................. (0.2) (0.3) (0.5)
------ ------ ------
Income (loss) before income taxes and
extraordinary item ............................ (2.0) (9.5) 5.3
Provision for (benefit from) income taxes ..... 0.6 (3.1) 1.9
------ ------ ------
Income (loss) before extraordinary item ....... (1.4) (6.4) 3.4
Extraordinary item (net of tax) ............... -- (0.6) --
------ ------ ------
Net income (loss) ............................. (1.4) (7.0) 3.4
====== ====== ======
FISCAL YEAR 1998 COMPARED TO 1997
NET SALES. Net sales during fiscal 1998 decreased $20.9 million, or 28.4%,
to $52.7 million, from $73.6 million in fiscal 1997.
Net sales of juvenile audio products increased $1.3 million, or 3.5%, to
$38.3 million during fiscal 1998, from $37.0 million during fiscal 1997. The
increase was primarily attributable to continued strength in walkie-talkies and
musical keyboards, partially offset by a decline in pre-school audio products.
Net sales of girls' toys decreased $19.7 million, or 86.5%, to $3.1 million
during fiscal 1998, from $22.8 million during fiscal 1997. Sales for fiscal 1997
were driven principally by the TV promotion of three dolls (Baby Pick Me Up(R),
Dreamie Sweets(R) and Rosie(R)). Sales for 1998 were comprised principally of
sales of one new non-promoted doll (Baby Learns To Walk(TM)) and final closeouts
of 1997 doll inventory. Net sales of boys' toys increased $392,000, or 5.4%, to
$7.6 million during fiscal 1998 from $7.2 million during fiscal 1997. This
increase was attributable to the introduction of the BlockMen(TM) construction
sets and the new radio-controlled "Burnin' Thunder" (TM) car, partially offset
by a decrease in sales of the radio-controlled Kawasaki(R) Ninja(R) motorcycle.
Net sales of products in other categories decreased $2.9 million, or 43.4%, to
$3.7 million during fiscal 1998, from $6.6 million during fiscal 1997. The
decrease was due primarily to decreased sales of handheld electronic games and
Hoppin' Poppin' Spaceballs(R), an action game that was TV promoted in 1997.
International net sales decreased $3.2 million, or 22.3%, to $11.1 million
during fiscal 1998 from $14.3 million in fiscal 1997. The decline was due
primarily to decreased sales of TV promotable items, principally dolls.
International net sales were 21.0% of total sales for fiscal 1998 as compared to
19.4% of total sales in fiscal 1997.
GROSS PROFIT. Gross profit decreased $7.6 million, or 41.9%, to $10.7
million during fiscal 1998 from $18.3 million in fiscal 1997. Gross profit as a
percentage of net sales decreased to 20.2% during fiscal 1998 from 24.9% in
fiscal 1997. Such decrease was primarily due to decreased sales of TV-promoted
toys, principally dolls, which generally have higher gross margins to cover the
related costs of TV advertising.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $13.3 million, or 54.8%, to $11.0 million
during fiscal 1998 from $24.3 million in fiscal 1997. The decrease resulted
primarily from the decreased TV advertising expense during fiscal 1998.
-16-
<PAGE>
INTEREST EXPENSE. As a result of debt repayment using the proceeds from
the Company's initial public offering in June 1997, interest expense decreased
$485,000, or 35.7%, to $875,000 during fiscal 1998 from $1.4 million in fiscal
1997.
OTHER INCOME. Other income decreased $125,000, or 53.9%, to $107,000
during fiscal 1998 from $232,000 during fiscal 1997. In 1997, the Company
received interest income related to certain insurance proceeds. The effects of
foreign currency translation also contributed to the decrease.
EXTRAORDINARY ITEM. As a result of debt repayment using the net
proceeds of the Company's initial public offering, $481,000 of debt issuance
cost (net of tax) was written off in fiscal 1997
INCOME TAXES. In fiscal 1998, the Company incurred a loss before income
taxes and extraordinary item of $1.1 million, which resulted in a benefit from
income taxes of $333,000 compared to a $2.3 million benefit from income taxes
during fiscal 1997.
NET INCOME (LOSS). As a result of the foregoing factors, the Company's
net loss for fiscal year 1998 was $738,000 compared to a net loss of $5.2
million for fiscal 1997.
FISCAL YEAR 1997 COMPARED TO 1996
NET SALES. Net sales during fiscal 1997 increased $10.4 million, or 16.5%,
to $73.6 million, from $63.2 million in fiscal 1996.
Net sales of juvenile audio products increased $5.6 million, or 18.0%, to
$37.0 million during fiscal 1997, from $31.3 million during fiscal 1996. This
increase was due primarily to increased sales of walkie talkies. Net sales of
girls' toys decreased $3.0 million, or 11.6%, to $22.8 million during fiscal
1997, from $25.8 million during fiscal 1996. The decrease was due to decreased
sales of dolls primarily related to softness of large doll sales industry-wide.
Net sales of boys' toys increased $3.5 million, or 91.6%, to $7.2 million during
fiscal 1997 from $3.8 million during fiscal 1996. The growth in net sales of
boys' toys was primarily attributable to the newly introduced Kawasaki(R)
Ninja(R) Supergyro(TM) Motorcycle. Net sales of products in other categories
increased $4.3 million, or 183.5%, to $6.6 million during fiscal 1997, from $2.3
million during fiscal 1996. This increase was due primarily to the introduction
of the Hoppin' Poppin' Spaceballs(R) game.
International net sales increased $2.5 million, or 21.0%, to $14.3 million
during fiscal 1997 from $11.8 million in fiscal 1996. The growth was due
primarily to increased net sales to the United Kingdom, Canada, France, Spain,
and Australia and partially offset by decreased net sales to Germany and Japan.
International net sales were 19.4% of total sales for fiscal 1997 as compared to
18.6% of total sales in fiscal 1996.
GROSS PROFIT. Gross profit decreased $2.9 million, or 13.5%, to $18.3
million during fiscal 1997 from $21.2 million in fiscal 1996. Gross profit as a
percentage of net sales decreased to 24.9% during fiscal 1997 from 33.5% in
fiscal 1996. Such decrease was related primarily to the decrease in sales of
TV-promoted dolls, which generally have higher margins, and close-out sales of
the doll inventory at less than cost.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $8.7 million, or 55.7%, to $24.3 million
during fiscal 1997 from $15.6 million in fiscal 1996. The increase resulted
primarily from television advertising expenses related to the introduction of
several new products. The Company produced commercials and purchased significant
airtime for four products for fiscal 1997 as compared to two products for the
prior fiscal year.
INTEREST EXPENSE. As a result of debt repayment using the net proceeds of
the Company's initial public offering, interest expense decreased $1.2 million,
or 46.7%, to $1.4 million during fiscal 1997 from $2.6 million in fiscal 1996.
-17-
<PAGE>
OTHER INCOME. Other income decreased $113,000, or 32.7%, to $232,000
during fiscal 1997 from $345,000 during fiscal 1996. This decrease was due
primarily to decreased interest income on certain insurance proceeds.
EXTRAORDINARY ITEM. As a result of debt repayment using the net proceeds
of the Company's initial public offering, $481,000 of debt issuance cost (net of
tax) was written off.
INCOME TAXES. In fiscal 1997, the Company incurred a loss before income
taxes and extraordinary item of $7 million which resulted in a benefit from
income taxes of $2.3 million compared to a $1.2 million provision for income
taxes during fiscal 1996.
NET INCOME (LOSS). As a result of the foregoing factors, the Company's
net loss for fiscal year 1997 was $5.2 million compared to net income of $2.2
million for fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has funded its operations and capital
requirements by cash generated from operations and borrowings. The Company's
primary capital needs have consisted of acquisitions of inventory, financing
accounts receivable and capital expenditures for product development.
The Company's operating activities provided net cash of $6.3 million
during fiscal 1998, consisting primarily of decreases in accounts receivable and
inventories, and a net decrease in income taxes receivable and payable,
partially offset by decreases in accounts payable and accrued liabilities and an
increase in prepaid expenses. Net cash used in investing activities during
fiscal 1998 was $1.3 million and was the result of capital expenditures,
increases in other assets and the payment of life insurance premiums on behalf
of a shareholder. Net cash used by financing activities was $4.8 million during
fiscal 1998 and represented net payments under revolving lines of credit. The
Company's working capital at January 31, 1999 was $391,000 and unrestricted cash
was $554,000.
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, and the Revolver.
As a result of losses incurred in fiscal 1998, the Company was not in
compliance with certain of the covenants contained in its previous line of
credit with a commercial bank at yearend. However, on February 2, 1999, the
Company secured the Revolver. The Revolver replaces the Company's previous line
of credit. The new terms include interest at the bank's prime rate plus three
quarters of one percent (.75%) and maturity at February 2, 2002. The maximum
loan limit remains at $10 million, subject to the availability of sufficient,
eligible inventory and accounts receivable.
The Company's anticipated fiscal 1999 and 2000 operating cash requirements
include payment of approximately $2.8 million related to television
advertisements run during 1997. Such amount is due to two media companies and is
being paid in monthly installments through April 2000. The Company has budgeted
approximately $900,000 for capital expenditures, consisting primarily of
purchases of tools and molds, for fiscal 1999.
At April 20, 1999, the Company had an additional borrowing capacity of an
aggregate of $1.6 million under the Revolver and the Hong Kong Credit Facility.
Based on projected fiscal 1999 operating results, the Company believes that cash
flows from operations and the available borrowings under the Revolver and the
Hong Kong Credit Facility will be sufficient to meet the Company's operating
cash requirements and fund the Company's anticipated capital expenditures.
However, there can be no assurance that the Company will meet its projected
operating results, and accordingly, the Company is considering all of its
financing
-18-
<PAGE>
alternatives. 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. If the
transactions with MVII are consummated, the Company will receive an additional
equity infusion of $3.8 million.
On April 15, 1999, the Company entered into a Stock Purchase Agreement
with MVII, LLC, a California limited liability company controlled by Tom Martin,
which contemplates several related transactions: (i) MVII purchased 566,038
shares of common stock from the Company for $1.2 million on April 15, 1999; (ii)
MVII commenced a tender offer to purchase up to 1.6 million shares of the
outstanding common stock of the Company at $4.38 per share in cash on April 21,
1999; and (iii) subject to shareholder and other approvals, MVII will purchase
an additional 1,792,453 shares of common stock (subject to upward adjustments
not to exceed in the aggregate 140,000 shares) from the Company for $3.8 million
simultaneously with the purchase of shares in the tender offer. Upon
consummation of the transactions, MVII will own more than 47% of the Company's
outstanding shares and will be entitled to nominate four of the six members of
the board of directors. (These transactions are described in greater detail in
the Company's Schedule 14D-9 filed with the Securities and Exchange Commission
on April 22, 1999.)
The Company is obligated to make future minimum royalty payments under
certain of its license agreements. As of January 31, 1999, the Company was
required to make an aggregrate of approximately $170,000 in payments of
guaranteed royalties under certain licenses in fiscal 1999 and $590,000
thereafter through fiscal 2002.
As part of the Company's strategy, the Company will evaluate potential
acquisitions of other toy businesses or product lines that the Company believes
would complement its existing business. The Company has no present understanding
or agreement with respect to any acquisition.
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 generally commit to their holiday season purchases during the
first two calendar quarters and those orders are generally shipped to the
retailers' distribution centers on a scheduled basis from May through October.
During fiscal 1998, 80% of the Company's net sales were made during the
Company's second and third fiscal quarters (May through October), generally in
connection with retail sales for the Christmas holiday season. As a result of
the seasonality of the Company's business, the Company expects that it will
incur a loss in the first quarter and fourth quarter of each fiscal year even in
years in which the Company is profitable for the year.
INFLATION
The Company does not believe that inflation in the United States or Europe
in recent years has had a significant effect on its results of operations.
YEAR 2000
Many existing computer systems and programs process transactions using two
digits rather than four digits for the year of a transaction. Unless the
hardware and/or the software has been modified, a significant number of those
computer systems and programs may process a transaction with a date of the year
"2000" as the year "1900", which could cause the system or the program to fail
or create erroneous results before, on or after January 1, 2000 (the "Y2K
Issue").
The Company's principal computer systems consist of: (i) management
information software ("MIS") for accounts receivable, general ledger, payables,
order entry, sales reporting, inventory tracking, product distribution, and
production scheduling; (ii) electronic data interchange ("EDI") for
order-taking, invoicing and the like between the Company and its major
customers; and (iii) local area network and personal computer operating systems.
The MIS systems at the Company's Hong Kong subsidiary have been upgraded
and successfully tested to be Y2K compliant. The MIS systems at the Company's
U.S. headquarters are in the process of
-19-
<PAGE>
being upgraded, replaced and tested. To date, the Company has completed
approximately 90% of its upgrades and replacements and approximately 50% of its
testing. Completion of all remediation and testing is expected to be completed
by July 31, 1999.
The Company is currently reprogramming, or replacing, and testing the EDI
software. The Company is communicating with its customers to evaluate their EDI
Y2K compliance. The Company believes that over the upcoming months its major
customers plan to test their EDI systems for internal, intermediary and supplier
Y2K compliance. The Company would be unable to receive and invoice orders from a
customer though EDI if the customer or its EDI intermediaries were not Y2K
compliant. Although the Company does not transmit electronic orders to its
independent manufacturers, delays or non-delivery of goods to the Company could
arise from Y2K Issues affecting their businesses and presently the Company is
communicating with its independent manufacturers to evaluate their Y2K
compliance. The effect of non-compliance by independent manufacturers and other
third parties is not determinable.
The Company's local area network operating system will require upgrades
according to vendors, but such upgrades are available at minimal cost. The
Company also intends to replace personal computers and software found not to be
Y2K compliant. The Company anticipates that these replacements will be completed
by July 31, 1999.
The Company has incurred approximately $12,000 in expenses in connection
with making its computer systems and programs Y2K compliant. The Company expects
to incur additional Y2K costs of approximately $25,000 during 1999. The Company
is utilizing both internal and external sources to address Y2K Issues, and the
Company anticipates Y2K compliance by July 31, 1999. All historical and future
costs have been and will continue to be funded out of existing cash and cash
flow from operations.
The failure to successfully address a material Y2K Issue could result in
an interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Particularly because
of the uncertainty of the Y2K readiness of customers, suppliers and contractors,
the Company is unable to assess at this time whether the consequences of the Y2K
Issue will have a material impact on the Company's results of operations,
liquidity or financial condition.
The Company currently has not developed a detailed contingency plan. The
Company assesses its Y2K status regularly and will begin to develop
comprehensive contingency plans if the Company believes it will not complete the
Y2K project in a timely manner. If the Company's Y2K project is not completed on
a timely basis, or if its major customers or suppliers fail to address all of
the Y2K Issues, the Company believes it could have a material adverse impact on
the Company's operations.
The cost of Y2K compliance and the referenced completion dates are
based on management's best estimates and may be updated, as additional
information becomes available. Reference is made to the first paragraph of
Part I of this report, which addresses forward-looking statements made by the
Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements and Schedules" included
on page F-1 for information required under this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-20-
<PAGE>
PART III
Information required by Items 10 through 13 is hereby incorporated by
reference to the captions "Principal Shareholders", "Election of Directors",
"Management", and "Certain Relationships and Related Transactions" in the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
anticipated to be filed within 120 days after the end of the Company's fiscal
year ended January 31, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) 1. Financial Statements. Reference is made to the Index on page
F-1 for a list of all financial statements filed as part of
this Report.
(a) 2. and (d) Financial Statement Schedules. Reference is made to the Index
on page F-1 for a list of all financial statement schedules
filed as part of this Report.
(a) 3. and (c) Exhibits. Reference is made to the Exhibit Index on page E-1
for a list of all exhibits filed as part of this Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
three months ended January 31, 1999.
-21-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DSI Toys, Inc.
Dated: April 30, 1999 By:/s/ M. D. DAVIS
M. D. Davis
Chairman and Chief Executive Officer
Dated: April 30, 1999 By:/s/ ROBERT L. WEISGARBER
Robert L. Weisgarber
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/RICHARD R. NEITZ President, Chief April 30, 1999
Richard R. Neitz Operating Officer and Director
/s/BARRY B. CONRAD Director April 30, 1999
Barry B. Conrad
/s/JACK R. CROSBY Director April 30, 1999
Jack R. Crosby
/S/JOSEPH N. MATLOCK Director April 30, 1999
Joseph N. Matlock
/S/DOUGLAS A. SMITH Director April 30, 1999
Douglas A. Smith
-22-
<PAGE>
DSI TOYS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGE
FINANCIAL STATEMENTS
Report of Independent Accountants F-2
Consolidated Balance Sheet at January 31, 1999 and 1998 F-3
Consolidated Statement of Operations for fiscal years 1998, 1997
and 1996 F-4
Consolidated Statement of Cash Flows for fiscal years 1998, 1997, and
1996 F-5
Consolidated Statement of Shareholders' Equity for fiscal years 1998,
1997, and 1996 F-6
Notes to Consolidated Financial Statements F-7
SCHEDULES
II. Valuation and Qualifying Accounts and Reserves S-1
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
DSI Toys, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of DSI
Toys, Inc. and its subsidiary (the Company) at January 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended January 31, 1999, 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.
PricewaterhouseCoopers LLP
Houston, Texas
April 28, 1999
F-2
<PAGE>
DSI TOYS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash ............................................................................. $ 554,197 $ 383,690
Restricted cash .................................................................. 150,000 150,000
Accounts receivable, net ......................................................... 1,069,725 8,008,288
Inventories ...................................................................... 4,207,704 6,437,418
Income tax receivable ............................................................ -- 642,264
Prepaid expenses ................................................................. 1,503,970 894,704
Deferred income taxes ............................................................ 801,000 183,000
------------ ------------
Total current assets ........................................................... 8,286,596 16,699,364
Property and equipment, net ........................................................ 1,642,672 1,252,572
Advances to shareholder (life insurance premiums) .................................. 1,543,814 1,278,401
Deferred income taxes .............................................................. 1,117,000 1,752,000
Other assets ....................................................................... 364,511 224,783
------------ ------------
$ 12,954,593 $ 21,207,120
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ......................................... $ 6,799,290 $ 9,740,201
Current portion of long-term debt ................................................ 824,675 585,783
Income taxes payable ............................................................. 271,920 108,630
------------ ------------
Total current liabilities ...................................................... 7,895,885 10,434,614
Long-term debt ..................................................................... 2,540,522 7,495,000
Deferred income taxes .............................................................. 113,000 119,000
------------ ------------
Total liabilities .............................................................. 10,549,407 18,048,614
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
none issued or outstanding ..................................................... -- --
Common stock, $.01 par value, 20,000,000 shares authorized,
8,719,000 shares issued, 6,000,000 shares outstanding .......................... 87,190 87,190
Additional paid-in capital ....................................................... 21,162,568 21,162,568
Common stock warrants ............................................................ 102,500 102,500
Accumulated other comprehensive income ........................................... 14,296 29,187
Retained earnings ................................................................ 3,699,224 4,437,653
------------ ------------
25,065,778 25,819,098
Less: treasury stock, 2,719,000 shares, at cost .................................. (22,660,592) (22,660,592)
------------ ------------
Total shareholders' equity ..................................................... 2,405,186 3,158,506
Commitments and contingencies (Note 11)
------------ ------------
$ 12,954,593 $ 21,207,120
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DSI TOYS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales ..................................................... $ 52,722,517 $ 73,624,398 $ 63,219,212
Costs of goods sold ........................................... 42,058,919 55,285,501 42,023,044
------------ ------------ ------------
Gross profit .................................................. 10,663,598 18,338,897 21,196,168
Selling, general and administrative expenses .................. 10,967,001 24,245,064 15,569,422
------------ ------------ ------------
Operating income (loss) ....................................... (303,403) (5,906,167) 5,626,746
Interest expense .............................................. 874,907 1,360,067 2,599,942
Other income .................................................. (106,881) (231,968) (344,469)
------------ ------------ ------------
Income (loss) before income taxes
and extraordinary item ................................... (1,071,429) (7,034,266) 3,371,273
Provision for (benefit from) income taxes ..................... (333,000) (2,329,323) 1,220,000
------------ ------------ ------------
Income (loss) before extraordinary item ....................... (738,429) (4,704,943) 2,151,273
Extraordinary item (net of tax) ............................... -- (480,754) --
------------ ------------ ------------
Net income (loss) ............................................. $ (738,429) $ (5,185,697) $ 2,151,273
============ ============ ============
BASIC EARNINGS PER SHARE
Earnings (loss) per share before
extraordinary item ................................... $ (0.12) $ (0.91) $ 0.61
Extraordinary item ....................................... -- (0.09) --
------------ ------------ ------------
Earnings (loss) per share ................................ $ (0.12) $ (1.00) $ 0.61
============ ============ ============
Weighted average shares outstanding ...................... 6,000,000 5,205,479 3,500,000
============ ============ ============
DILUTED EARNINGS PER SHARE
Earnings (loss) per share before
extraordinary item ................................... $ (0.12) $ (0.91) $ 0.58
Extraordinary item ....................................... -- (0.09) --
------------ ------------ ------------
Earnings (loss) per share ................................ $ (0.12) $ (1.00) $ 0.58
============ ============ ============
Weighted average shares outstanding ...................... 6,000,000 5,205,479 3,739,146
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DSI TOYS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................... $ (738,429) $ (5,185,697) $ 2,151,273
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation .................................................... 570,779 661,517 596,332
Loss on early retirement of debt ................................ -- 480,754 --
Amortization and write-off of
debt discount and issuance costs ........................... -- 199,152 163,057
Provision for doubtful accounts ................................. (17,424) 145,096 62,160
Loss (gain) on sale of equipment ................................ 200 (3,865) (12,511)
Deferred income taxes ........................................... 11,000 (2,781,000) 686,605
Changes in assets and liabilities:
Accounts receivable ........................................ 6,955,987 (4,921,595) 941,715
Due from shareholder ....................................... -- 151,667 667,616
Inventories ................................................ 2,229,714 (1,822,331) (1,205,125)
Income taxes receivable/payable ............................ 805,554 (726,845) (121,663)
Prepaid expenses ........................................... (609,266) 567,485 (332,183)
Accounts payable and accrued liabilities ................... (2,940,911) 3,481,100 766,398
------------ ------------ ------------
Net cash provided (used) by operating activities ....... 6,267,204 (9,754,562) 4,363,674
Cash flows from investing activities:
Capital expenditures ................................................ (961,304) (726,691) (284,260)
Proceeds from sale of equipment ..................................... 225 6,965 24,037
Life insurance premiums paid for shareholder ........................ (265,413) (357,413) (289,676)
Repayments by shareholder ........................................... -- 511,764 --
Decrease (increase) in other assets ................................. (104,728) 313,085 (392,552)
------------ ------------ ------------
Net cash used in investing activities .................. (1,331,220) (252,290) (942,451)
Cash flows from financing activities:
Net borrowings (repayments) under revolving lines of credit ......... (4,730,655) 4,551,304 (2,088,225)
Net borrowings (repayments) on long-term debt ....................... 15,069 (13,429,418) (2,499,790)
Net proceeds from issuance of common stock .......................... -- 17,744,475 --
Proceeds from issuance of warrants .................................. -- 2,500 --
Debt and stock issue costs .......................................... (35,000) -- --
------------ ------------ ------------
Net cash provided (used) by financing activities ....... (4,750,586) 8,868,861 (4,588,015)
Effect of exchange rate changes on cash ................................... (14,891) 19,689 8,329
------------ ------------ ------------
Net increase (decrease) in cash ........................................... 170,507 (1,118,302) (1,158,463)
Cash and cash equivalents, beginning of year .............................. 383,690 1,501,992 2,660,455
------------ ------------ ------------
Cash and cash equivalents, end of year .................................... $ 554,197 $ 383,690 $ 1,501,992
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DSI TOYS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------------- PAID-IN
SHARES AMOUNT CAPITAL WARRANTS
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, January 31, 1996 ... 6,219,000 $ 622 $ 3,504,661 $ 100,000
Comprehensive income:
Net income ..............
Foreign currency
translation adjustments,
net of tax .............
Comprehensive income .
Change in par value of
common stock ............ 61,568 (61,568)
------------ ------------ ------------ ------------
Balance, January 31, 1997 ... 6,219,000 62,190 3,443,093 100,000
Comprehensive loss:
Net loss ................
Foreign currency
translation adjustments,
net of tax .............
Comprehensive loss ........
Issuance of common stock .. 2,500,000 25,000 18,475,000
Stock issuance costs ...... (755,525)
Warrants issued ........... 2,500
------------ ------------ ------------ ------------
Balance, January 31, 1998 ... 8,719,000 87,190 21,162,568 102,500
Comprehensive loss:
Net loss ................
Foreign currency
translation adjustments,
net of tax .............
Comprehensive loss ........
------------ ------------ ------------ ------------
Balance, January 31, 1999 ... 8,719,000 $ 87,190 $ 21,162,568 $ 102,500
============ ============ ============ ============
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE RETAINED TREASURY
INCOME EARNINGS STOCK TOTAL
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, January 31, 1996 ... $ 1,169 $ 7,472,077 $(22,660,592) $(11,582,063)
Comprehensive income:
Net income .............. 2,151,273 2,151,273
Foreign currency
translation adjustments,
net of tax ............. 8,329 8,329
------------
Comprehensive income . 2,159,602
------------
Change in par value of
common stock ............ --
------------ ------------ ------------ ------------
Balance, January 31, 1997 ... 9,498 9,623,350 (22,660,592) (9,422,461)
Comprehensive loss:
Net loss ................ (5,185,697) (5,185,697)
Foreign currency
translation adjustments,
net of tax ............. 19,689 19,689
------------
Comprehensive loss ........ (5,166,008)
------------
Issuance of common stock .. 18,500,000
Stock issuance costs ...... (755,525)
Warrants issued ........... 2,500
------------ ------------ ------------ ------------
Balance, January 31, 1998 ... 29,187 4,437,653 (22,660,592) 3,158,506
Comprehensive loss:
Net loss ................ (738,429) (738,429)
Foreign currency
translation adjustments,
net of tax ............. (14,891) (14,891)
------------
Comprehensive loss ........ (753,320)
------------ ------------ ------------ ------------
Balance, January 31, 1999 ... $ 14,296 $ 3,699,224 $(22,660,592) $ 2,405,186
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
DSI TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION:
DSI Toys, Inc. (the "Company") 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
primarily in China.
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 include 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; (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.
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.
Effective May 1, 1997, the Company's Articles of Incorporation were amended
to (i) authorize the issuance of 5,000,000 shares of $.01 par value preferred
stock, (ii) change the par value of common stock to $.01 and (iii) reduce the
authorized shares of common stock to 20,000,000 shares.
On June 3, 1997, the Company completed its initial public offering (the
"Offering") of 2,500,000 shares of common stock, which provided the Company net
proceeds of $17.7 million. All of the net proceeds were used to repay debt of
the Company. In connection with the Offering, the Company issued warrants to
purchase 250,000 shares of common stock to the lead underwriters. Such warrants
are exercisable at $10.80 per share and expire May 28, 2002.
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. 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 1998 is a reference to the fiscal year ended January 31,
1999).
CASH EQUIVALENTS
The Company considers investments with original maturity dates of three
months or less from the date of purchase to be cash equivalents. Restricted cash
held as a compensating balance under a revolving loan supported by letters of
credit is not considered a cash equivalent.
F-7
<PAGE>
REVENUE RECOGNITION
Revenues are recognized upon shipment of product by the Company, or in the
case of FOB Asia sales, by the manufacturer, and, at that point, legal
responsibility and title pass to the buyer. The Company provides an allowance
for doubtful accounts and accrues for returns and discounts using a percentage
of gross sales based on historical experience. Provision is made currently for
estimated returns of defective and slow-moving merchandise, price protection and
customer allowances and is included as a reduction of accounts receivable.
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. Maintenance and repairs are
charged to operations, and replacements or betterments are capitalized. Property
or equipment sold, retired, or otherwise disposed of is removed from the
accounts, and any gains or losses thereon are included in operations.
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 and debt discount are amortized over the term of the
related debt on a straight-line basis. As a result of the debt repayment using
the proceeds of the Offering, in 1997 the Company recorded an extraordinary
charge of $481,000 (net of tax) related to the write-off of unamortized debt
issuance and discount costs associated with the retired debt.
ADVERTISING
The cost of producing media advertising is capitalized as incurred and
expensed in the period in which the advertisement is first shown. During interim
periods, media communications costs are accrued in relation to sales when the
advertising is clearly implicit in the related sales arrangement. In any event,
all media communication costs are expensed in the fiscal year incurred. All
other advertising costs are expensed in the period incurred. Television
advertising expense totaled $141,000, $13.5 million, and $6.0 million during
fiscal 1998, 1997 and 1996, respectively. There were no prepaid television
advertising production costs at January 31, 1999 and 1998.
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
The Company's foreign subsidiary uses the local currency as the functional
currency. Accordingly, assets and liabilities of the Company's foreign
subsidiary are translated using the exchange rate in effect at the balance sheet
date, while income and expenses are translated using average rates. Translation
adjustments are reported as a separate component of shareholders' equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments recorded on the balance sheet include
cash and cash equivalents, accounts receivable, accounts payable and debt. Due
to their short maturity, the fair value of cash and cash equivalents, accounts
receivable and accounts payable approximates carrying value. The fair value of
the Company's debt approximates the carrying amount of the debt as it is at
variable market rates.
F-8
<PAGE>
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.
(See Note 12).
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.
IMPAIRMENT OF ASSETS
The Company reviews for the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. The Company has not identified any
such impairment losses.
EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS 128) requires the Company to report both basic earnings per share, which
is based on the weighted average number of common shares outstanding, and
diluted earnings per share, which is based on the weighted average number of
common shares as well as all dilutive potential common shares outstanding.
Stock options and warrants are the only potentially dilutive shares the
Company has outstanding at January 31, 1999. During fiscal 1998 and 1997, the
Company had 1,241,888, and 1,171,888 shares, respectively, of common stock
options and warrants outstanding which were not included in the diluted earnings
per share calculation because the options and warrants would have been
anti-dilutive.
STOCK-BASED COMPENSATION PLANS
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related interpretations in
accounting for its plans and the disclosure-only provision of Statement of
Financial Accocunting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123) in disclosures regarding the plan.
COMPREHENSIVE INCOME
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) which establishes
new rules for the reporting and presentation of comprehensive income and its
components in a full set of financial statements. The Company's comprehensive
income is comprised of net income and foreign currency translation adjustments.
The adoption of SFAS 130 had no impact on the Company's net income or total
shareholders' equity. Prior to the adoption of SFAS 130, foreign currency
translation adjustments were reported separately in the statement of
shareholders' equity. The comprehensive income amounts in the prior fiscal
years' financial statements have been reclassified to conform to SFAS 130.
SEGMENT INFORMATION
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). SFAS 131 supersedes SFAS 14, "Financial Reporting for
Segments of a Business Enterprise," replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
131 also requires disclosures about products and services, geographic areas and
major customers.
F-9
<PAGE>
The adoption of SFAS 131 did not affect the Company's results of operations or
financial position but did affect the disclosures of segment information (see
Note 12).
NOTE 3 - ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following as of January 31:
1999 1998
------------ ------------
Trade receivables ...................... $ 2,984,619 $ 10,999,014
Provisions for:
Discounts and markdowns .............. (1,383,808) (1,956,722)
Return of defective goods ............ (407,628) (829,674)
Doubtful accounts .................... (123,458) (204,330)
------------ ------------
Accounts receivable, net ............... $ 1,069,725 $ 8,008,288
============ ============
NOTE 4 - PROPERTY AND EQUIPMENT:
Property and equipment consist of the following as of January 31:
ESTIMATED USEFUL LIVES 1999 1998
----------------------- ---------- ----------
Molds ...................... 3 years $2,978,822 $2,300,345
Equipment, furniture and
fixtures ................... 5-7 years 1,647,244 1,486,254
Leasehold improvements ..... 10 years or lease term 997,420 879,429
Automobiles ................ 3-5 years 84,190 84,216
---------- ----------
5,707,676 4,750,244
Less: accumulated
depreciation ............. 4,065,004 3,497,672
---------- ----------
$1,642,672 $1,252,572
========== ==========
NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following as of
January 31:
1999 1998
---------- ----------
Trade payables ........................... $4,388,808 $7,518,710
Accrued royalties ........................ 776,590 968,267
Accrued compensation and commissions ..... 973,441 553,608
Other .................................... 660,451 699,616
---------- ----------
$6,799,290 $9,740,201
========== ==========
F-10
<PAGE>
NOTE 6 - NOTES PAYABLE
Indebtedness consists of the following as of January 31:
1999 1998
---------- ----------
Bank revolving line of credit for $10 million
with a commercial bank collateralized by all
of the Company's U.S. accounts receivable,
intangibles, equipment, fixtures and inventory
and 65% of the common stock of DSI (HK) Ltd.,
principal due on January 22, 1999; interest at
prime (7.75% at January 31, 1999) ................. $2,528,000 $7,495,000
Revolving bank loan drawn against an $8 million
line of credit, collateralized by a
customer's letter of credit and $150,000
cash, interest at prime (7.75% at January
31, 1999) ......................................... 814,289 577,945
Other ................................................ 22,908 7,838
---------- ----------
3,365,197 8,080,783
Less: current portion ................................ 824,675 585,783
---------- ----------
$2,540,522 $7,495,000
========== ==========
During the third and fourth quarters of fiscal 1998, the Company was out of
compliance with certain of the covenants of the previous line of credit. As a
result, the bank accelerated maturity to January 22, 1999. On February 2, 1999,
the Company replaced the previous line of credit with another revolving credit
facility (the "Revolver").
The Revolver includes a $10 million revolving line of credit commitment,
subject to availability under a borrowing base calculated by reference to the
level of eligible accounts receivable and inventory, as defined in the
agreement. The Revolver matures on February 2, 2002. Interest on borrowings
outstanding under the Revolver is payable monthly in arrears at an annual rate
equal to prime plus .75%. In addition, an unused line fee at an annual rate
equal to .25% applied to the amount by which $10 million exceeds the average
daily principal balance during the month and a collateral management fee of
$2,000 is payable monthly.
The Revolver is collateralized by a lien on substantially all of the
Company's U.S. accounts receivable, intangibles, equipment, fixtures, inventory
and 65% of the outstanding common stock of DSI (HK) Ltd.
The Revolver contains certain restrictive covenants and conditions among
which are prohibition on payment of dividends, limitations on further
indebtedness, restrictions on dispositions and acquisition of assets,
limitations on advances to third parties and compliance with minimum net worth
amounts.
NOTE 7 - INCOME TAXES:
The components of income (loss) before provision for (benefit from) income
taxes by fiscal year were as follows:
1998 1997 1996
------------ ------------ ------------
Domestic ........... $ (2,944,103) $(11,784,930) $ (898,344)
Foreign ............ 1,872,674 4,750,664 4,269,617
------------ ------------ ------------
$ (1,071,429) $ (7,034,266) $ 3,371,273
============ ============ ============
F-11
<PAGE>
The provision for income taxes (benefit) by fiscal year is as follows:
1998 1997 1996
----------- ----------- -----------
Current:
Federal ..................... $ (615,358) $ (299,000) $ (185,605)
State ....................... -- -- (14,000)
Foreign ..................... 271,358 750,677 733,000
----------- ----------- -----------
(344,000) 451,677 533,395
----------- ----------- -----------
Deferred:
Federal ..................... 17,000 (2,742,000) 657,605
State ....................... -- -- (11,000)
Foreign ..................... (6,000) (39,000) 40,000
----------- ----------- -----------
11,000 (2,781,000) 686,605
----------- ----------- -----------
(333,000) (2,329,323) 1,220,000
Tax on Extraordinary Item
(Current Federal) .............. -- (270,000) --
----------- ----------- -----------
$ (333,000) $(2,599,323) $ 1,220,000
=========== =========== ===========
The difference between income taxes (benefit) at the statutory federal and
the effective income tax rates by fiscal year is as follows:
1998 1997 1996
----------- ----------- -----------
Taxes (benefit) computed at
statutory rate .................. $ (364,000) $(2,391,000) $ 1,146,000
State income taxes net of federal
benefit ......................... -- -- (16,000)
Nondeductible items ............... -- -- 13,000
Other, net ........................ 31,000 61,677 77,000
----------- ----------- -----------
$ (333,000) $(2,329,323) $ 1,220,000
=========== =========== ===========
Deferred tax assets (liabilities) are comprised of the following at
January 31:
1999 1998
----------- -----------
Allowance for doubtful accounts ............ $ 70,000 $ 63,000
Inventory valuation adjustments ............ 19,000 31,000
Depreciation ............................... 97,000 101,000
Accruals for inventory returns and markdowns 712,000 89,000
Foreign and alternative minimum tax credits 973,000 1,535,000
Net operating loss carryforward ............ -- 1,124,000
Other ...................................... 47,000 155,000
----------- -----------
Gross deferred tax assets ............... 1,918,000 3,098,000
----------- -----------
Unremitted earnings of foreign subsidiary .. -- (1,163,000)
Depreciation ............................... (113,000) (119,000)
----------- -----------
Gross deferred tax liabilities .......... (113,000) (1,282,000)
----------- -----------
Net deferred tax assets (liabilities) ...... $ 1,805,000 $ 1,816,000
=========== ===========
At January 31, 1999, the Company has a $850,000 foreign tax credit
carryforward which will expire if not utilized by January 31, 2003. The Company
believes that the foreign and alternative minimum tax credit carryforwards will
be available to reduce future federal income tax liabilities and has recorded
the tax benefit of
F-12
<PAGE>
these carryforwards as noncurrent deferred tax assets. The Company's net
operating loss carryforward for state purposes is not significant.
NOTE 8 - EMPLOYEE BENEFIT PLAN:
The Company maintains a 401(k) Plan (the Plan) for the benefit of its U.S.
employees. The Company may, at its discretion, provide funds to match employee
contributions to the Plan. The Company contributed $35,000, $31,000 and $105,000
in fiscal 1998, 1997 and 1996, respectively, as employer matching contributions
to employee contributions.
NOTE 9 - THE STOCK OPTION PLAN AND WARRANTS:
The Company has reserved 388,888 common shares for issuance upon exercise of
warrants issued to a bank. Such warrants are currently exercisable at a purchase
price of $2 per share and expire December 11, 2005.
In connection with the Offering, the Company issued warrants to purchase
250,000 shares of common stock. Such warrants are exercisable at $10.80 per
share and expire May 28, 2002.
In May 1997, the Board adopted the DSI Toys, Inc. 1997 Stock Option Plan (the
1997 Plan) whereby certain employees may be granted stock options, appreciation
rights or awards related to the Company's common stock. Additionally, the
Company may grant nonstatutory stock options to nonemployee board members. The
Board has authorized 600,000 shares to be available for grant pursuant to the
1997 Plan. Options expire no later than ten years from the date of grant.
Additional awards may be granted under the 1997 Plan in the form of cash,
stock or stock appreciation rights. The stock appreciation right awards may
consist of the right to receive payment in cash or common stock. Any award may
be subject to certain conditions, including continuous service with the Company
or achievement of business objectives.
A summary of the option activity under the 1997 Plan follows: Number of
OUTSTANDING WEIGHTED AVERAGE
OPTIONS OPTION PRICE
----------- ----------------
Options outstanding at January 31, 1997 ... -- --
Granted ................................. 533,000 $ 8.00
----------- ----------------
Options outstanding at January 31, 1998 ... 533,000 8.00
Granted ................................. 82,000 1.41
Surrendered ............................. (12,000) 8.00
----------- ----------------
Options outstanding at January 31, 1999 ... 603,000 7.10
=========== ================
The weighted average fair value at date of grant for options granted during
fiscal 1998 and 1997 was $1.41 and $8.00, respectively. Vesting periods for
options granted range from immediate to seven years from the date of grant in
increments between 5% and 90% per year.
Options outstanding at January 31, 1999 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
NUMBER OF AVERAGE REMAINING NUMBER OF AVERAGE
OUTSTANDING EXERCISE CONTRACTUAL EXERCISABLE EXERCISE
OPTION PRICE OPTIONS PRICE LIFE OPTIONS PRICE
- ------------------------ ----------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.14 - 1.59 ........... 60,000 $ 1.22 10 3,333 $ 1.59
1.94 - 2.01 ............ 22,000 1.95 10 7,333 1.95
8.00 ................... 521,000 8.00 9 194,299 8.00
----------- -----------
603,000 204,965
=========== ===========
</TABLE>
The Company applies APB 25 and related interpretations in accounting for its
stock option plan. Accordingly, no compensation cost has been recognized by the
Company for this plan. The following unaudited pro forma data is
F-13
<PAGE>
calculated as if compensation cost for the 1997 Plan was determined based upon
the fair value at the grant date for awards under the plan consistent with the
methodology prescribed under SFAS 123 for fiscal years 1998 and 1997:
1998 1997
------------- -------------
Pro forma net loss ........................... $ (1,323,870) $ (5,593,246)
Pro forma basic loss per common share ........ (.22) (1.07)
Pro forma diluted loss per common share ...... (.22) (1.07)
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes options-repricing model with the following weighted average
assumptions used for grants in fiscal 1998 and 1997: expected volatility of 80%
in fiscal 1998 and 70% in fiscal 1997, risk-free interest rate of 4.64% to
6.52%, no dividend yield and an expected life of seven years.
NOTE 10 - RELATED PARTY TRANSACTIONS:
The Company entered into a consulting agreement with the previous sole
shareholder to serve as a consultant to the Company for three years for annual
compensation of $300,000. The consulting agreement also required 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 paid the Vice Chairman of the Board the sum of
$240,000 in three equal payments on January 1, 1998, 1997 and 1996.
The Company paid $100,000 to a partnership controlled by a director of the
Company upon completion of the Offering.
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 1998, 1997 and 1996. Management believes that the
rental rates approximate fair market value.
The Company pays insurance premiums for certain life insurance policies owned
by the Tommy and JoBeth Moss Joint Life Insurance Trust, and is entitled to
repayment of the advanced premiums upon the death of JoBeth Moss. The
receivables related to these policies as of January 31, 1999 and 1998 amounted
to $1,543,814 and $1,278,401, respectively, and are collateralized by the
related insurance policies. The Trust is restricted from borrowing against the
policies until the receivable is satisfied in full.
Additional related party transactions are described in Notes 1 and 11.
NOTE 11 - COMMITMENTS AND CONTINGENCIES:
In the normal course of business, the Company is involved in product and
intellectual property issues which sometimes result in litigation. It is the
opinion of management that the ultimate resolution of such matters will not have
a material adverse effect on the Company's financial position or results of
operations taken as a whole.
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 1998, 1997, and 1996 amounted to $625,000, $693,000 and $687,000,
respectively. Aggregate minimum rental commitments under noncancelable leases
are as follows for the specified fiscal years:
1999 ................................. $ 587,327
2000 ................................. 583,475
2001 ................................. 324,426
2002 ................................. 135,965
----------
$1,631,193
==========
F-14
<PAGE>
Royalty expense under licensing agreements aggregated $1,298,000, $3,069,000
and $1,578,000 in fiscal 1998, 1997 and 1996, respectively. At January 31, 1999,
minimum guaranteed royalties payable under these agreements in fiscal 1999 and
thereafter through 2002 of $170,000 and $590,000, respectively, are included in
accrued royalties payable and prepaid expenses.
NOTE 12 - SEGMENT INFORMATION:
The Company designs, develops, markets and distributes a variety of toys and
children's consumer electronics. These product lines are grouped into four major
categories which represent the Company's operating segments, as follows:
Juvenile audio products, including walkie-talkies, pre-school audio products,
pre-teen audio products and musical toys; girls' toys, including dolls, play
sets and accessories, and boys' toys, including radio control vehicles, action
figures and western and military action toys.
These operating segments all have similar economic characteristics: the
marketing of children's products. Based on these similarities, the Company's
products can be aggregated into one reportable segment for purposes of this
disclosure.
The Company sells its products through (i) the Hong Kong operation, where
products are shipped directly from contract manufacturers to DSI's customers,
and (ii) the United States operation, where products are shipped from DSI's
warehouse in Houston to its customers.
Financial information for fiscal 1998, 1997 and 1996 for the U.S. and Hong
Kong operations is as follows:
UNITED STATES HONG KONG CONSOLIDATED
------------- ------------ ------------
FISCAL 1998:
Net sales ...................... $ 14,817,505 $ 37,905,012 $ 52,722,517
Operating income (loss) ........ (4,110,596) 3,807,193 (303,403)
Depreciation expense............ 275,146 295,632 570,778
Capital expenditures............ 255,940 705,364 961,304
Total assets at fiscal year end 9,438,517 3,516,076 12,954,593
FISCAL 1997:
Net sales ...................... 28,550,033 45,074,365 73,624,398
Operating income (loss) ........ (8,722,057) 2,815,890 (5,906,167)
Depreciation expense............ 266,914 394,603 661,517
Capital expenditures............ 294,613 432,078 726,691
Total assets at fiscal year end 18,071,267 3,135,853 21,207,120
FISCAL 1996:
Net sales ...................... 27,970,378 35,248,834 63,219,212
Operating income ............... 3,033,677 2,593,069 5,626,746
Depreciation expense............ 236,159 360,173 596,332
Capital expenditures............ 183,676 100,584 284,260
Total assets at fiscal year end 11,394,682 3,921,066 15,315,748
Sales to major customers that exceeded 10% of the Company's total net
sales consist of the following for the specified fiscal years:
1998 1997 1996
------ ------ ------
Wal-Mart .......................... 19% 17% 19%
Toys "R" Us ....................... 11% 22% 12%
Kmart ............................. 4% 10% 14%
Approximately 21% of the Company's sales were exports to foreign countries
during fiscal 1998 and 19% during fiscal 1997 and 1996.
F-15
<PAGE>
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION:
Additional cash flow information by fiscal year is as follows:
1998 1997 1996
---------- ---------- ----------
Cash paid (received) for:
Interest .............................. $ 614,150 $ 379,063 $2,360,538
Income taxes .......................... (1,149,829) 1,139,929 655,058
Noncash activities included the following:
Accounts receivable write-off ......... $ 63,946 $ 45,932 $ 25,188
NOTE 14 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
-----------------------------------------------------------
4/30/98 7/31/98 10/31/98 1/31/99
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ............................. $ 5,926,126 $ 17,524,808 $ 24,563,262 $ 4,708,321
Operating income (loss) ............... (796,703) 626,935 2,466,318 (2,599,953)
Income (loss) before income taxes ..... (1,008,027) 442,294 2,216,365 (2,722,061)
Net income (loss) ..................... (645,137) 271,754 1,429,788 (1,794,834)
Basic earnings (loss) per share ....... $ (0.11) $ 0.05 $ 0.24 $ (0.30)
Diluted earnings (loss) per share ..... $ (0.11) $ 0.05 $ 0.24 $ (0.30)
<CAPTION>
FISCAL QUARTER ENDED
-----------------------------------------------------------
4/30/97 7/31/97 10/31/97 1/31/98
------------ ------------ ------------ ------------
Net sales ............................. $ 7,427,707 $ 24,382,768 $ 30,018,242 $ 11,795,681
Operating income (loss) ............... (293,897) 2,871,310 (6,059,281) (2,424,299)
Income (loss) before income taxes
and extraordinary item .............. (750,895) 2,622,301 (6,295,634) (2,610,038)
Net income (loss) ..................... (480,753) 1,197,519 (4,029,206) (1,873,257)
Basic earnings (loss) per share ....... $ (0.14) $ 0.23 $ (0.67) $ (0.31)
Diluted earnings (loss) per share ..... $ (0.14) $ 0.22 $ (0.67) $ (0.31)
</TABLE>
NOTE 15 - SUBSEQUENT EVENT:
On April 15, 1999, the Company entered into a Stock Purchase and Sale
Agreement with MVII, LLC, a California limited liability company controlled by
Tom Martin, which contemplates several related transactions: (i) MVII purchased
566,038 shares of common stock from the Company for $1.2 million on April 15,
1999; (ii) MVII commenced a tender offer to purchase up to 1.6 million shares of
the outstanding common stock of the Company at $4.38 per share in cash on April
21, 1999; and (iii) subject to shareholder and other approvals, MVII will
purchase an additional 1,792,453 shares of common stock (subject to upward
adjustments not to exceed in the aggregate 140,000 shares) from the Company for
$3.8 million simultaneously with the purchase of shares in the tender offer.
Upon consummation of the transactions, MVII will own more than 47% of the
Company's outstanding shares and will be entitled to nominate four of the six
members of the board of directors.
F-16
<PAGE>
DSI TOYS, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (SCHEDULE II)
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE CHARGED BALANCE CHARGED BALANCE CHARGED BALANCE
AT TO COSTS AT TO COSTS AT TO COSTS AT
JANUARY AND JANUARY AND JANUARY AND JANUARY
DESCRIPTION 31, 1996 EXPENSES DEDUCTIONS 31, 1997 EXPENSES DEDUCTIONS 31, 1998 EXPENSES DEDUCTIONS 31, 1999
- --------------------------- -------- -------- ---------- -------- -------- ---------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves deducted
from assets:
Trade receivables ........ 68 62 (25) 105 145 (46) 204 (17) (64) 123
Discounts and markdowns .. 700 1,037 (966) 771 2,447 (1,261) 1,957 1,559 (2,132) 1,384
Return of defective goods 288 801 (872) 217 2,617 (2,004) 830 2,416 (2,838) 408
-------- -------- ---------- -------- -------- ---------- -------- -------- ---------- --------
1,056 1,900 (1,863) 1,093 5,209 (3,311) 2,991 3,958 (5,034) 1,915
======== ======== ========== ======== ======== ========== ======== ======== ========== ========
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
3.1 Amended and Restated Articles of Incorporation. (1)
3.2 Amended and Restated Bylaws. (1)
3.3 Amendment to Bylaws. (1)
4.1 Form of Common Stock Certificate. (1)
4.2 Form of Warrant Agreement among the Company and Representatives to
purchase 250,000 shares of common stock. (1)
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. (1)
4.4 Registration Rights Agreement by and between the Company and
Hibernia Corporation. (1)
4.5 Registration Rights Agreement by and between the Registrant and
Tommy Moss. (1)
10.1 1997 Stock Option Plan. (1)
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. (1)
10.3 Employment Agreement dated December 11, 1995 by and between the
Company and M. D. Davis. (1)
10.4 Employment Agreement dated December 11, 1995 by and between the
Company and Richard R. Neitz. (1)
10.5 Employment Agreement dated December 11, 1995 by and between the
Company and Yau Wing Kong. (1)
10.6 Employment Agreement dated December 11, 1995 by and between the
Company and Dale Y. Chen. (1)
10.7 Employment Agreement dated December 11, 1995 by and between the
Company and Thomas V. Yarnell. (1)
10.8 Employment Agreement dated March 16, 1997 by and between the Company
and J. Russell Denson. (1)
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"). (1)
10.10 First Amendment to Bank One Letter Loan Agreement, dated January 31,
1996. (1)
10.11 Second Amendment to Bank One Letter Loan Agreement, dated August 1,
1996. (1)
10.12 Third Amendment to Bank One Letter Loan Agreement, dated November
14, 1996. (1)
10.13 Fourth Amendment to Bank One Letter Loan Agreement, dated January
31, 1997. (1)
10.14 Fifth Amendment to Bank One Letter Loan Agreement, dated January 31,
1997. (1)
10.15 Line of Credit Facility with State Street Bank and Trust Company,
Hong Kong Branch, dated April 1, 1997, evidencing a $5,000,000 line
of credit. (1)
10.16 Underwriting Agreement dated May 28, 1997 among the Company, the
Tommy Moss Living Trust, Hibernia Corporation and Tucker Anthony
Incorporated and Sutro & Co. Incorporated. (2)
10.17 Warrant Agreement dated May 28, 1997 by and among the Company,
Tucker Anthony Incorporated and Sutro & Co. Incorporated. (3)
10.18 Renewal and Modification of Line of Credit Facility with State
Street Bank and Trust Company, Hong Kong Branch, dated June 6, 1997,
evidencing an $8,000,000 line of credit. (4)
10.19 Debenture by DSI (HK) Limited to State Street Bank and Trust
Company, Hong Kong Branch, dated July 29, 1997. (5)
E-1
<PAGE>
10.20 Amended and Restated Bank One Letter Loan Agreement, dated October
22, 1997. (6)
10.21 First Amendment to Amended and Restated Bank One Letter Loan
Agreement, dated January 31, 1998. (7)
10.22 Second Amendment to Amended and Restated Bank One Letter Loan
Agreement, dated September 30, 1998. (8)
10.23 Employment Agreement dated August 20, 1998 by and between the
Company and Howard G. Peretz.*
10.24 Loan and Security Agreement by and between the Company and Sunrock
Capital Corp. dated February 2, 1999.*
10.25 Stock Pledge Agreement by and between the Company and Sunrock
Capital Corp. dated February 2, 1999.*
10.26 Assignment of Deposit Account by and between the Company and Sunrock
Capital Corp. dated February 2, 1999.*
10.27 Trademark Security Agreement by and between the Company and Sunrock
Capital Corp. dated February 2, 1999.*
10.28 Patent Collateral Assignment by and between the Company and Sunrock
Capital Corp. dated February 2, 1999.*
10.29 Stock Purchase and Sale Agreement dated April 15, 1999 by and
between the Company and MVII, LLC.(9)
21 Subsidiaries. (1)
27 Financial Data Schedule.*
(1) Filed as a part of the Registrant's Registration Statement on Form S-1
(No. 333-23961) and incorporated herein by reference.
(2) Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarterly period
ended April 30, 1997, and incorporated herein by reference.
(3) Filed as Exhibit 10.2 to the Company's Form 10-Q for the quarterly period
ended April 30, 1997, and incorporated herein by reference.
(4) Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarterly period
ended July 31, 1997, and incorporated herein by reference.
(5) Filed as Exhibit 10.2 to the Company's Form 10-Q for the quarterly period
ended July 31, 1997, and incorporated herein by reference.
(6) Filed as Exhibit 10.1 to the Company's Form 10-Q for the quarterly period
ended October 31, 1997, and incorporated herein by reference.
(7) Filed as Exhibit 10.21 to the Company's Form 10-K for the annual period
ended January 31, 1998, and incorporated herein by reference.
(8) Filed as Exhibit 10.22 to the Company's Form 10-Q for the quarterly period
ended October 31, 1998, and incorporated herein by reference.
(9) Filed as Exhibit 2 to the Company's Schedule 14D-9 and incorporated herein
by reference.
* Filed herewith.
E-2
EXHIBIT 10.23
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is hereby made and entered into
this 20th day of August, 1998, (the "Effective Date") by and between DSI Toys,
Inc. a Texas corporation, whose principal business address is 1100 West Sam
Houston Parkway, North, Houston, Texas 77043 (hereinafter referred to as
"Employer" or "Company"), and Howard G. Peretz, an individual presently residing
at 141 Oakwood Road, East Watchung, New Jersey 07060 (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 as may be customary for a Senior Vice
President 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 Senior Vice President - Marketing and Strategic Planning. 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 initially
have responsiblities in the areas of Marketing and Strategic Planning and shall
be responsible to and report to the President and Chief Operating Officer of the
Company. Such responsiblities and reporting relationships may be changed from
time to time by 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 the date hereof and ending on August 19, 2001
(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
Eighty Thousand Dollars ($180,000) per year during the first year of the
Employment Term; One Hundred Ninety Thousand Dollars ($190,000) per year during
the second year of the Employment Term; and Two Hundred Thousand Dollars
($200,000) per year during the third year of the Employment
<PAGE>
Term. Such annual salary shall be defined as the "Base Salary". Employee's Base
Salary may be raised during the Employment Term at the discretion of the Board
of Directors of Employer. Such Base Salary shall be paid in twice monthly
installments on the 15th and last day of each month.
2.2 PERFORMANCE BONUS. Commencing with the fiscal year beginning February
1, 1998, Employee shall be eligible to participate in the Company's annual
incentive performance bonus program at the executive level, equally to other
same level employees, as such is determined and defined by the Company's Board
of Directors.
2.3 STOCK OPTIONS. Employee shall be eligible to participate in the DSI
Toys, Inc. 1997 Stock Option Plan at the executive level. Employee shall be
granted Stock Options, or their equivalent, for the purchase of 50,000 shares of
Common Stock ("Options") of the Company pursuant to the terms of the DSI Toys,
Inc. 1997 Stock Option Plan, and pursuant to the following additional terms:
(a) The Options shall be granted with an issue date of August 20, 1998
(the "Date of Grant") and may be exercised by Optionee in accordance with the
terms of the DSI Toys, Inc. 1997 Stock Option Plan ("Plan") and the Employee's
Stock Option Agreement ("Option Agreement"), at any time during a ten year
period which begins on the Date of Grant, subject to the limitations of vesting
as hereinafter set forth in subsections 2.3.(b), (c) and (d) hereof. To the
extent not previously exercised, or not terminated by other provisions of the
Plan or Option Agreement, the Options shall terminate and expire at 5:00 p.m.
CDT on August 19, 2008.
(b) Except for any years in which Accelerated Vesting occurs, Employee
shall be vested in Options pursuant to the following schedule (until such time
as either Optionee is vested in 100% of the Options or the Options have
terminated):
DATE PERCENTAGE OF OPTIONS VESTING
---- -----------------------------
April 5, 1999 Five Percent
April 5, 2000 Five Percent
April 5, 2001 Five Percent
April 5, 2002 Five Percent
April 5, 2003 Fifteen Percent
April 5, 2004 Fifteen Percent
August 30, 2004 Fifty Percent
(c) In the first fiscal year after the date hereof in which the Company's
Common Stock trades above $2.00 per share for ten consecutive trading days, then
in lieu of the vesting for that year as set forth in Section 2.3 (b), 33-1/3% of
the options will accelerate ("Acclerated Options") and the Employee shall become
fully vested in these options at the end of that fiscal year. In the first of
any subsequent fiscal year in which the Company's Common Stock trades above
$4.00 per share for ten consecutive trading days, then in lieu of the vesting
for that year as set forth in 2.3 (b), 33-1/3% (or the balance) of the options
<PAGE>
will accelerate and the Employee will be fully vested in those options at the
end of that fiscal year. In the first of any subsequent year in which the
Company's Common Stock trades above $6.00 per share for ten consecutive trading
days, then in lieu of the vesting for that year as set forth in 2.3 (b), 33-1/3%
of the options will accelerate and Employee will be fully vested in those
options at the end of that year. There will be only one acceleration in any
given fiscal year.
(d) Upon a "Change of Control" (as defined herein) the Employee shall
become fully vested in all options and all options must be exercised within
thirty days of such event. Any options not exercised within such thirty days
shall automatically terminate and shall no longer be exercisable.
A "Change in Control" means (i) a sale of all or substantially all of the
assets of the Company to any person or related group of persons (other than a
majority-owned subsidiary of the Company) as an entirety or substantially as an
entirety in one transaction or series of transactions or (ii) the merger or
consolidation of the Company with or into another corporation in which the
Company is not the surviving entity.
(e) In the event Employee is an employee of the Company and Employee's
employment by the Company is terminated for any reason, all non-vested Options
shall immediately expire and terminate and all vested options must be exercised
within thirty days of such termination. Any options not exercised within such
thirty days shall automatically terminate and shall no longer be exercisable.
(f) The Fair Market Value of the shares of Common Stock subject to the
Options on the Date of Grant is $1.14 per share, as determined in accordance
with Section 5.3 (a) of the Plan. The exercise price of the Options is $1.14 per
share, which price is 100% of the Fair Market Value of the shares of Common
Stock subject to the Options on the Date of Grant.
In the event of a change in ownership of the Company, or the
involuntary termination of the Employee without cause, all unvested options
shall immediately vest and all options must be exercised within thirty days of
such event. Any options not exercised within such 30 days shall automatically
terminate and no longer be exerciseable.
2.4 BENEFITS. (a) Employee may be eligible to participate in any and all
benefit plans which Employer may from time to time make generally available to
executive level employees of the Company, however, the extent to which executive
level employeesshall be entitled to participate in such benefit plans shall be
determined at the sole discretion of the Company's Board of Directors. On the
date hereof these benefit plans include: medical insurance, dental insurance,
life insurance, long-term disability, and 401(K) profit sharing plan.
(b) Employee shall be entitled to three (3) weeks vacation per total
calendar year in accordance with Employer policies, as well as those public
holidays duly observed by the Employer, however, no more than (2) weeks vacation
shall be taken at one time. For calendar year 1998, Employee shall be entitled
to two weeks vacation. Additionally, Employee shall be entitled to sick days as
set forth in the Employer's sick leave policy.
2.5 EXTENT OF SERVICE. During the Employment Term, Employee agrees to
devote such reasonable business time, attention, energy and efforts to further
the business of the Employer consistent with services performed by a Senior Vice
President 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, or investing in toy companies that are
"publicly traded" companies.
<PAGE>
It is acknowledged by the Employer that Employee is engaged in the
business known as "Shout" and in a licensing venture known as "Fat Lady Sings".
These endeavours are excluded from this provision, so long as the endeavours do
not interfere with Employee performing his duties hereunder and so long as the
performance of Employee's duties hereunder take priority over either endeavour.
2.6 OFFICES. The Employer shall provide office space for the Employee at
the DSI Toys, Inc. corporate headquarters, 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.
2.7 EXPENSE ALLOWANCE. The Employer shall promptly reimburse Employee for
all approved business expenses reasonably incurred in the performance of his
duties, including reasonable expenditures for entertainment.
2.8 SPECIAL ALLOWANCES. Employee shall be paid a Relocation and Interim
Travel Allowance of Fifty Thousand Dollars ($50,000.00) upon completion of
Employee's Permanent Relocation to Houston, Texas. "Permanent Relocation" for
the purposes of this document is defined as the moving of Employee to Houston,
Texas (or the corresponding metropolitan area) and Employee establishing Texas
residency. Said relocation is to be completed on or before (6 MONTHS). In the
event any or all of said allowance is taxable to Employee as compensation, the
Company shall reimburse Employee for the income taxes incurred by Employee in
connection with the Allowance. Employee may, at his election, take an advance
against this Allowance of up to $4,000 per month for the period of August 20,
1998 through February 19, 1999.
BUSINESS TRAVEL. Employee shall be entitled to travel portal to portal via
business 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 pay any Performance Bonus due as required in Section 2.2, if such
Performance Bonus has been earned by Employee. In the event of Employee's death
prior to the completion of a fiscal year during the Employment Term, Employee's
estate shall be entitled to a pro rated Performance Bonus based on the portion
of the fiscal year in which Employee was actually employed prior to his death.
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.
<PAGE>
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", Employee 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 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, fails to cure such "cause." "For cause"
shall be if Employee:
(a) intentionally and willfully neglects the performance of his
duties established by the Company, 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 reasonable
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) commits a material breach 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
<PAGE>
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.
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, and if and only if Employee is not breach of the terms of Article 4,
Employee shall be paid as severance pay his regular Base Salary from the date of
termination for a period of six months and payable over that six month period in
equal installments on the Company's regular payroll dates.
if such termination without cause occurs prior to the time Employee
has completed Permanent Relocation to Houston, Texas, then Employee shall be
paid his regular Base Salary from the date of termination for a period of six
(6) months.
if such termination without cause occurs after Employee has
completed his Permanent Relocation to Houston, Texas, and if such Permanent
Relocation has been maintained, then Employee shall be paid his regular Base
Salary from the date of termination for a period of twelve (12) months.
Further, Employee shall be entitled to a pro rated Performance Bonus for such
portion of the fiscal year in which he was employed (as determined by the date
of termination) by the Company but no other severance shall be paid to Employee.
Further, upon payment by the Employer to Employee of the above set forth Base
Salary and pro rated Performance Bonus, Employee shall have no further rights
and Employer no other liabilities or other obligations of any kind or nature
under this Agreement except for accrued employee benefits to which Employee is
already entitled.
(b) 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, but
Employee shall not be entitled to any severance pay and shall not be entitled to
any Performance Bonus for such portion of the fiscal year in which he was
employed prior to termination.
3.5 CALCULATION. For the purposes of this Agreement, any pro rated
Performance Bonus which is due Employee is payable within thirty (30) days after
receipt by the Company of its audited financial statements for the fiscal year
for which the pro rated Performance Bonus is due.
ARTICLE 4
COVENANTS
4.1 DISCLOSURE OF INFORMATION. (a) For the purposes of this Agreement the term
"Confidential Information" does not include information which (i) is or becomes
generally available to the public other than as a result of a disclosure by
Employee or his representatives in violation of this Agreement, (ii) was
available to Employee on a non-confidential basis prior to its disclosure to
Employee by the Company or its representatives or agents, or (iii) becomes
available to Employee on a non-confidential basis from a source other than the
Company or its representatives or agents, provided, however, that such source is
not bound by a confidentiality agreement with the Company or its representatives
or agents or otherwise prohibited from transmitting the information to Employee
by a contractural, legal or fiduciary obligation.
<PAGE>
(b) 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 secrets, 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 applicabl, except as may be necessary
to carry out Employee's duties.
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
its obligation hereunder, for a period of six months 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,
<PAGE>
including, without limitation, any person that manufactures, markets, imports,
sells or distributes toys. (If the Employment Term is terminated pursuant to
Section 3.4 and Employer elects to enforce the provisions of this Section 4.2.,
Employer shall be obligated to pay Employee, in lieu of severance pay, if any,
on or before the fifteenth (15th) day of each month during the six month period,
or part thereof, following termination of the Employment Term an amount equal to
one-twelfth (1/12) of the annual salary set forth in Section 2.1).
It is acknowledged by the Employer that Employee is engaged in the
business known as "Shout" and in a licensing venture known as "Fat Lady Sings".
These endeavours are excluded from this provision
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 divert, interfere with or attempt to divert or interfere
with 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
(c) knowingly induce or advise any service provider or representative of
Employer to terminate or materially alter its relationship with
Employer.
4.4 INTELLECTUAL PROPERTY. Employee covenants and agrees that all right,
title and interest, including, without limitation, all trademarks, copyrights
and patents, in and to any material produced, or inventions developed by him
which affect or relate to the Company's business or affect or relate to the
Employer's industry shall vest in the Company and that he shall have no personal
right, title or interest whatsoever therein.
Employee further convenants and agrees that he will, at all times during
his employment and after termination of his employment for any reason, assist
the Company and its nominees in every proper way, without charge by him but at
the Company's expense, to obtain for its benefit patents for such inventions in
any or all countries; and to this end he will execute, acknowledge and deliver,
when so requested, all such further papers, including applications for patents,
assignments and affidavits, as may be needed in order to obtain or to maintain
such patents or to vest title thereto in the Company, its successors and
assigns, or its nominees.
Employee has attached hereto a list identifying all trademarks, trademark
applications, copyrights, copyright applications, patents and patent
applications not assigned to the Company which have heretobefore been taken out
or filed on his behalf and briefly describing all unpatented inventions made
before his employment by the Company, which are excluded from the operation of
this agreement; and he covenants and represents that this list is complete and,
if no list is attached, that he has no such trademarks, trademark applications,
copyrights, copyright applications, patents, patent applications or inventions
at the time of signing this Agreement.
<PAGE>
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 provision or by its severance herefrom. Furthermore, in lieu of
<PAGE>
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 acknowledges he 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.
EMPLOYER: DSI TOYS, INC. EMPLOYEE: Howard G. Peretz
By: /s/ M. D. DAVIS /s/ HOWARD G. PERETZ
M.D. Davis, C.E.O. Howard G. Peretz
EXHIBIT 10.24
LOAN AND SECURITY AGREEMENT
BY AND BETWEEN
SUNROCK CAPITAL CORP.
AS LENDER
AND
DSI TOYS, INC.
AS BORROWER
DATED: FEBRUARY 2, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
SECTION 1. DEFINITIONS.....................................................1
SECTION 2. LOANS...........................................................8
2.1 Calculation of Borrowing Limits.................................8
2.2 Seasonal Inventory Advances.....................................8
2.3 Reduction of Borrowing Limits...................................9
2.4 Maximum Credit Limit and Maximum Inventory Credit Limit.........9
2.5 Availability Reserves..........................................10
SECTION 3. INTEREST AND FEES..............................................10
3.1 Interest.......................................................10
3.2 Unused Line Fee................................................11
3.3 Collateral Management Fee......................................11
SECTION 4. CONDITIONS PRECEDENT...........................................11
4.1 Conditions Precedent to Initial Loans and Letter of Credit
Accommodations.................................................11
4.2 Conditions Precedent to All Loans and Letter of Credit
Accommodations.................................................13
SECTION 5. GRANT OF SECURITY INTEREST.....................................13
SECTION 6. COLLECTION AND ADMINISTRATION..................................14
6.1 Borrower's Loan Account........................................14
6.2 Statements.....................................................14
6.3 Collection of Accounts.........................................15
6.4 Payments.......................................................16
6.5 Authorization to Make Loans....................................16
6.6 Use of Proceeds................................................16
SECTION 7. COLLATERAL REPORTING AND COVENANTS.............................17
7.1 Collateral Reporting...........................................17
7.2 Accounts Covenants.............................................17
7.3 Inventory Covenants............................................19
7.4 Equipment Covenants............................................19
7.5 Power of Attorney..............................................20
7.6 Right to Cure..................................................20
7.7 Access to Premises.............................................21
SECTION 8. REPRESENTATIONS AND WARRANTIES.................................21
8.1 Corporate Existence, Power and Authority; Subsidiaries.........21
8.2 Financial Statements; No Material Adverse Change...............21
(i)
<PAGE>
8.3 Chief Executive Office; Collateral Locations...................22
8.4 Priority of Liens; Title to Properties.........................22
8.5 Tax Returns....................................................22
8.6 Litigation.....................................................22
8.7 Compliance with Other Agreements and Applicable Laws...........22
8.8 Bank Accounts..................................................23
8.9 Accuracy and Completeness of Information.......................23
8.10 Survival of Warranties; Cumulative.............................23
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS.............................23
9.1 Maintenance of Existence.......................................23
9.2 New Collateral Locations.......................................23
9.3 Compliance with Laws, Regulations, Etc.........................24
9.4 Payment of Taxes and Claims....................................24
9.5 Insurance......................................................24
9.6 Financial Statements and Other Information.....................25
9.7 Sale of Assets, Consolidation, Merger, Dissolution, Etc........26
9.8 Encumbrances...................................................26
9.9 Indebtedness...................................................27
9.10 Loans, Investments, Guarantees, Etc............................27
9.11 Dividends and Redemptions......................................28
9.12 Transactions with Affiliates...................................28
9.13 Additional Bank Accounts.......................................28
9.14 Net Worth......................................................28
9.15 Capital Expenditures...........................................29
9.16 Costs and Expenses.............................................29
9.17 Further Assurances.............................................29
SECTION 10. EVENTS OF DEFAULT AND REMEDIES.................................30
10.1 Events of Default..............................................30
10.2 Remedies.......................................................31
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW....33
11.1 Governing Law; Choice of Forum; Service of Process; Jury
Trial Waiver...................................................33
11.2 Waiver of Notices..............................................34
11.3 Amendments and Waivers.........................................34
11.4 Waiver of Counterclaims........................................34
11.5 Indemnification................................................34
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS...............................35
12.1 Term...........................................................35
12.2 Notices........................................................36
12.3 Partial Invalidity.............................................37
12.4 Successors.....................................................37
12.5 Entire Agreement...............................................37
12.6 Nonapplicability of Chapter 346................................38
12.7 Waiver of Consumer Rights......................................38
12.8 Oral Agreements Ineffective....................................38
(ii)
<PAGE>
LOAN AND SECURITY AGREEMENT
This Loan and Security Agreement (this "Agreement") dated February 2,
1999, is entered into by and between Sunrock Capital Corp., a Delaware
corporation ("Lender"), and DSI Toys, Inc., a Texas corporation ("Borrower").
W I T N E S S E T H:
WHEREAS, Borrower has requested that Lender enter into certain financing
arrangements with Borrower pursuant to which Lender may make loans and provide
other financial accommodations to Borrower; and
WHEREAS, Lender is willing to make such loans and provide such financial
accommodations on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual conditions and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS
All terms used herein which are defined in Article 1 or Article 9 of the
Uniform Commercial Code shall have the meanings given therein unless otherwise
defined in this Agreement. All references to the plural herein shall also mean
the singular and to the singular shall also mean the plural unless the context
otherwise requires. All references to Borrower and Lender pursuant to the
definitions set forth in the recitals hereto, or to any other person herein,
shall include their respective successors and assigns. The words "hereof",
"herein", "hereunder", "this Agreement" and words of similar import when used in
this Agreement shall refer to this Agreement as a whole and not any particular
provision of this Agreement and as this Agreement now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced. The
word "including" when used in this Agreement shall mean "including, without
limitation". An Event of Default shall exist or continue or be continuing until
such Event of Default is waived in accordance with Section 11.3 or is cured in a
manner satisfactory to Lender, if such Event of Default is capable of being
cured as determined by Lender. Any accounting term used herein unless otherwise
defined in this Agreement shall have the meanings customarily given to such term
in accordance with GAAP. For purposes of this Agreement, the following terms
shall have the respective meanings given to them below:
1.1 "Accounts" shall mean all present and future rights of Borrower to
payment for goods sold or leased or for services rendered, which are not
evidenced by instruments or chattel paper, and whether or not earned by
performance.
LOAN AND SECURITY AGREEMENT - Page 1
<PAGE>
1.2 "Availability Reserves" shall mean, as of any date of determination,
such amounts as Lender may from time to time establish and revise in good faith
reducing the amount of Loans which would otherwise be available to Borrower
under the lending formula(s) provided for herein: (a) to reflect events,
conditions, contingencies or risks which, as determined by Lender in good faith,
do or may affect either (i) the Collateral or any other property which is
security for the Obligations or its value, (ii) the assets, business or
prospects of Borrower or any Obligor or (iii) the security interests and other
rights of Lender in the Collateral (including the enforceability, perfection and
priority thereof) or (b) to reflect Lender's good faith belief that any
collateral report or financial information furnished by or on behalf of Borrower
or any Obligor to Lender is or may have been incomplete, inaccurate or
misleading in any material respect or (c) in respect of any state of facts which
Lender determines in good faith constitutes an Event of Default or may, with
notice or passage of time or both, constitute an Event of Default.
1.3 "Blocked Accounts" shall have the meaning set forth in Section 6.3
hereof.
1.4 "Capital Expenditure" shall mean all payments in respect of any fixed
asset or improvement, or replacement, substitution, or addition thereto, which
has a useful life of more than one year, including, without limitation, those
arising in connection with the direct or indirect acquisition of such assets by
way of increased product or service charges or offset items or in connection
with any lease of property by Borrower that, in accordance with GAAP, should be
reflected as a liability on the balance sheet of Borrower.
1.5 "Change of Control" shall be deemed to have occurred at such time as a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly,
of more than thirty-four percent (34%) of the total voting power of all classes
of stock then outstanding of Borrower normally entitled to vote in the election
of directors.
1.6 "Collateral" shall have the meaning set forth in Section 5 hereof.
1.7 "Eligible Accounts" shall mean Accounts created by Borrower which are
and continue to be acceptable to Lender based on the criteria set forth below.
In general, Accounts shall be Eligible Accounts if:
(a) such Accounts arise from the actual and BONA FIDE sale and
delivery of goods by Borrower or rendition of services by Borrower in the
ordinary course of its business which transactions are completed in accordance
with the terms and provisions contained in any documents related thereto;
(b) such Accounts (i) are not unpaid more than one hundred and
twenty (120) days after the date of the original invoice for them or (ii)
otherwise have been designated as Permitted Extended Datings by Lender;
LOAN AND SECURITY AGREEMENT - Page 2
<PAGE>
(c) such Accounts comply with the terms and conditions contained in
Section 7.2(c) of this Agreement;
(d) such Accounts do not arise from sales on consignment,
guaranteed sale, sale and return, sale on approval, or other terms under which
payment by the account debtor may be conditional or contingent, other than
Accounts relating solely to Sold Through Inventory that have been verified by
the Lender;
(e) the chief executive office of the account debtor with respect
to such Accounts is located in the United States, its territories or Canada
(provided that Accounts payable by Canadian account debtors shall be denominated
and payable in U.S. dollars at the U.S. offices of the Borrower), or, at
Lender's option, if either: (i) the account debtor has delivered to Borrower an
irrevocable letter of credit issued or confirmed by a bank satisfactory to
Lender and payable only in the United States of America and in U.S. dollars,
sufficient to cover such Account, in form and substance satisfactory to Lender
and, if required by Lender, the original of such letter of credit has been
delivered to Lender or Lender's agent and the issuer thereof notified of the
assignment of the proceeds of such letter of credit to Lender, or (ii) such
Account is subject to credit insurance payable to Lender issued by an insurer
and on terms and in an amount acceptable to Lender, or (iii) such Account is
otherwise acceptable in all respects to Lender (subject to such lending formula
with respect thereto as Lender may determine);
(f) such Accounts do not consist of progress billings, bill and
hold invoices or retainage invoices, except as to bill and hold invoices, if
Lender shall have received an agreement in writing from the account debtor, in
form and substance satisfactory to Lender, confirming the unconditional
obligation of the account debtor to take the goods related thereto and pay such
invoice;
(g) the account debtor with respect to such Accounts has not
asserted a counterclaim, defense or dispute and does not have, and does not
engage in transactions which may give rise to, any right of setoff against such
Accounts (but the portion of the Accounts of such account debtor in excess of
the amount at any time and from time to time owed by Borrower to such account
debtor or claimed owed by such account debtor may be deemed Eligible Accounts);
(h) there are no facts, events or occurrences which would impair
the validity, enforceability or collectability of such Accounts or reduce the
amount payable or delay payment thereunder;
(i) such Accounts are subject to the first priority, valid and
perfected security interest of Lender and any goods giving rise thereto are not,
and were not at the time of the sale thereof, subject to any liens except those
permitted in this Agreement;
(j) neither the account debtor nor any officer or employee of the
account debtor with respect to such Accounts is an officer, employee or agent of
or affiliated with Borrower directly or indirectly by virtue of family
membership, ownership, control, management or otherwise;
LOAN AND SECURITY AGREEMENT - Page 3
<PAGE>
(k) the account debtors with respect to such Accounts are not any
foreign government, the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, unless, if the
account debtor is the United States of America, any State, political
subdivision, department, agency or instrumentality thereof, upon Lender's
request, the Federal Assignment of Claims Act of 1940, as amended or any similar
State or local law, if applicable, has been complied with in a manner
satisfactory to Lender;
(l) there are no proceedings or actions which are threatened or
pending against the account debtors with respect to such Accounts which might
result in any material adverse change in any such account debtor's financial
condition;
(m) such Accounts are not owed by an account debtor who has
Accounts unpaid more than ninety (90) days [thirty (30) days in the case of any
Account designated by Lender as a Permitted Extended Dating] after the due date
specified in the original invoice for them which constitute more than fifty
percent (50%) of the total Accounts of such account debtor;
(n) such Accounts are owed by account debtors whose total
indebtedness to Borrower does not exceed the credit limit with respect to such
account debtors as determined by Lender from time to time (but the portion of
the Accounts not in excess of such credit limit may be deemed Eligible
Accounts); and
(o) such Accounts are owed by account debtors deemed creditworthy
at all times by Lender, as determined by Lender.
General criteria for Eligible Accounts may be established and revised from time
to time by Lender in good faith. Any Accounts which are not Eligible Accounts
shall nevertheless be part of the Collateral.
1.8 "Eligible In-Transit Inventory" shall mean Inventory that would
qualify as Eligible Inventory but for the fact that such Inventory is in transit
from Hong Kong to Houston, Texas, but only to the extent: (a) Borrower shall
have provided to Lender a clean on-board bill of lading evidencing title to such
Inventory, in form and substance satisfactory to Lender; (b) Borrower shall have
insured such Inventory against loss or damage in amounts and pursuant to
policies approved by Lender, and Lender shall have been named as sole loss payee
under such policies; and (c) Borrower shall have taken such additional actions
and provided Lender with such additional documentation as Lender may request
from time to time, including, without limitation, all documentation necessary to
allow Lender to claim such Inventory from the customs authorities of any
jurisdiction in which such Inventory may be located.
1.9 "Eligible Inventory" shall mean Inventory consisting of finished goods
held for resale in the ordinary course of the business of Borrower, which are
acceptable to Lender based
LOAN AND SECURITY AGREEMENT - Page 4
<PAGE>
on the criteria set forth below. In general, Eligible Inventory shall not
include (a) work-in-process; (b) components which are not part of finished
goods; (c) spare parts for equipment; (d) packaging and shipping materials; (e)
supplies used or consumed in Borrower's business; (f) Inventory at premises
other than those owned and controlled by Borrower, except to the extent Lender
shall have received an agreement in writing from the person in possession of
such Inventory and/or the owner or operator of such premises in form and
substance satisfactory to Lender acknowledging Lender's first priority security
interest in the Inventory, waiving security interests and claims by such person
against the Inventory and permitting Lender access to, and the right to remain
on, the premises so as to exercise Lender's rights and remedies and otherwise
deal with the Collateral; (g) Inventory subject to a security interest or lien
in favor of any person other than Lender except those permitted in this
Agreement; (h) bill and hold goods; (i) unserviceable, obsolete or slow moving
Inventory; (j) Inventory which is not subject to the first priority, valid and
perfected security interest of Lender; (k) returned, damaged and/or defective
Inventory; and (l) Inventory purchased or sold on consignment. General criteria
for Eligible Inventory may be established and revised from time to time by
Lender in good faith. Any Inventory which is not Eligible Inventory shall
nevertheless be part of the Collateral.
1.10 "Equipment" shall mean all of Borrower's now owned and hereafter
acquired equipment, machinery, computers and computer hardware and software
(whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used in
connection therewith, and substitutions and replacements thereof, wherever
located.
1.11 "Event of Default" shall mean the occurrence or existence of any
event or condition described in Section 10.1 hereof.
1.12 "Excess Availability" shall mean the amount, as determined by Lender,
calculated at any time, equal to:
(a) the lesser of (i) the amount of the Loans available to Borrower
as of such time based on the lending formulas set forth in Sections 2.1
and 2.2 hereunder, as determined by Lender, and subject to the
Availability Reserves from time to time established by Lender hereunder
and all sub-limits established under Section 2.4, and (ii) the Maximum
Credit, MINUS
(b) the sum of: (i) the amount of all then outstanding and unpaid
Obligations, plus (ii) the aggregate amount of all trade payables of
Borrower which are more than thirty (30) days past due as of such time
plus (iii) the amount of checks issued by Borrower to pay trade payables,
but not yet sent and (iv) the amount of all overdrafts of Borrower, if
any.
1.13 "Financing Agreements" shall mean, collectively, this Agreement and
all notes, guarantees, security agreements and other agreements, documents and
instruments now or at any time hereafter executed and/or delivered by Borrower
or any Obligor in connection with this Agreement, as the same now exist or may
hereafter be amended, modified, supplemented, extended, renewed, restated or
replaced.
LOAN AND SECURITY AGREEMENT - Page 5
<PAGE>
1.14 "GAAP" shall mean generally accepted accounting principles in the
United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Board which are applicable to the
circumstances as of the date of determination consistently applied, except that,
for purposes of Sections 9.14 and 9.15 hereof, GAAP shall be determined on the
basis of such principles in effect on the date hereof and consistent with those
used in the preparation of the audited financial statements delivered to Lender
prior to the date hereof.
1.15 "Information Certificate" shall mean the Information Certificate of
Borrower constituting Exhibit A hereto containing material information with
respect to Borrower, its business and assets provided by or on behalf of
Borrower to Lender in connection with the preparation of this Agreement and the
other Financing Agreements and the financing arrangements provided for herein.
1.16 "Inventory" shall mean all of Borrower's now owned and hereafter
existing or acquired raw materials, work in process, finished goods and all
other inventory of whatsoever kind or nature, wherever located.
1.17 "Loans" shall mean the loans now or hereafter made by Lender to or
for the benefit of Borrower on a revolving basis (involving advances, repayments
and re-advances) as set forth in Sections 2.1 and 2.2 hereof.
1.18 "Maximum Credit" shall mean the amount of $10,000,000.00.
1.19 "Net Amount of Eligible Accounts" shall mean as of any date of
calculation the gross amount of Eligible Accounts less (a) sales, excise or
similar taxes included in the amount thereof and (b) an amount equal to sixty
percent (60%) of the consolidated accrued liability reflected on Borrower's
books with respect to returns, discounts, claims, credits and other allowances
as of such date of calculation.
1.20 "Net Worth" shall mean as to any Person, at any time, in accordance
with GAAP (except as otherwise specifically set forth below), on a consolidated
basis for such Person and its subsidiaries (if any), the amount equal to the
difference between: (a) the aggregate net book value of all assets of such
Person and its subsidiaries, calculating the book value of inventory for this
purpose on a first-in-first-out basis, after deducting from such book values all
appropriate reserves in accordance with GAAP (including all reserves for
doubtful receivables, obsolescence, depreciation and amortization) and (b) the
aggregate amount of the indebtedness and other liabilities of such Person and
its subsidiaries (including tax and other proper accruals).
1.21 "Obligations" shall mean any and all Loans and all other obligations,
liabilities and indebtedness of every kind, nature and description owing by
Borrower to Lender and/or its
LOAN AND SECURITY AGREEMENT - Page 6
<PAGE>
affiliates, including principal, interest, charges, fees, costs and expenses,
however evidenced, whether as principal, surety, endorser, guarantor or
otherwise, whether arising under this Agreement or otherwise, whether now
existing or hereafter arising, whether arising before, during or after the
initial or any renewal term of this Agreement or after the commencement of any
case with respect to Borrower under the United States Bankruptcy Code or any
similar statute (including the payment of interest and other amounts which would
accrue and become due but for the commencement of such case, whether or not such
amounts are allowed or allowable in whole or in part in such case), whether
direct or indirect, absolute or contingent, joint or several, due or not due,
primary or secondary, liquidated or unliquidated, secured or unsecured, and
however acquired by Lender.
1.22 "Obligor" shall mean any guarantor, endorser, acceptor, surety or
other person liable on or with respect to the Obligations or who is the owner of
any property which is security for the Obligations, other than Borrower.
1.23 "Payment Account" shall have the meaning set forth in Section 6.3
hereof.
1.24 "Permitted Extended Dating" shall mean each Account payable by an
account debtor for which Lender shall have determined (based on Lender's
evaluation of such account debtor's creditworthiness, past credit history and
such other matters as Lender may elect to consider at its sole option) that no
material increase in the risk of collection shall be presented by Borrower's
issuance of invoices to such account debtor that do not require payment for
goods or services up to 180 days after the date of such invoice; provided,
however, in the event any Account payable by an account debtor designated as a
Permitted Extended Dating shall be unpaid after thirty (30) days from the due
date of the corresponding original invoice, all Accounts of such account debtor
shall cease to be Permitted Extended Datings. Lender may establish Availability
Reserves from time to time with respect to Permitted Extended Datings in such
amount as Lender may deem necessary or appropriate.
1.25 "Person" or "person" shall mean any individual, sole proprietorship,
partnership, corporation (including any corporation which elects subchapter S
status under the Internal Revenue Code of 1986, as amended), limited liability
company, limited liability partnership, business trust, unincorporated
association, joint stock corporation, trust, joint venture or other entity or
any government or any agency or instrumentality or political subdivision
thereof.
1.26 "Prime Rate" shall mean the "prime rate" from time to time published
in the Money Rates column of the Wall Street Journal (Eastern Edition, New York
Metro); provided, however, if the Money Rates column of the Wall Street Journal
(Eastern Edition, New York Metro) ceases to published or otherwise does not
designate a "prime rate" as of any business day, the Lender shall have the right
to obtain such information from a similar business publication of its selection.
1.27 "Records" shall mean all of Borrower's present and future books of
account of every kind or nature, purchase and sale agreements, invoices, ledger
cards, bills of lading and other shipping evidence, statements, correspondence,
memoranda, credit files and other data
LOAN AND SECURITY AGREEMENT - Page 7
<PAGE>
relating to the Collateral or any account debtor, together with the tapes,
disks, diskettes and other data and software storage media and devices, file
cabinets or containers in or on which the foregoing are stored (including any
rights of Borrower with respect to the foregoing maintained with or by any other
person).
1.28 "Sold Through Inventory" shall mean Inventory that was initially sold
on a guaranteed basis and that subsequently has been sold to the ultimate
consumer of such Inventory, but only to the extent the Person that purchased
such Inventory from Borrower has confirmed (in writing or as may otherwise be
acceptable to Lender) to Lender: (a) such Person's sale of the relevant
Inventory; and (b) the release of any claim against, or offset by, such Person
in respect of such Inventory, such confirmation to be supported by such
information as Lender may require.
1.29 "Subsidiary" shall mean DSI (HK) Limited, together with any Person of
which at least a majority of the securities or other ownership interests having
by the terms thereof ordinary voting power to elect a majority of the board of
directors or other individuals performing similar functions of such Person
(irrespective of whether or not at the time securities or other ownership
interests of any other class or classes of such Person shall have or might have
voting power by reason of the happening of any contingency) is at the time
directly or indirectly owned or controlled by the Company or one or more
Subsidiaries of the Company or by the Company and one or more Subsidiaries of
the Company.
1.30 "Value" shall mean, as determined by Lender in good faith, with
respect to Inventory, the lower of (a) cost computed on a first-in first-out
basis in accordance with GAAP or (b) market value.
SECTION 2. LOANS
2.1 CALCULATION OF BORROWING LIMITS. Subject to and upon the terms and
conditions contained herein, Lender agrees to make Loans to Borrower from time
to time in amounts requested by Borrower up to the lesser of: (a) the Maximum
Credit; and (b) the amount equal to the sum of:
(i) eighty percent (80%) of the Net Amount of Eligible
Accounts, PLUS
(ii) subject to the limitation set forth at Section 2.4 below,
the sum of: (A) fifty percent (50%) of the Value of Eligible Inventory;
and (B) fifty percent (50%) of the Value of Eligible In-Transit Inventory;
LESS
(iii) any Availability Reserves.
2.2 SEASONAL INVENTORY ADVANCES. In addition to the Loans permitted under
Section 2.1 above, but subject to, and upon the terms and conditions contained
herein (including, without limitation, the provisions set forth in Section 2.4
below), Lender agrees to make Loans to Borrower from time to time as follows up
to the lesser of (a) the Maximum Credit LESS Loans
LOAN AND SECURITY AGREEMENT - Page 8
<PAGE>
extended under Section 2.1 above; and (b) the amounts set forth below with
respect to the corresponding periods specified below:
(i) during the period commencing on the date of this Agreement
and extending through April 30, 1999, the lesser of (A) the sum of: (1)
twenty percent (20%) of the Value of Eligible Inventory; and (2) twenty
percent (20%) of the Value of Eligible In-Transit Inventory; or (B) one
million dollars ($1,000,000.00); or
(ii) during the period commencing May 1, 1999, and extending
through June 30, 1999, the lesser of (A) the sum of: (1) ten percent (10%)
of the Value of Eligible Inventory; and (2) ten percent (10%) of the Value
of Eligible In-Transit Inventory; or (B) one million dollars
($1,000,000.00); or
(iii) during the period commencing January 1, 2000, and
extending through June 30, 2000, the sum of: (A) ten percent (10%) of the
Value of Eligible Inventory; and (B) ten percent (10%) of the Value of
Eligible In-Transit Inventory; or
(iv) during the period commencing January 1, 2001, and
extending through June 30, 2001, the sum of: (A) ten percent (10%) of the
Value of Eligible Inventory; and (B) ten percent (10%) of the Value of
Eligible In-Transit Inventory.
All Loan amounts calculated pursuant to Sections 2.2(i) through (iv), inclusive,
shall be subject to reduction for all applicable Availability Reserves.
2.3 REDUCTION OF BORROWING LIMITS. Lender may, in its discretion, from
time to time, upon not less than five (5) days prior notice to Borrower, (a)
reduce the lending formula with respect to Eligible Accounts to the extent that
Lender determines in good faith that: (i) the dilution with respect to the
Accounts for any period (based on the ratio of (A) the aggregate amount of
reductions in Accounts other than as a result of payments in cash to (B) the
aggregate amount of total sales) has increased in any material respect or may be
reasonably anticipated to increase in any material respect above historical
levels, or (C) the general creditworthiness of account debtors has declined or
(b) reduce the lending formula(s) with respect to Eligible Inventory or Eligible
In-Transit Inventory to the extent that Lender determines that: (i) the number
of days of the turnover of the Inventory for any period has changed in any
material respect; (ii) the liquidation value of the Eligible Inventory, or any
category thereof, has decreased; (iii) the nature and quality of the Inventory
has deteriorated; or (iv) Lender's ability to seize and dispose of Eligible
In-Transit Inventory has been impaired or diminished in any respect. In
determining whether to reduce the lending formula(s), Lender may consider
events, conditions, contingencies or risks which are also considered in
determining Eligible Accounts, Eligible Inventory, Eligible In-Transit Inventory
or in establishing Availability Reserves.
2.4 MAXIMUM CREDIT LIMIT AND MAXIMUM INVENTORY CREDIT LIMIT.
Notwithstanding the calculations set forth at Section 2.1(b)(ii) and Section 2.2
above, the dollar amount of Loans available to Borrower pursuant to such
sections shall be limited to five million dollars ($5,000,000) in the aggregate
at all times. Except in Lender's discretion, the aggregate amount
LOAN AND SECURITY AGREEMENT - Page 9
<PAGE>
of the Obligations outstanding at any time shall not exceed the Maximum Credit.
In the event that the outstanding amount of Obligations exceed the amounts
available under the lending formulas or the Maximum Credit, as applicable, such
event shall not limit, waive or otherwise affect any rights of Lender in that
circumstance or on any future occasions and Borrower shall, upon demand by
Lender, which may be made at any time or from time to time, immediately repay to
Lender the entire amount of any such excess(es) for which payment is demanded.
2.5 AVAILABILITY RESERVES. All Loans otherwise available to Borrower
pursuant to the lending formulas and subject to the Maximum Credit and other
applicable limits hereunder shall be subject to Lender's continuing right to
establish and revise Availability Reserves.
SECTION 3. INTEREST AND FEES
3.1 INTEREST.
(a) Borrower shall pay to Lender interest on the outstanding
principal amount of the non-contingent Obligations at the rate of three quarters
of one percent (.75%) per annum in excess of the Prime Rate, except that, at
Lender's option, without notice, Borrower shall pay to Lender interest at the
lesser of (A) the Maximum Legal Rate and (B) the Prime Rate, PLUS four percent
(4%): (i) on the non-contingent Obligations for (1) the period from and after
the date of termination or non-renewal hereof until such time as Lender has
received full and final payment of all such Obligations (notwithstanding entry
of any judgment against Borrower), and (2) the period from and after the date of
the occurrence of an Event of Default for so long as such Event of Default is
continuing as determined by Lender and (ii) on the Loans at any time outstanding
in excess of the amounts available to Borrower under Section 2 (whether or not
such excess(es), arise or are made with or without Lender's knowledge or consent
and whether made before or after an Event of Default).
(b) Interest shall be payable by Borrower to Lender monthly in
arrears not later than the first day of each calendar month and shall be
calculated on the basis of a three hundred sixty (360) day year and actual days
elapsed. The interest rate shall increase or decrease by an amount equal to each
increase or decrease in the Prime Rate effective as of the date on which the
applicable increase or decrease in the Prime Rate shall be published in the
printed version of the Wall Street Journal (Eastern Edition, New York Metro) or
such other publication as Lender may select in accordance with the terms hereof.
All interest accruing hereunder on and after an Event of Default or termination
or non-renewal hereof shall be payable on demand. In no event shall charges
constituting interest payable by Borrower to Lender exceed the maximum amount or
the rate permitted under any applicable law or regulation, and if any part or
provision of this Agreement is in contravention of any such law or regulation,
such part or provision shall be deemed amended to conform thereto. No
agreements, conditions, provisions or stipulations contained in this Agreement
or any other instrument, document or agreement between Borrower and Lender or
default of Borrower, or the exercise by Lender of the right to accelerate the
payment of the maturity of principal and interest, or to exercise any option
whatsoever contained in this Agreement or any other Financing Agreement, or the
arising of any contingency whatsoever, shall entitle Lender to contract for,
charge, or receive, in any event, interest
LOAN AND SECURITY AGREEMENT - Page 10
<PAGE>
exceeding the maximum rate of interest permitted by applicable state or federal
law in effect from time to time (hereinafter "MAXIMUM LEGAL RATE"). In no event
shall Borrower be obligated to pay interest exceeding such Maximum Legal Rate
and all agreements, conditions or stipulations, if any, which may in any event
or contingency whatsoever operate to bind, obligate or compel Borrower to pay a
rate of interest exceeding the Maximum Legal Rate, shall be without binding
force or effect, at law or in equity, to the extent only of the excess of
interest over such Maximum Legal Rate. In the event any interest is contracted
for, charged or received in excess of the Maximum Legal Rate (`"EXCESS"),
Borrower acknowledges and stipulates that any such contract, charge, or receipt
shall be the result of an accident and BONA FIDE error, and that any Excess
received by Lender shall be applied, first, to reduce the principal then unpaid
hereunder; second, to reduce the other Obligations; and third, returned to
Borrower, it being the intention of the parties hereto not to enter at any time
into a usurious or otherwise illegal relationship. Borrower recognizes that,
with fluctuations in the Prime Rate and the Maximum Legal Rate, such a result
could inadvertently occur. By the execution of this Agreement, Borrower
covenants that (i) the credit or return of any Excess shall constitute the
acceptance by Borrower of such Excess, and (ii) Borrower shall not seek or
pursue any other remedy, legal or equitable, against Lender, based in whole or
in part upon contracting for, charging or receiving of any interest in excess of
the maximum authorized or receiving of any interest in excess of the maximum
authorized by applicable law. For the purpose of determining whether or not any
Excess has been contracted for, charged or received by Lender, all interest at
any time contracted for, charged or received by Lender in connection with this
Agreement shall be amortized, prorated, allocated and spread in equal parts
during the entire term of this Agreement.
3.2 UNUSED LINE FEE. Borrower shall pay to Lender monthly an unused line
fee at a rate equal to one-quarter percent (.25%) per annum, applied to the
amount by which Maximum Credit amount exceeds the average daily principal
balance of the outstanding Loans during the immediately preceding month (or part
thereof) while this Agreement is in effect and for so long thereafter as any of
the Obligations are outstanding, which fee shall be payable on the first day of
each month in arrears.
3.3 COLLATERAL MANAGEMENT FEE. Borrower shall pay to Lender monthly a
Collateral management fee in an amount equal to two thousand dollars ($2,000)
while this Agreement is in effect and for so long thereafter as any of the
Obligations are outstanding. The first such Collateral management fee shall be
collected on the date of the making of the initial Loans under this Agreement
with respect to the first full calendar month thereafter. Thereafter, such
Collateral management fee shall be payable on the first day of each succeeding
month in advance.
SECTION 4. CONDITIONS PRECEDENT
4.1 CONDITIONS PRECEDENT TO INITIAL LOANS AND LETTER OF CREDIT
ACCOMMODATIONS. Each of the following is a condition precedent to Lender making
the initial Loans hereunder:
(a) Lender shall have received evidence, in form and substance
satisfactory to Lender, that Lender has valid perfected and first priority
security interests in and liens upon the Collateral and any other property which
is intended to be security for the Obligations or the liability of any Obligor
in respect thereof, subject only to the security interests and liens permitted
herein or in the other Financing Agreements;
LOAN AND SECURITY AGREEMENT - Page 11
<PAGE>
(b) all requisite corporate action and proceedings in connection
with this Agreement and the other Financing Agreements shall be satisfactory in
form and substance to Lender, and Lender shall have received all information and
copies of all documents, including records of requisite corporate action and
proceedings which Lender may have requested in connection therewith, such
documents where requested by Lender or its counsel to be certified by
appropriate corporate officers or governmental authorities;
(c) no material adverse change shall have occurred in the assets,
business or prospects of Borrower since the date of Lender's latest field
examination and no change or event shall have occurred which would impair the
ability of Borrower or any Obligor to perform its obligations hereunder or under
any of the other Financing Agreements to which it is a party or of Lender to
enforce the Obligations or realize upon the Collateral;
(d) Lender shall have completed a field review of the Records and
such other information with respect to the Collateral as Lender may require to
determine the amount of Loans available to Borrower, the results of which shall
be satisfactory to Lender, not more than three (3) business days prior to the
date hereof;
(e) Lender shall have received, in form and substance satisfactory
to Lender, all consents, waivers, acknowledgments and other agreements from
third persons which Lender may deem necessary or desirable in order to permit,
protect and perfect its security interests in and liens upon the Collateral or
to effectuate the provisions or purposes of this Agreement and the other
Financing Agreements, including acknowledgments by lessors, mortgagees and
warehousemen of Lender's security interests in the Collateral, waivers by such
persons of any security interests, liens or other claims by such persons to the
Collateral and agreements permitting Lender access to, and the right to remain
on, the premises to exercise its rights and remedies and otherwise deal with the
Collateral;
(f) Lender shall have received evidence of insurance and loss
payee endorsements required hereunder and under the other Financing Agreements,
in form and substance satisfactory to Lender, and certificates of insurance
policies and/or endorsements naming Lender as loss payee;
(g) Lender shall have received, in form and substance satisfactory
to Lender, such opinion letters of counsel to Borrower with respect to the
Financing Agreements and such other matters as Lender may request;
(h) the other Financing Agreements and all instruments and
documents hereunder and thereunder shall have been duly executed and delivered
to Lender, in form and substance satisfactory to Lender;
LOAN AND SECURITY AGREEMENT - Page 12
<PAGE>
(i) Lender shall have received a one-time facility fee in the
amount of $50,000 for the establishment of the credit facilities provided
hereunder;
(j) the Excess Availability as determined by Lender, as of the
date hereof, shall be not less than $750,000 after giving effect to the initial
Loans made or to be made in connection with the initial transactions hereunder;
and
(k) Lender shall have received evidence of the restructuring of
payments to Nickelodeon on terms acceptable to Lender, such evidence to be in
form and substance satisfactory to Lender.
4.2 CONDITIONS PRECEDENT TO ALL LOANS AND LETTER OF CREDIT ACCOMMODATIONS.
Each of the following is an additional condition precedent to Lender making
Loans to Borrower, including the initial Loans and any future Loans:
(a) all representations and warranties contained herein and in the
other Financing Agreements shall be true and correct in all material respects
with the same effect as though such representations and warranties had been made
on and as of the date of the making of each such Loan and after giving effect
thereto; and
(b) no Event of Default and no event or condition which, with
notice or passage of time or both, would constitute an Event of Default, shall
exist or have occurred and be continuing on and as of the date of the making of
such Loan and after giving effect thereto.
SECTION 5. GRANT OF SECURITY INTEREST
To secure payment and performance of all Obligations, Borrower hereby
grants to Lender a continuing security interest in, a lien upon, and a right of
set off against, and hereby assigns to Lender as security, the following
property and interests in property of Borrower, whether now owned or hereafter
acquired or existing, and wherever located (collectively, the "Collateral"):
5.1 Accounts;
5.2 all present and future contract rights, general intangibles (including
tax and duty refunds, registered and unregistered patents, trademarks, service
marks, copyrights, trade names, applications for the foregoing, trade secrets,
goodwill, processes, drawings, blueprints, customer lists, licenses, whether as
licensor or licensee, choses in action and other claims and existing and future
leasehold interests in equipment, real estate and fixtures), chattel paper,
documents, instruments, securities (including only 65% of the outstanding
capital stock of DSI (HK) Limited) and other investment property, letters of
credit, bankers' acceptances and guaranties;
5.3 all present and future monies, securities (including only 65% of the
outstanding capital stock of DSI (HK) Limited), credit balances, deposits,
deposit accounts and other property of Borrower now or hereafter held or
received by or in transit to Lender or its affiliates or at any
LOAN AND SECURITY AGREEMENT - Page 13
<PAGE>
other depository or other institution from or for the account of Borrower,
whether for safekeeping, pledge, custody, transmission, collection or otherwise,
and all present and future liens, security interests, rights, remedies, title
and interest in, to and in respect of Accounts and other Collateral, including
(a) rights and remedies under or relating to guaranties, contracts of
suretyship, letters of credit and credit and other insurance related to the
Collateral, (b) rights of stoppage in transit, replevin, repossession,
reclamation and other rights and remedies of an unpaid vendor, lienor or secured
party, (c) goods described in invoices, documents, contracts or instruments with
respect to, or otherwise representing or evidencing, Accounts or other
Collateral, including returned, repossessed and reclaimed goods, and (d)
deposits by and property of account debtors or other persons securing the
obligations of account debtors;
5.4 Inventory;
5.5 Equipment;
5.6 Records; and
5.7 all products and proceeds of the foregoing, in any form, including
insurance proceeds and all claims against third parties for loss or damage to or
destruction of any or all of the foregoing.
SECTION 6. COLLECTION AND ADMINISTRATION
6.1 BORROWER'S LOAN ACCOUNT. Lender shall maintain one or more loan
account(s) on its books in which shall be recorded (a) all Loans and other
Obligations and the Collateral, (b) all payments made by or on behalf of
Borrower and (c) all other appropriate debits and credits as provided in this
Agreement, including fees, charges, costs, expenses and interest. All entries in
the loan account(s) shall be made in accordance with Lender's customary
practices as in effect from time to time.
6.2 STATEMENTS. Lender shall render to Borrower each month a statement
setting forth the balance in the Borrower's loan account(s) maintained by Lender
for Borrower pursuant to the provisions of this Agreement, including principal,
interest, fees, costs and expenses. Each such statement shall be subject to
subsequent adjustment by Lender but shall, absent manifest errors or omissions,
be considered correct and deemed accepted by Borrower and conclusively binding
upon Borrower as an account statement except to the extent that Lender receives
a written notice from Borrower of any specific exceptions of Borrower thereto
within forty-five (45) days after the date such statement has been mailed by
Lender. Until such time as Lender shall have rendered to Borrower a written
statement as provided above, the balance in Borrower's loan account(s) shall be
presumptive evidence of the amounts due and owing to Lender by Borrower.
LOAN AND SECURITY AGREEMENT - Page 14
<PAGE>
6.3 COLLECTION OF ACCOUNTS.
(a) Borrower shall establish and maintain, at its expense, blocked
accounts or lockboxes and related blocked accounts (in either case, "Blocked
Accounts"), as Lender may specify, with such banks as are acceptable to Lender
into which Borrower shall promptly deposit, and shall direct its account debtors
to directly remit, all cash payments received by Borrower (or, in the case of
account debtors, payable to Borrower), including, without limitation, all
payments in respect of Accounts, all payments constituting proceeds of Inventory
or other Collateral, all tax, duty and other cash refunds, and all other cash
payments, in each case in the identical form in which such payments are made,
whether by cash, check or other manner. The banks at which the Blocked Accounts
are established shall enter into an agreement, in form and substance
satisfactory to Lender, providing that all items received or deposited in the
Blocked Accounts are the property of Lender, that the depository bank has no
lien upon, or right to setoff against, the Blocked Accounts, the items received
for deposit therein, or the funds from time to time on deposit therein and that
the depository bank will wire, or otherwise transfer, in immediately available
funds, on a daily basis, all funds received or deposited into the Blocked
Accounts to such bank account of Lender as Lender may from time to time
designate for such purpose ("Payment Account"). Borrower agrees that all
payments made to such Blocked Accounts or other funds received and collected by
Lender, whether on the Accounts or as proceeds of Inventory or other Collateral
or otherwise shall be the property of Lender.
(b) For purposes of calculating the amount of the Loans available
to Borrower, such payments will be applied (conditional upon final collection)
to the Obligations on the business day of receipt by Lender of immediately
available funds in the Payment Account provided such payments and notice thereof
are received in accordance with Lender's usual and customary practices as in
effect from time to time and within sufficient time to credit Borrower's loan
account on such day, and if not, then on the next business day. For the purposes
of calculating interest on the Obligations, such payments or other funds
received will be applied (conditional upon final collection) to the Obligations
one (1) business day following the date of receipt of immediately available
funds by Lender in the Payment Account provided such payments or other funds and
notice thereof are received in accordance with Lender's usual and customary
practices as in effect from time to time and within sufficient time to credit
Borrower's loan account on such day, and if not, then on the next business day.
(c) Borrower and all of its affiliates, subsidiaries,
shareholders, directors, employees or agents shall, acting as trustee for
Lender, receive, as the property of Lender, any monies, checks, notes, drafts or
any other payment relating to and/or proceeds of Accounts or other Collateral
which come into their possession or under their control and immediately upon
receipt thereof, shall deposit or cause the same to be deposited in the Blocked
Accounts, or remit the same or cause the same to be remitted, in kind, to
Lender. In no event shall the same be commingled with Borrower's own funds.
Borrower agrees to reimburse Lender on demand for any amounts owed or paid to
any bank at which a Blocked Account is established or any other bank or person
involved in the transfer of funds to or from the Blocked Accounts arising out of
Lender's payments to or indemnification of such bank or person. The obligation
of Borrower to
LOAN AND SECURITY AGREEMENT - Page 15
<PAGE>
reimburse Lender for such amounts pursuant to this Section 6.3 shall survive the
termination or non-renewal of this Agreement.
6.4 PAYMENTS. All Obligations shall be payable to the Payment Account as
provided in Section 6.3 or such other place as Lender may designate from time to
time. Lender may apply payments received or collected from Borrower or for the
account of Borrower (including the monetary proceeds of collections or of
realization upon any Collateral) to such of the Obligations, whether or not then
due, in such order and manner as Lender determines. At Lender's option, all
principal, interest, fees, costs, expenses and other charges provided for in
this Agreement or the other Financing Agreements may be charged directly to the
loan account(s) of Borrower. Borrower shall make all payments to Lender on the
Obligations free and clear of, and without deduction or withholding for or on
account of, any setoff, counterclaim, defense, duties, taxes, levies, imposts,
fees, deductions, withholding, restrictions or conditions of any kind. If after
receipt of any payment of, or proceeds of Collateral applied to the payment of,
any of the Obligations, Lender is required to surrender or return such payment
or proceeds to any Person for any reason, then the Obligations intended to be
satisfied by such payment or proceeds shall be reinstated and continue and this
Agreement shall continue in full force and effect as if such payment or proceeds
had not been received by Lender. Borrower shall be liable to pay to Lender, and
does hereby indemnify and hold Lender harmless for the amount of any payments or
proceeds surrendered or returned. This Section 6.4 shall remain effective
notwithstanding any contrary action which may be taken by Lender in reliance
upon such payment or proceeds. This Section 6.4 shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
6.5 AUTHORIZATION TO MAKE LOANS. Lender is authorized to make the Loans
based upon telephonic or other instructions received from anyone purporting to
be an officer of Borrower or other authorized person or, at the discretion of
Lender, if such Loans are necessary to satisfy any Obligations. All requests for
Loans hereunder shall specify the date on which the requested advance is to be
made and the amount of the requested Loan. Requests received after 12:00 p.m.
Philadelphia, Pennsylvania, time on any day shall be deemed to have been
received as of the opening of business on the immediately following business
day. All Loans under this Agreement shall be conclusively presumed to have been
made to, and at the request of and for the benefit of, Borrower when deposited
to the credit of Borrower or otherwise disbursed or established in accordance
with the instructions of Borrower or in accordance with the terms and conditions
of this Agreement.
6.6 USE OF PROCEEDS. Borrower shall use the initial proceeds of the Loans
provided by Lender to Borrower hereunder only for: (a) payments to each of the
persons listed in the disbursement direction letter furnished by Borrower to
Lender on or about the date hereof and (b) costs, expenses and fees in
connection with the preparation, negotiation, execution and delivery of this
Agreement and the other Financing Agreements. All other Loans made by Lender to
Borrower pursuant to the provisions hereof shall be used by Borrower only for
general operating, working capital and other proper corporate purposes of
Borrower not otherwise prohibited by the terms hereof. None of the proceeds will
be used, directly or indirectly, for the purpose of purchasing or carrying any
margin security or for the purposes of reducing or retiring any
LOAN AND SECURITY AGREEMENT - Page 16
<PAGE>
indebtedness which was originally incurred to purchase or carry any margin
security or for any other purpose which might cause any of the Loans to be
considered a "purpose credit" within the meaning of Regulation G of the Board of
Governors of the Federal Reserve System, as amended.
SECTION 7. COLLATERAL REPORTING AND COVENANTS
7.1 COLLATERAL REPORTING. Borrower shall provide Lender with the following
documents in a form satisfactory to Lender: (a) on a regular basis as required
by Lender, but no less than weekly, a schedule of Accounts, sales made, credits
issued, cash received and other information requested by Lender with respect to
current accounts receivable balances; (b) on a monthly basis, not more than
fifteen (15) days after the end of each calendar month, or more frequently as
Lender may request (i) perpetual inventory reports, (ii) inventory reports by
category and (iii) agings of accounts payable; (c) upon Lender's request, (i)
copies of customer statements and credit memos, remittance advices and reports,
and copies of deposit slips and bank statements, (ii) copies of shipping and
delivery documents, and (iii) copies of purchase orders, invoices and delivery
documents for Inventory and Equipment acquired by Borrower; (d) agings of
accounts receivable on a monthly basis, not more than fifteen (15) days after
the end of each calendar month, or more frequently as Lender may request; and
(e) such other reports as to the Collateral as Lender shall request from time to
time. If any of Borrower's records or reports of the Collateral are prepared or
maintained by an accounting service, contractor, shipper or other agent,
Borrower hereby irrevocably authorizes such service, contractor, shipper or
agent to deliver such records, reports, and related documents to Lender and to
follow Lender's instructions with respect to further services at any time that
an Event of Default exists or has occurred and is continuing.
7.2 ACCOUNTS COVENANTS.
(a)...Borrower shall notify Lender promptly of: (i) any material
delay in Borrower's performance of any of its obligations to any account debtor
or the assertion of any claims, offsets, defenses or counterclaims by any
account debtor, or any disputes with account debtors, or any settlement,
adjustment or compromise thereof, (ii) all material adverse information relating
to the financial condition of any account debtor and (iii) any event or
circumstance which, to Borrower's knowledge would cause Lender to consider any
then existing Accounts as no longer constituting Eligible Accounts. No credit,
discount, allowance or extension or agreement for any of the foregoing shall be
granted to any account debtor without Lender's consent, except in the ordinary
course of Borrower's business in accordance with practices and policies
previously disclosed in writing to Lender. So long as no Event of Default exists
or has occurred and is continuing, Borrower shall settle, adjust or compromise
any claim, offset, counterclaim or dispute with any account debtor. At any time
that an Event of Default exists or has occurred and is continuing, Lender shall,
at its option, have the exclusive right to settle, adjust or compromise any
claim, offset, counterclaim or dispute with account debtors or grant any
credits, discounts or allowances.
LOAN AND SECURITY AGREEMENT - Page 17
<PAGE>
(b) Without limiting the obligation of Borrower to deliver any
other information to Lender, Borrower shall promptly report to Lender any return
of Inventory by any one account debtor if the inventory so returned in such case
has a value in excess of $100,000. At any time that Inventory is returned,
reclaimed or repossessed, the Account (or portion thereof) which arose from the
sale of such returned, reclaimed or repossessed Inventory shall not be deemed an
Eligible Account. In the event any account debtor returns Inventory when an
Event of Default exists or has occurred and is continuing, Borrower shall, upon
Lender's request, (i) hold the returned Inventory in trust for Lender, (ii)
segregate all returned Inventory from all of its other property, (iii) dispose
of the returned Inventory solely according to Lender's instructions, and (iv)
not issue any credits, discounts or allowances with respect thereto without
Lender's prior written consent.
(c) With respect to each Account: (i) the amounts shown on any
invoice delivered to Lender or schedule thereof delivered to Lender shall be
true and complete, (ii) no payments shall be made thereon except payments
immediately delivered to Lender pursuant to the terms of this Agreement, (iii)
no credit, discount, allowance or extension or agreement for any of the
foregoing shall be granted to any account debtor except as reported to Lender in
accordance with this Agreement and except for credits, discounts, allowances or
extensions made or given in the ordinary course of Borrower's business in
accordance with practices and policies previously disclosed to Lender, (iv)
there shall be no setoffs, deductions, contras, defenses, counterclaims or
disputes existing or asserted with respect thereto except as reported to Lender
in accordance with the terms of this Agreement, (v) none of the transactions
giving rise thereto will violate any applicable State or Federal laws or
regulations, all documentation relating thereto will be legally sufficient under
such laws and regulations and all such documentation will be legally enforceable
in accordance with its terms.
(d) Lender shall have the right at any time or times, in Lender's
name or in the name of a nominee of Lender, to verify the validity, amount or
any other matter relating to any Account or other Collateral, by mail,
telephone, facsimile transmission or otherwise.
(e) Borrower shall deliver or cause to be delivered to Lender,
with appropriate endorsement and assignment, with full recourse to Borrower, all
chattel paper and instruments which Borrower now owns or may at any time acquire
immediately upon Borrower's receipt thereof, except as Lender may otherwise
agree.
(f) Lender may, at any time or times that an Event of Default
exists or has occurred and is continuing, (i) notify any or all account debtors
that the Accounts have been assigned to Lender and that Lender has a security
interest therein and Lender may direct any or all accounts debtors to make
payment of Accounts directly to Lender, (ii) extend the time of payment of,
compromise, settle or adjust for cash, credit, return of merchandise or
otherwise, and upon any terms or conditions, any and all Accounts or other
obligations included in the Collateral and thereby discharge or release the
account debtor or any other party or parties in any way liable for payment
thereof without affecting any of the Obligations, (iii) demand, collect or
enforce payment of any Accounts or such other obligations, but without any duty
to do so, and Lender shall not be liable for its failure to collect or enforce
the payment thereof nor for the negligence of its agents
LOAN AND SECURITY AGREEMENT - Page 18
<PAGE>
or attorneys with respect thereto and (iv) take whatever other action Lender may
deem necessary or desirable for the protection of its interests. At any time
that an Event of Default exists or has occurred and is continuing, at Lender's
request, all invoices and statements sent to any account debtor shall state that
the Accounts and such other obligations have been assigned to Lender and are
payable directly and only to Lender and Borrower shall deliver to Lender such
originals of documents evidencing the sale and delivery of goods or the
performance of services giving rise to any Accounts as Lender may require.
7.3 INVENTORY COVENANTS. With respect to the Inventory: (a) Borrower shall
at all times maintain inventory records reasonably satisfactory to Lender,
keeping correct and accurate records itemizing and describing the kind, type,
quality and quantity of Inventory, Borrower's cost therefor and daily
withdrawals therefrom and additions thereto; (b) Borrower shall conduct a
physical count of the Inventory at least once each year, but at any time or
times as Lender may request on or after an Event of Default, and promptly
following such physical inventory shall supply Lender with a report in the form
and with such specificity as may be reasonably satisfactory to Lender concerning
such physical count; (c) Borrower shall not remove any Inventory from the
locations set forth or permitted herein, without the prior written consent of
Lender, except for sales of Inventory in the ordinary course of Borrower's
business and except to move Inventory directly from one location set forth or
permitted herein to another such location; (d) upon Lender's request, Borrower
shall, at its expense, no more than once in any twelve (12)- month period, but
at any time or times as Lender may request on or after an Event of Default,
deliver or cause to be delivered to Lender written reports or appraisals as to
the Inventory in form, scope and methodology acceptable to Lender and by an
appraiser acceptable to Lender, addressed to Lender or upon which Lender is
expressly permitted to rely; (e) Borrower shall produce, use, store and maintain
the Inventory with all reasonable care and caution and in accordance with
applicable standards of any insurance and in conformity with applicable laws
(including the requirements of the Federal Fair Labor Standards Act of 1938, as
amended and all rules, regulations and orders related thereto); (f) Borrower
assumes all responsibility and liability arising from or relating to the
production, use, sale or other disposition of the Inventory; (g) Borrower shall
not sell Inventory to any customer on approval, or any other basis which
entitles the customer to return or may obligate Borrower to repurchase such
Inventory (other than guaranteed sales of Inventory in quantities consistent
with past practices as disclosed in writing to Lender or as Lender may otherwise
expressly approve in writing); (h) Borrower shall keep the Inventory in good and
marketable condition; and (i) Borrower shall not, without prior written notice
to Lender, acquire or accept any Inventory on consignment or approval.
7.4 EQUIPMENT COVENANTS. With respect to the Equipment: (a) upon Lender's
request, Borrower shall, at its expense, at any time or times as Lender may
request on or after an Event of Default, deliver or cause to be delivered to
Lender written reports or appraisals as to the Equipment in form, scope and
methodology acceptable to Lender and by an appraiser acceptable to Lender; (b)
Borrower shall keep the Equipment in good order, repair, running and marketable
condition (ordinary wear and tear excepted); (c) Borrower shall use the
Equipment with all reasonable care and caution and in accordance with applicable
standards of any insurance and in conformity with all applicable laws; (d) the
Equipment is and shall be used in Borrower's business and not for personal,
family, household or farming use; (e) Borrower shall not remove any
LOAN AND SECURITY AGREEMENT - Page 19
<PAGE>
Equipment from the locations set forth or permitted herein, except to the extent
necessary to have any Equipment repaired or maintained in the ordinary course of
the business of Borrower or to move Equipment directly from one location set
forth or permitted herein to another such location and except for the movement
of motor vehicles used by or for the benefit of Borrower in the ordinary course
of business; (f) the Equipment is now and shall remain personal property and
Borrower shall not permit any of the Equipment to be or become a part of or
affixed to real property; and (g) Borrower assumes all responsibility and
liability arising from the use of the Equipment.
7.5 POWER OF ATTORNEY. Borrower hereby irrevocably designates and appoints
Lender (and all persons designated by Lender) as Borrower's true and lawful
attorney-in-fact, and authorizes Lender, in Borrower's or Lender's name, to: (a)
at any time an Event of Default or event which with notice or passage of time or
both would constitute an Event of Default exists or has occurred and is
continuing (i) demand payment on Accounts or other proceeds of Inventory or
other Collateral, (ii) enforce payment of Accounts by legal proceedings or
otherwise, (iii) exercise all of Borrower's rights and remedies to collect any
Account or other Collateral, (iv) sell or assign any Account upon such terms,
for such amount and at such time or times as the Lender deems advisable, (v)
settle, adjust, compromise, extend or renew an Account, (vi) discharge and
release any Account, (vii) prepare, file and sign Borrower's name on any proof
of claim in bankruptcy or other similar document against an account debtor,
(viii) notify the post office authorities to change the address for delivery of
Borrower's mail to an address designated by Lender, and open and dispose of all
mail addressed to Borrower, and (ix) do all acts and things which are necessary,
in Lender's determination, to fulfill Borrower's obligations under this
Agreement and the other Financing Agreements and (b) at any time to (i) take
control in any manner of any item of payment or proceeds thereof, (ii) have
access to any lockbox or postal box into which Borrower's mail is deposited,
(iii) endorse Borrower's name upon any items of payment or proceeds thereof and
deposit the same in the Lender's account for application to the Obligations,
(iv) endorse Borrower's name upon any chattel paper, document, instrument,
invoice, or similar document or agreement relating to any Account or any goods
pertaining thereto or any other Collateral, (v) sign Borrower's name on any
verification of Accounts and notices thereof to account debtors and (vi) execute
in Borrower's name and file any UCC financing statements or amendments thereto.
Borrower hereby releases Lender and its officers, employees and designees from
any liabilities arising from any act or acts under this power of attorney and in
furtherance thereof, whether of omission or commission, except as a result of
Lender's own gross negligence or willful misconduct as determined pursuant to a
final non-appealable order of a court of competent jurisdiction.
7.6 RIGHT TO CURE. Lender may, at its option, (a) cure any default by
Borrower under any agreement with a third party or pay or bond on appeal any
judgment entered against Borrower, (b) discharge taxes, liens, security
interests or other encumbrances at any time levied on or existing with respect
to the Collateral and (c) pay any amount, incur any expense or perform any act
which, in Lender's judgment, is necessary or appropriate to preserve, protect,
insure or maintain the Collateral and the rights of Lender with respect thereto.
Lender may add any amounts so expended to the Obligations and charge Borrower's
account therefor, such amounts to be repayable by Borrower on demand. Lender
shall be under no obligation to effect such cure,
LOAN AND SECURITY AGREEMENT - Page 20
<PAGE>
payment or bonding and shall not, by doing so, be deemed to have assumed any
obligation or liability of Borrower. Any payment made or other action taken by
Lender under this Section shall be without prejudice to any right to assert an
Event of Default hereunder and to proceed accordingly.
7.7 ACCESS TO PREMISES. From time to time as requested by Lender, at the
cost and expense of Borrower, (a) Lender or its designee shall have complete
access to all of Borrower's premises during normal business hours and after
notice to Borrower, or at any time and without notice to Borrower if an Event of
Default exists or has occurred and is continuing, for the purposes of
inspecting, verifying and auditing the Collateral and all of Borrower's books
and records, including the Records, and (b) Borrower shall promptly furnish to
Lender such copies of such books and records or extracts therefrom as Lender may
request, and (c) use during normal business hours such of Borrower's personnel,
equipment, supplies and premises as may be reasonably necessary for the
foregoing and if an Event of Default exists or has occurred and is continuing
for the collection of Accounts and realization of other Collateral.
SECTION 8. REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants to Lender the following (which
shall survive the execution and delivery of this Agreement), the truth and
accuracy of which are a continuing condition of the making of Loans by Lender to
Borrower:
8.1 CORPORATE EXISTENCE, POWER AND AUTHORITY; SUBSIDIARIES. Borrower is a
corporation duly organized and in good standing under the laws of its state of
incorporation and is duly qualified as a foreign corporation and in good
standing in all states or other jurisdictions where the nature and extent of the
business transacted by it or the ownership of assets makes such qualification
necessary, except for those jurisdictions in which the failure to so qualify
would not have a material adverse effect on Borrower's financial condition,
results of operation or business or the rights of Lender in or to any of the
Collateral. The execution, delivery and performance of this Agreement, the other
Financing Agreements and the transactions contemplated hereunder and thereunder
are all within Borrower's corporate powers, have been duly authorized and are
not in contravention of law or the terms of Borrower's articles of
incorporation, by-laws, or other organizational documentation, or any indenture,
agreement or undertaking to which Borrower is a party or by which Borrower or
its property are bound. This Agreement and the other Financing Agreements
constitute legal, valid and binding obligations of Borrower enforceable in
accordance with their respective terms. Borrower does not have any subsidiaries
except as set forth on the Information Certificate.
8.2 FINANCIAL STATEMENTS; NO MATERIAL ADVERSE CHANGE. All financial
statements relating to Borrower which have been or may hereafter be delivered by
Borrower to Lender have been prepared in accordance with GAAP and fairly present
the financial condition and the results of operation of Borrower as of the dates
and for the periods set forth therein. Except as disclosed in any interim
financial statements furnished by Borrower to Lender prior to the date of this
Agreement, there has been no material adverse change in the assets, liabilities,
properties and
LOAN AND SECURITY AGREEMENT - Page 21
<PAGE>
condition, financial or otherwise, of Borrower, since the date of the most
recent audited financial statements furnished by Borrower to Lender prior to the
date of this Agreement.
8.3 CHIEF EXECUTIVE OFFICE; COLLATERAL LOCATIONS. The chief executive
office of Borrower and Borrower's Records concerning Accounts are located only
at the address set forth at Section 12.2 of this Agreement and its only other
places of business and the only other locations of Collateral, if any, are the
addresses set forth in the Information Certificate, subject to the right of
Borrower to establish new locations in accordance with Section 9.2 below. The
Information Certificate correctly identifies any of such locations which are not
owned by Borrower and sets forth the owners and/or operators thereof and to the
best of Borrower's knowledge, the holders of any mortgages on such locations.
8.4 PRIORITY OF LIENS; TITLE TO PROPERTIES. The security interests and
liens granted to Lender under this Agreement and the other Financing Agreements
constitute valid and perfected first priority liens and security interests in
and upon the Collateral subject only to the liens indicated on Schedule 8.4
hereto and the other liens permitted under Section 9.8 hereof. Borrower has good
and marketable title to all of its properties and assets subject to no liens,
mortgages, pledges, security interests, encumbrances or charges of any kind,
except those granted to Lender and such others as are specifically listed on
Schedule 8.4 hereto or permitted under Section 9.8 hereof.
8.5 TAX RETURNS. Borrower has filed, or caused to be filed, in a timely
manner all tax returns, reports and declarations which are required to be filed
by it (without requests for extension except as previously disclosed in writing
to Lender). All information in such tax returns, reports and declarations is
complete and accurate in all material respects. Borrower has paid or caused to
be paid all taxes due and payable or claimed due and payable in any assessment
received by it, except taxes the validity of which are being contested in good
faith by appropriate proceedings diligently pursued and available to Borrower
and with respect to which adequate reserves have been set aside on its books.
Adequate provision has been made for the payment of all accrued and unpaid
Federal, State, county, local, foreign and other taxes whether or not yet due
and payable and whether or not disputed.
8.6 LITIGATION. Except as set forth on the Information Certificate, there
is no present investigation by any governmental agency pending, or to the best
of Borrower's knowledge threatened, against or affecting Borrower, its assets or
business and there is no action, suit, proceeding or claim by any Person
pending, or to the best of Borrower's knowledge threatened, against Borrower or
its assets or goodwill, or against or affecting any transactions contemplated by
this Agreement, which if adversely determined against Borrower would result in
any material adverse change in the assets, business or prospects of Borrower or
would impair the ability of Borrower to perform its obligations hereunder or
under any of the other Financing Agreements to which it is a party or of Lender
to enforce any Obligations or realize upon any Collateral.
8.7 COMPLIANCE WITH OTHER AGREEMENTS AND APPLICABLE LAWS. Borrower is not
in default in any material respect under, or in violation in any material
respect of any of the terms of, any agreement, contract, instrument, lease or
other commitment to which it is a party or by which
LOAN AND SECURITY AGREEMENT - Page 22
<PAGE>
it or any of its assets are bound and Borrower is in compliance in all material
respects with all applicable provisions of laws, rules, regulations, licenses,
permits, approvals and orders of any foreign, Federal, State or local
governmental authority.
8.8 BANK ACCOUNTS. All of the deposit accounts, investment accounts or
other accounts in the name of or used by Borrower maintained at any bank or
other financial institution are set forth on Schedule 8.8 hereto, subject to the
right of Borrower to establish new accounts in accordance with Section 9.13
below.
8.9 ACCURACY AND COMPLETENESS OF INFORMATION. All information furnished by
or on behalf of Borrower in writing to Lender in connection with this Agreement
or any of the other Financing Agreements or any transaction contemplated hereby
or thereby, including all information on the Information Certificate is true and
correct in all material respects on the date as of which such information is
dated or certified and does not omit any material fact necessary in order to
make such information not misleading. No event or circumstance has occurred
which has had or could reasonably be expected to have a material adverse affect
on the business, assets or prospects of Borrower, which has not been fully and
accurately disclosed to Lender in writing.
8.10 SURVIVAL OF WARRANTIES; CUMULATIVE. All representations and
warranties contained in this Agreement or any of the other Financing Agreements
shall survive the execution and delivery of this Agreement and shall be deemed
to have been made again to Lender on the date of each additional borrowing or
other credit accommodation hereunder and shall be conclusively presumed to have
been relied on by Lender regardless of any investigation made or information
possessed by Lender. The representations and warranties set forth herein shall
be cumulative and in addition to any other representations or warranties which
Borrower shall now or hereafter give, or cause to be given, to Lender.
SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS
9.1 MAINTENANCE OF EXISTENCE. Borrower shall at all times preserve, renew
and keep in full, force and effect its corporate existence and rights and
franchises with respect thereto and maintain in full force and effect all
permits, licenses, trademarks, trade names, approvals, authorizations, leases
and contracts necessary to carry on the business as presently or proposed to be
conducted. Borrower shall give Lender thirty (30) days prior written notice of
any proposed change in its corporate name, which notice shall set forth the new
name and Borrower shall deliver to Lender a copy of the amendment to the
Articles of Incorporation of Borrower providing for the name change certified by
the Secretary of State of the jurisdiction of incorporation of Borrower as soon
as it is available.
9.2 NEW COLLATERAL LOCATIONS. Borrower may open any new location within
the continental United States provided Borrower (a) gives Lender thirty (30)
days prior written notice of the intended opening of any such new location and
(b) executes and delivers, or causes to be executed and delivered, to Lender
such agreements, documents, and instruments as Lender may
LOAN AND SECURITY AGREEMENT - Page 23
<PAGE>
deem reasonably necessary or desirable to protect its interests in the
Collateral at such location, including UCC financing statements.
9.3 COMPLIANCE WITH LAWS, REGULATIONS, ETC. Borrower shall, at all times,
comply in all material respects with all laws, rules, regulations, licenses,
permits, approvals and orders of any Federal, State or local governmental
authority applicable to it.
9.4 PAYMENT OF TAXES AND CLAIMS. Borrower shall duly pay and discharge all
taxes, assessments, contributions and governmental charges upon or against it or
its properties or assets, except for taxes the validity of which are being
contested in good faith by appropriate proceedings diligently pursued and
available to Borrower and with respect to which adequate reserves have been set
aside on its books. Borrower shall be liable for any tax or penalties imposed on
Lender as a result of the financing arrangements provided for herein and
Borrower agrees to indemnify and hold Lender harmless with respect to the
foregoing, and to repay to Lender on demand the amount thereof, and until paid
by Borrower such amount shall be added and deemed part of the Loans, PROVIDED,
THAT, nothing contained herein shall be construed to require Borrower to pay any
income or franchise taxes attributable to the income of Lender from any amounts
charged or paid hereunder to Lender. The foregoing indemnity shall survive the
payment of the Obligations and the termination or non-renewal of this Agreement.
9.5 INSURANCE. Borrower shall, at all times, maintain with financially
sound and reputable insurers insurance with respect to the Collateral against
loss or damage and all other insurance of the kinds and in the amounts
customarily insured against or carried by corporations of established reputation
engaged in the same or similar businesses and similarly situated. Said policies
of insurance shall be satisfactory to Lender as to form, amount and insurer.
Borrower shall furnish certificates, policies or endorsements to Lender as
Lender shall require as proof of such insurance, and, if Borrower fails to do
so, Lender is authorized, but not required, to obtain such insurance at the
expense of Borrower. All policies shall provide for at least thirty (30) days
prior written notice to Lender of any cancellation or reduction of coverage and
that Lender may act as attorney for Borrower in obtaining, and at any time an
Event of Default exists or has occurred and is continuing, adjusting, settling,
amending and canceling such insurance. Borrower shall cause Lender to be named
as a loss payee and an additional insured (but without any liability for any
premiums) under such insurance policies and Borrower shall obtain
non-contributory lender's loss payable endorsements to all insurance policies in
form and substance satisfactory to Lender. Such lender's loss payable
endorsements shall specify that the proceeds of such insurance shall be payable
to Lender as its interests may appear and further specify that Lender shall be
paid regardless of any act or omission by Borrower or any of its affiliates. At
its option, Lender may apply any insurance proceeds received by Lender at any
time to the cost of repairs or replacement of Collateral and/or to payment of
the Obligations, whether or not then due, in any order and in such manner as
Lender may determine or hold such proceeds as cash collateral for the
Obligations.
LOAN AND SECURITY AGREEMENT - Page 24
<PAGE>
9.6 FINANCIAL STATEMENTS AND OTHER INFORMATION.
(a) Borrower shall keep proper books and records in which true and
complete entries shall be made of all dealings or transactions of or in relation
to the Collateral and the business of Borrower and its subsidiaries (if any) in
accordance with GAAP and Borrower shall furnish or cause to be furnished to
Lender: (i) within thirty (30) days after the end of each calendar month,
monthly unaudited consolidated financial statements, and, if Borrower has any
subsidiaries, unaudited consolidating financial statements (including in each
case balance sheets, statements of income and loss, statements of cash flow, and
statements of shareholders' equity), all prepared in accordance with GAAP (or
with footnote disclosure information acceptable to Lender) and in reasonable
detail, fairly presenting the financial position and the results of the
operations of Borrower and its subsidiaries as of the end of and through such
fiscal month and (ii) within ninety (90) days after the end of each fiscal year,
audited consolidated financial statements and, if Borrower has any subsidiaries,
audited consolidating financial statements of Borrower and its subsidiaries
(including in each case balance sheets, statements of income and loss,
statements of cash flow and statements of shareholders' equity), and the
accompanying notes thereto, all in reasonable detail, fairly presenting the
financial position and the results of the operations of Borrower and its
subsidiaries as of the end of and for such fiscal year, together with the
unqualified opinion of independent certified public accountants, which
accountants shall be an independent accounting firm selected by Borrower and
reasonably acceptable to Lender, that such financial statements have been
prepared in accordance with GAAP, and present fairly the results of operations
and financial condition of Borrower and its subsidiaries as of the end of and
for the fiscal year then ended.
(b) Borrower shall promptly notify Lender in writing of the
details of (i) any loss, damage, investigation, action, suit, proceeding or
claim relating to the Collateral or any other property which is security for the
Obligations or which would result in any material adverse change in Borrower's
business, properties, assets, goodwill or condition, financial or otherwise and
(ii) the occurrence of any Event of Default or event which, with the passage of
time or giving of notice or both, would constitute an Event of Default.
(c) Borrower shall promptly after the sending or filing thereof
furnish or cause to be furnished to Lender copies of all reports which Borrower
sends to its stockholders generally and copies of all reports and registration
statements which Borrower files with the Securities and Exchange Commission, any
national securities exchange or the National Association of Securities Dealers,
Inc.
(d) Borrower shall furnish to Lender, at least sixty (60) days
prior to the end of each fiscal year, Borrower's monthly projections of the
consolidated financial statements, and, if Borrower has any subsidiaries,
consolidating financial statements (including in each case balance sheets,
statements of income and loss, statements of cash flow, statements of
shareholders' equity and anticipated borrowing availability under this
Agreement), for the next succeeding fiscal year.
(e) Borrower also shall furnish or cause to be furnished to Lender
such budgets, forecasts, projections and other information respecting the
Collateral and the business of
LOAN AND SECURITY AGREEMENT - Page 25
<PAGE>
Borrower, as Lender may, from time to time, reasonably request. Lender is hereby
authorized to deliver a copy of any financial statement or any other information
relating to the business of Borrower to any court or other government agency or
to any participant or assignee or prospective participant or assignee. Borrower
hereby irrevocably authorizes and directs all accountants or auditors to deliver
to Lender, at Borrower's expense, copies of the financial statements of Borrower
and any reports or management letters prepared by such accountants or auditors
on behalf of Borrower and to disclose to Lender such information as they may
have regarding the business of Borrower. Any documents, schedules, invoices or
other papers delivered to Lender may be destroyed or otherwise disposed of by
Lender one (1) year after the same are delivered to Lender, except as otherwise
designated by Borrower to Lender in writing.
9.7 SALE OF ASSETS, CONSOLIDATION, MERGER, DISSOLUTION, ETC. Borrower
shall not, directly or indirectly, (a) merge into or with or consolidate with
any other Person or permit any other Person to merge into or with or consolidate
with it, or (b) sell, assign, lease, transfer, abandon or otherwise dispose of
any stock or indebtedness to any other Person or any of its assets to any other
Person (except for (i) sales of Inventory in the ordinary course of business and
(ii) the disposition of worn-out or obsolete Equipment or Equipment no longer
used in the business of Borrower so long as (A) if an Event of Default exists or
has occurred and is continuing, any proceeds are paid to Lender and (B) such
sales do not involve Equipment having an aggregate fair market value in excess
of $50,000 for all such Equipment disposed of in any fiscal year of Borrower),
or (c) form or acquire any additional subsidiaries, or (d) wind up, liquidate or
dissolve or (e) agree to do any of the foregoing.
9.8 ENCUMBRANCES. Borrower shall not create, incur, assume or suffer to
exist any security interest, mortgage, pledge, lien, charge or other encumbrance
of any nature whatsoever on any of its assets or properties, including the
Collateral, EXCEPT: (a) liens and security interests of Lender; (b) liens
securing the payment of taxes, either not yet overdue or the validity of which
are being contested in good faith by appropriate proceedings diligently pursued
and available to Borrower and with respect to which adequate reserves have been
set aside on its books; (c) non-consensual statutory liens (other than liens
securing the payment of taxes) arising in the ordinary course of Borrower's
business to the extent: (i) such liens secure indebtedness which is not overdue
or (ii) such liens secure indebtedness relating to claims or liabilities which
are fully insured and being defended at the sole cost and expense and at the
sole risk of the insurer or being contested in good faith by appropriate
proceedings diligently pursued and available to Borrower, in each case prior to
the commencement of foreclosure or other similar proceedings and with respect to
which adequate reserves have been set aside on its books; (d) zoning
restrictions, easements, licenses, covenants and other restrictions affecting
the use of real property which do not interfere in any material respect with the
use of such real property or ordinary conduct of the business of Borrower as
presently conducted thereon or materially impair the value of the real property
which may be subject thereto; (e) purchase money security interests in Equipment
(including capital leases) and purchase money mortgages on real estate not to
exceed $250,000 in the aggregate at any time outstanding so long as such
security interests and mortgages do not apply to any property of Borrower other
than the Equipment or real estate so acquired, and the indebtedness secured
thereby does not exceed the cost of the Equipment or real estate so
LOAN AND SECURITY AGREEMENT - Page 26
<PAGE>
acquired, as the case may be; and (f) the security interests and liens set forth
on Schedule 8.4 hereto.
9.9 INDEBTEDNESS. Borrower shall not incur, create, assume, become or be
liable in any manner with respect to, or permit to exist, any obligations or
indebtedness, EXCEPT: (a) the Obligations; (b) trade obligations and normal
accruals in the ordinary course of business not yet due and payable, or with
respect to which the Borrower is contesting in good faith the amount or validity
thereof by appropriate proceedings diligently pursued and available to Borrower,
and with respect to which adequate reserves have been set aside on its books;
(c) purchase money indebtedness (including capital leases) to the extent not
incurred or secured by liens (including capital leases) in violation of any
other provision of this Agreement; and (d) the indebtedness set forth on
Schedule 9.9 hereto; provided, THAT, (i) Borrower may only make regularly
scheduled payments of principal and interest in respect of such indebtedness in
accordance with the terms of the agreement or instrument evidencing or giving
rise to such indebtedness as in effect on the date hereof, (ii) Borrower shall
not, directly or indirectly, (A) amend, modify, alter or change the terms of
such indebtedness or any agreement, document or instrument related thereto as in
effect on the date hereof, or (B) redeem, retire, defease, purchase or otherwise
acquire such indebtedness, or set aside or otherwise deposit or invest any sums
for such purpose, and (iii) Borrower shall furnish to Lender all notices or
demands in connection with such indebtedness either received by Borrower or on
its behalf, promptly after the receipt thereof, or sent by Borrower or on its
behalf, concurrently with the sending thereof, as the case may be.
9.10 LOANS, INVESTMENTS, GUARANTEES, ETC. Borrower shall not, directly or
indirectly, make any loans or advance money or property to any person, or invest
in (by capital contribution, dividend or otherwise) or purchase or repurchase
the stock or indebtedness or all or a substantial part of the assets or property
of any person, or guarantee, assume, endorse, or otherwise become responsible
for (directly or indirectly) the indebtedness, performance, obligations or
dividends of any Person or agree to do any of the foregoing, EXCEPT: (a) the
endorsement of instruments for collection or deposit in the ordinary course of
business; (b) investments in: (i) short-term direct obligations of the United
States Government, (ii) negotiable certificates of deposit issued by any bank
satisfactory to Lender, payable to the order of the Borrower or to bearer and
delivered to Lender, and (iii) commercial paper rated A1 or P1; PROVIDED, THAT,
as to any of the foregoing, unless waived in writing by Lender, Borrower shall
take such actions as are deemed necessary by Lender to perfect the security
interest of Lender in such investments and (c) the loans, advances and
guarantees set forth on Schedule 9.10 hereto; PROVIDED, THAT, as to such loans,
advances and guarantees, (i) Borrower shall not, directly or indirectly, (A)
amend, modify, alter or change the terms of such loans, advances or guarantees
or any agreement, document or instrument related thereto, or (B) as to such
guarantees, redeem, retire, defease, purchase or otherwise acquire the
obligations arising pursuant to such guarantees, or set aside or otherwise
deposit or invest any sums for such purpose, and (ii) Borrower shall furnish to
Lender all notices or demands in connection with such loans, advances or
guarantees or other indebtedness subject to such guarantees either received by
Borrower or on its behalf, promptly after the receipt thereof, or sent by
Borrower or on its behalf, concurrently with the sending thereof, as the case
may be.
LOAN AND SECURITY AGREEMENT - Page 27
<PAGE>
9.11 DIVIDENDS AND REDEMPTIONS. Borrower shall not, directly or
indirectly, declare or pay any dividends on account of any shares of class of
capital stock of Borrower now or hereafter outstanding, or set aside or
otherwise deposit or invest any sums for such purpose, or redeem, retire,
defease, purchase or otherwise acquire any shares of any class of capital stock
(or set aside or otherwise deposit or invest any sums for such purpose) for any
consideration other than common stock or apply or set apart any sum, or make any
other distribution (by reduction of capital or otherwise) in respect of any such
shares or agree to do any of the foregoing.
9.12 TRANSACTIONS WITH AFFILIATES. Borrower shall not, directly or
indirectly, (a) purchase, acquire or lease any property from, or sell, transfer
or lease any property to, any officer, director, agent or other person
affiliated with Borrower, except 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 the Borrower than Borrower would obtain in a
comparable arm's length transaction with an unaffiliated person (Lender
acknowledges that Borrower enters into transactions with its Subsidiaries from
time to time, including the purchase of Inventory and the payment of commissions
and fees in connection with such Inventory purchases, and such transactions are
hereby approved by Lender to the extent they are conducted upon substantially
the same terms as prior transactions disclosed to Lender) or (b) make any
payments of management, consulting or other fees for management or similar
services, or of any indebtedness owing to any officer, employee, shareholder,
director or other person affiliated with Borrower except reasonable compensation
to officers, employees and directors for services rendered to Borrower in the
ordinary course of business.
9.13 ADDITIONAL BANK ACCOUNTS. Borrower shall not, directly or indirectly,
open, establish or maintain any deposit account, investment account or any other
account with any bank or other financial institution, other than the Blocked
Accounts and the accounts set forth in Schedule 8.8 hereto, except: (a) as to
any new or additional Blocked Accounts and other such new or additional accounts
which contain any Collateral or proceeds thereof, with the prior written consent
of Lender and subject to such conditions thereto as Lender may establish and (b)
as to any accounts used by Borrower to make payments of payroll, taxes or other
obligations to third parties, after prior written notice to Lender.
9.14 NET WORTH. (a) The Company will not permit its Net Worth to be less
than the following respective amounts at the following respective dates:
January 31, 1999 $ 2,400,000
April 30, 1999 $ 1,700,000
July 31, 1999 $ 2,500,000
October 31, 1999 $ 4,400,000
January 31, 2000 $ 4,000,000
April 30, 2000 $ 3,300,000
LOAN AND SECURITY AGREEMENT - Page 28
<PAGE>
(b) From and after July 31, 2000, the Company will not permit its
Net Worth to be less than $4,000,000 at any time.
9.15 CAPITAL EXPENDITURES. Borrower shall not make or incur any Capital
Expenditure if, after giving effect thereto, the aggregate amount of all Capital
Expenditures by Borrower and its Subsidiaries in any fiscal year would exceed
$1,500,000.
9.16 COSTS AND EXPENSES. Borrower shall pay Lender on demand all costs,
expenses, filing fees and taxes paid or payable in connection with the
preparation, negotiation, execution, delivery, recording, administration,
collection, liquidation, enforcement and defense of the Obligations, Lender's
rights in the Collateral, this Agreement, the other Financing Agreements and all
other documents related hereto or thereto, including any amendments, supplements
or consents which may hereafter be contemplated (whether or not executed) or
entered into in respect hereof and thereof, including: (a) all costs and
expenses of filing or recording (including Uniform Commercial Code financing
statement filing taxes and fees, documentary taxes, intangibles taxes and
mortgage recording taxes and fees, if applicable); (b) all insurance premiums,
appraisal fees and search fees; (c) costs and expenses of remitting loan
proceeds, collecting checks and other items of payment, and establishing and
maintaining the Blocked Accounts, together with Lender's customary charges and
fees with respect thereto; (d) costs and expenses of preserving and protecting
the Collateral; (e) costs and expenses paid or incurred in connection with
obtaining payment of the Obligations, enforcing the security interests and liens
of Lender, selling or otherwise realizing upon the Collateral, and otherwise
enforcing the provisions of this Agreement and the other Financing Agreements or
defending any claims made or threatened against Lender arising out of the
transactions contemplated hereby and thereby (including preparations for and
consultations concerning any such matters); (f) all out-of-pocket expenses and
costs heretofore and from time to time hereafter incurred by Lender during the
course of periodic field examinations of the Collateral and Borrower's
operations, plus a per diem charge at the rate of $750 per person per day for
Lender's examiners in the field and office; and (d) the fees and disbursements
of counsel (including legal assistants) to Lender in connection with any of the
foregoing.
9.17 FURTHER ASSURANCES. At the request of Lender at any time and from
time to time, Borrower shall, at its expense, duly execute and deliver, or cause
to be duly executed and delivered, such further agreements, documents and
instruments, and do or cause to be done such further acts as may be necessary or
proper to evidence, perfect, maintain and enforce the security interests and the
priority thereof in the Collateral and to otherwise effectuate the provisions or
purposes of this Agreement or any of the other Financing Agreements. Lender may
at any time and from time to time request a certificate from an officer of
Borrower representing that all conditions precedent to the making of Loans
contained herein are satisfied. In the event of such request by Lender, Lender
may, at its option, cease to make any further Loans until Lender has received
such certificate and, in addition, Lender has determined that such conditions
are satisfied. Where permitted by law, Borrower hereby authorizes Lender to
execute and file one or more UCC financing statements signed only by Lender.
LOAN AND SECURITY AGREEMENT - Page 29
<PAGE>
SECTION 10. EVENTS OF DEFAULT AND REMEDIES
10.1 EVENTS OF DEFAULT. The occurrence or existence of any one or more of
the following events are referred to herein individually as an "Event of
Default", and collectively as "Events of Default":
(a) Borrower fails to pay when due any of the Obligations or
Borrower or any Obligor fails to perform any of the terms, covenants, conditions
or provisions contained in this Agreement or any of the other Financing
Agreements;
(b) any representation, warranty or statement of fact made by
Borrower to Lender in this Agreement, the other Financing Agreements or any
other agreement, schedule, confirmatory assignment or otherwise shall when made
or deemed made be false or misleading in any material respect;
(c) any Obligor revokes, terminates or fails to perform any of the
terms, covenants, conditions or provisions of any guarantee, endorsement or
other agreement of such party in favor of Lender;
(d) any judgment for the payment of money is rendered against
Borrower or any Obligor in excess of $25,000 in any one case or in excess of
$75,000 in the aggregate and shall remain undischarged or unvacated for a period
in excess of thirty (30) days or execution shall at any time not be effectively
stayed, or any judgment other than for the payment of money, or injunction,
attachment, garnishment or execution is rendered against Borrower or any Obligor
or any of their assets;
(e) any Obligor (being a natural person or a general partner of an
Obligor which is a partnership) dies or Borrower or any Obligor, which is a
partnership, limited liability company, limited liability partnership or a
corporation, dissolves or suspends or discontinues doing business;
(f) Borrower or any Obligor becomes insolvent (however defined or
evidenced), makes an assignment for the benefit of creditors, makes or sends
notice of a bulk transfer or calls a meeting of its creditors or principal
creditors;
(g) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law or
in equity) is filed against Borrower or any Obligor or all or any part of its
properties and such petition or application is not dismissed within thirty (30)
days after the date of its filing or Borrower or any Obligor shall file any
answer admitting or not contesting such petition or application or indicates its
consent to, acquiescence in or approval of, any such action or proceeding or the
relief requested is granted sooner;
LOAN AND SECURITY AGREEMENT - Page 30
<PAGE>
(h) a case or proceeding under the bankruptcy laws of the United
States of America now or hereafter in effect or under any insolvency,
reorganization, receivership, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at a law
or equity) is filed by Borrower or any Obligor or for all or any part of its
property; or
(i) any default by Borrower or any Obligor under any agreement,
document or instrument relating to any indebtedness for borrowed money owing to
any person other than Lender, or any capitalized lease obligations, contingent
indebtedness in connection with any guarantee, letter of credit, indemnity or
similar type of instrument in favor of any person other than Lender, in any case
in an amount in excess of $50,000, which default continues for more than the
applicable cure period, if any, with respect thereto, or any default by Borrower
or any Obligor under any material contract, lease, license or other obligation
to any person other than Lender, which default continues for more than the
applicable cure period, if any, with respect thereto;
(j) any Change in Control of the Borrower shall occur;
(k) the indictment or threatened indictment of Borrower or any
Obligor under any criminal statute, or commencement or threatened commencement
of criminal or civil proceedings against Borrower or any Obligor, pursuant to
which statute or proceedings the penalties or remedies sought or available
include forfeiture of any of the property of Borrower or such Obligor;
(l) there shall be a material adverse change in the business, assets
or prospects of Borrower or any Obligor after the date hereof;
(m) there shall be an event of default under any of the other
Financing Agreements; or
(n) DSI (HK) Limited shall fail to maintain its existing credit
facility with State Street Bank and Trust Company or one or more credit
facilities acceptable to Lender, in either case upon such terms and conditions
as Lender may find adequate to provide financing for the continued operations of
DSI (HK) Limited in the manner then conducted.
10.2 REMEDIES.
(a) At any time an Event of Default exists or has occurred and is
continuing, Lender shall have all rights and remedies provided in this
Agreement, the other Financing Agreements, the Uniform Commercial Code and other
applicable law, all of which rights and remedies may be exercised without notice
to or consent by Borrower or any Obligor, except as such notice or consent is
expressly provided for hereunder or required by applicable law. All rights,
remedies and powers granted to Lender hereunder, under any of the other
Financing Agreements, the Uniform Commercial Code or other applicable law, are
cumulative, not exclusive and enforceable, in Lender's discretion,
alternatively, successively, or concurrently on any one or more occasions, and
shall include, without limitation, the right to apply to a court of equity for
LOAN AND SECURITY AGREEMENT - Page 31
<PAGE>
an injunction to restrain a breach or threatened breach by Borrower of this
Agreement or any of the other Financing Agreements. Lender may, at any time or
times, proceed directly against Borrower or any Obligor to collect the
Obligations without prior recourse to the Collateral.
(b) Without limiting the foregoing, at any time an Event of Default
exists or has occurred and is continuing, Lender may, in its discretion and
without limitation, (i) accelerate the payment of all Obligations and demand
immediate payment thereof to Lender (PROVIDED, THAT, upon the occurrence of any
Event of Default described in Sections 10.1(g) and 10.1(h), all Obligations
shall automatically become immediately due and payable), (ii) with or without
judicial process or the aid or assistance of others, enter upon any premises on
or in which any of the Collateral may be located and take possession of the
Collateral or complete processing, manufacturing and repair of all or any
portion of the Collateral, (iii) require Borrower, at Borrower's expense, to
assemble and make available to Lender any part or all of the Collateral at any
place and time designated by Lender, (iv) collect, foreclose, receive,
appropriate, setoff and realize upon any and all Collateral, (v) remove any or
all of the Collateral from any premises on or in which the same may be located
for the purpose of effecting the sale, foreclosure or other disposition thereof
or for any other purpose, (vi) sell, lease, transfer, assign, deliver or
otherwise dispose of any and all Collateral (including entering into contracts
with respect thereto, public or private sales at any exchange, broker's board,
at any office of Lender or elsewhere) at such prices or terms as Lender may deem
reasonable, for cash, upon credit or for future delivery, with the Lender having
the right to purchase the whole or any part of the Collateral at any such public
sale, all of the foregoing being free from any right or equity of redemption of
Borrower, which right or equity of redemption is hereby expressly waived and
released by Borrower and/or (vii) terminate this Agreement. If any of the
Collateral is sold or leased by Lender upon credit terms or for future delivery,
the Obligations shall not be reduced as a result thereof until payment therefor
is finally collected by Lender. If notice of disposition of Collateral is
required by law, five (5) days prior notice by Lender to Borrower designating
the time and place of any public sale or the time after which any private sale
or other intended disposition of Collateral is to be made, shall be deemed to be
reasonable notice thereof and Borrower waives any other notice. In the event
Lender institutes an action to recover any Collateral or seeks recovery of any
Collateral by way of pre-judgment remedy, Borrower waives the posting of any
bond which might otherwise be required.
(c) Lender may apply the cash proceeds of Collateral actually
received by Lender from any sale, lease, foreclosure or other disposition of the
Collateral to payment of the Obligations, in whole or in part and in such order
as Lender may elect, whether or not then due. Borrower shall remain liable to
Lender for the payment of any deficiency with interest at the highest rate
provided for herein and all costs and expenses of collection or enforcement,
including attorneys' fees and legal expenses.
(d) Without limiting the foregoing, upon the occurrence of an
Event of Default or an event which with notice or passage of time or both would
constitute an Event of Default, Lender may, at its option, without notice, (i)
cease making Loans or reduce the lending formulas or amounts of Loans available
to Borrower and/or (ii) terminate any provision of this Agreement providing for
any future Loans to be made by Lender to Borrower.
LOAN AND SECURITY AGREEMENT - Page 32
<PAGE>
SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW
11.1 GOVERNING LAW; CHOICE OF FORUM; SERVICE OF PROCESS; JURY TRIAL
WAIVER.
(a) The validity, interpretation and enforcement of this Agreement
and the other Financing Agreements and any dispute arising out of the
relationship between the parties hereto, whether in contract, tort, equity or
otherwise, shall be governed by the internal laws of the State of Texas (without
giving effect to principles of conflicts of law).
(b) Borrower and Lender irrevocably consent and submit to the
non-exclusive jurisdiction of the State of Texas and the United States District
Court for the Northern District of Texas and waive any objection based on venue
or FORUM NON CONVENIENS with respect to any action instituted therein arising
under this Agreement or any of the other Financing Agreements or in any way
connected with or related or incidental to the dealings of the parties hereto in
respect of this Agreement or any of the other Financing Agreements or the
transactions related hereto or thereto, in each case whether now existing or
hereafter arising, and whether in contract, tort, equity or otherwise, and agree
that any dispute with respect to any such matters shall be heard only in the
courts described above (except that Lender shall have the right to bring any
action or proceeding against Borrower or its property in the courts of any other
jurisdiction which Lender deems necessary or appropriate in order to realize on
the Collateral or to otherwise enforce its rights against Borrower or its
property).
(c) Borrower hereby waives personal service of any and all process
upon it and consents that all such service of process may be made by certified
mail (return receipt requested) directed to its address set forth on the
signature pages hereof and service so made shall be deemed to be completed five
(5) days after the same shall have been so deposited in the U.S. mails, or, at
Lender's option, by service upon Borrower in any other manner provided under the
rules of any such courts. Within thirty (30) days after such service, Borrower
shall appear in answer to such process, failing which Borrower shall be deemed
in default and judgment may be entered by Lender against Borrower for the amount
of the claim and other relief requested.
(d) BORROWER AND LENDER EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY
JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS
AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED
WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT
OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS
RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. BORROWER AND LENDER
EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT BORROWER OR
LOAN AND SECURITY AGREEMENT - Page 33
<PAGE>
LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY
COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF
THEIR RIGHT TO TRIAL BY JURY.
(e) Lender shall not have any liability to Borrower (whether in
tort, contract, equity or otherwise) for losses suffered by Borrower in
connection with, arising out of, or in any way related to the transactions or
relationships contemplated by this Agreement, or any act, omission or event
occurring in connection herewith, unless it is determined by a final and
non-appealable judgment or court order binding on Lender, that the losses were
the result of acts or omissions constituting gross negligence or willful
misconduct. In any such litigation, Lender shall be entitled to the benefit of
the rebuttable presumption that it acted in good faith and with the exercise of
ordinary care in the performance by it of the terms of this Agreement.
11.2 WAIVER OF NOTICES. Borrower hereby expressly waives demand,
presentment, protest and notice of protest and notice of dishonor with respect
to any and all instruments and commercial paper, included in or evidencing any
of the Obligations or the Collateral, and any and all other demands and notices
of any kind or nature whatsoever with respect to the Obligations, the Collateral
and this Agreement, except such as are expressly provided for herein. No notice
to or demand on Borrower which Lender may elect to give shall entitle Borrower
to any other or further notice or demand in the same, similar or other
circumstances.
11.3 AMENDMENTS AND WAIVERS. Neither this Agreement nor any provision
hereof shall be amended, modified, waived or discharged orally or by course of
conduct, but only by a written agreement signed by an authorized officer of
Lender, and as to amendments, as also signed by an authorized officer of
Borrower. Lender shall not, by any act, delay, omission or otherwise be deemed
to have expressly or impliedly waived any of its rights, powers and/or remedies
unless such waiver shall be in writing and signed by an authorized officer of
Lender. Any such waiver shall be enforceable only to the extent specifically set
forth therein. A waiver by Lender of any right, power and/or remedy on any one
occasion shall not be construed as a bar to or waiver of any such right, power
and/or remedy which Lender would otherwise have on any future occasion, whether
similar in kind or otherwise.
11.4 WAIVER OF COUNTERCLAIMS. Borrower waives all rights to interpose any
claims, deductions, setoffs or counterclaims of any nature (other then
compulsory counterclaims) in any action or proceeding with respect to this
Agreement, the Obligations, the Collateral or any matter arising therefrom or
relating hereto or thereto.
11.5 INDEMNIFICATION. Borrower shall indemnify and hold Lender, and its
directors, agents, employees and counsel, harmless from and against any and all
losses, claims, damages, liabilities, costs or expenses imposed on, incurred by
or asserted against any of them in connection with any litigation,
investigation, claim or proceeding commenced or threatened related to the
negotiation, preparation, execution, delivery, enforcement, performance or
administration of this Agreement, any other Financing Agreements, or any
undertaking or proceeding related to any of the transactions contemplated hereby
or any act, omission, event or transaction related or attendant thereto,
including amounts paid in settlement, court costs, and the fees and expenses of
LOAN AND SECURITY AGREEMENT - Page 34
<PAGE>
counsel. To the extent that the undertaking to indemnify, pay and hold harmless
set forth in this Section may be unenforceable because it violates any law or
public policy, Borrower shall pay the maximum portion which it is permitted to
pay under applicable law to Lender in satisfaction of indemnified matters under
this Section. The foregoing indemnity shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.
SECTION 12. TERM OF AGREEMENT; MISCELLANEOUS
12.1 TERM.
(a) This Agreement and the other Financing Agreements shall become
effective as of the date set forth on the first page hereof and shall continue
in full force and effect for a term ending on the date three (3) years from the
date hereof (the "Termination Date"). On the Termination Date Borrower hereby
promises to pay to Lender, in full, all outstanding and unpaid Obligations and
shall furnish cash collateral to Lender in such amounts as Lender determines are
reasonably necessary to secure Lender from loss, cost, damage or expense,
including attorneys' fees and legal expenses, in connection with any contingent
Obligations, including checks or other payments provisionally credited to the
Obligations and/or as to which Lender has not yet received final and
indefeasible payment. Such payments in respect of the Obligations and cash
collateral shall be remitted by wire transfer in Federal funds to such bank
account of Lender, as Lender may, in its discretion, designate in writing to
Borrower for such purpose. Interest shall be due until and including the next
business day, if the amounts so paid by Borrower to the bank account designated
by Lender are received in such bank account later than 12:00 noon, Philadelphia,
Pennsylvania, time.
(b) No termination of this Agreement or the other Financing
Agreements shall relieve or discharge Borrower of its respective duties,
obligations and covenants under this Agreement or the other Financing Agreements
until all Obligations have been fully and finally discharged and paid, and
Lender's continuing security interest in the Collateral and the rights and
remedies of Lender hereunder, under the other Financing Agreements and
applicable law, shall remain in effect until all such Obligations have been
fully and finally discharged and paid.
(c) If for any reason (other than by reason of a Change of Control
that occurs on or before June 2, 1999, in which event the provisions of Section
12.1(d) will apply) this Agreement is terminated prior to the end of the then
current term or renewal term of this Agreement, in view of the impracticality
and extreme difficulty of ascertaining actual damages and by mutual agreement of
the parties as to a reasonable calculation of Lender's lost profits as a result
thereof, Borrower agrees to pay to Lender, upon the effective date of such
termination, an early termination fee in the amount set forth below if such
termination is effective in the period indicated:
LOAN AND SECURITY AGREEMENT - Page 35
<PAGE>
AMOUNT PERIOD
------------ -----------
(i) 3.00% of Maximum Credit From the date hereof to and
including the first anniversary
of the date of this Agreement
(ii) 2.00% of Maximum Credit From the first anniversary of
the date of this Agreement to
and including the second
anniversary of this Agreement
(iii) 1.00% of Maximum Credit From and after second anniversary
of this Agreement, but excluding
the Termination Date
Such early termination fee shall be presumed to be the amount of damages
sustained by Lender as a result of such early termination and Borrower agrees
that it is reasonable under the circumstances currently existing. In addition,
Lender shall be entitled to such early termination fee upon the occurrence of
any Event of Default described in Sections 10.1(g) and 10.1(h) hereof, even if
Lender does not exercise its right to terminate this Agreement, but elects, at
its option, to provide financing to Borrower or permit the use of cash
collateral under the United States Bankruptcy Code. The early termination fee
provided for in this Section 12.1 shall be deemed included in the Obligations.
(d) If, by reason of a Change of Control that occurs on or before June 2,
1999, Lender elects to terminate this Agreement prior to the end of the current
term of this Agreement, then Lender agrees that the early termination fee
payable by Borrower to Lender, upon the effective date of such termination, will
be in the amount of One Hundred Fifty Thousand Dollars ($150,000), instead of
the amount provided in Section 12.1(c)(i), above. On the other hand, if, by
reason of a Change of Control that occurs on or before June 2, 1999, Borrower
(instead of Lender) elects to terminate this Agreement prior to the end of the
current term of this Agreement, and if the effective date of Borrower's election
to terminate this Agreement is on or before June 2, 1999, then Lender agrees
that the early termination fee payable by Borrower to Lender, upon the effective
date of such termination, will be in the amount of Two Hundred Thousand Dollars
($200,000), instead of the amount provided in Section 12.1(c)(i), above. This
reduction to the amount of the early termination fee that would otherwise be
payable under Section 12.1(c)(i) above is effective if, and only if, the
Obligations are paid in full on or before the effective date of the termination
of this Agreement. If the Obligations are not paid in full on or before the
effective date of the termination of this Agreement, then the reduction to the
early termination fee, as provided in this Section 12.1(d), will not apply, and
the early termination fee will be calculated in accordance with Section
12.1(c)(i).
12.2 NOTICES. All notices, requests and demands hereunder shall be in
writing and (a) made to Lender or Borrower at their respective addresses set
forth below, or to such other address as either party may designate by written
notice to the other in accordance with this provision, and (b) deemed to have
been given or made: if delivered in person, immediately upon delivery; if by
telex, telegram or facsimile transmission, immediately upon sending and upon
LOAN AND SECURITY AGREEMENT - Page 36
<PAGE>
confirmation of receipt; if by nationally recognized overnight courier service
with instructions to deliver the next business day, one (1) business day after
sending; and if by certified mail, return receipt requested, five (5) days after
mailing.
If to Lender: Sunrock Capital Corp. Sunrock Capital Corp.
15851 North Dallas Parkway 11 Penn Center
Suite 500, Office 514 1835 Market Street
Dallas, Texas 75248 Philadelphia, Pennsylvania 19103
Attention: Robert J. Katcha Attention: John Erwin
Facsimile: 972.371.5746 Facsimile: 215.979.7679
Telephone: 972.371.5745 Telephone: 215.979.7654
If to Borrower: 1100 West Sam Houston Parkway (North)
Suite A
Houston, Texas 77043
Attention: Thomas V. Yarnell, Vice President and General
Counsel
Facsimile: 713.365.9911
Telephone: 713.365.9900
12.3 PARTIAL INVALIDITY. If any provision of this Agreement is held to be
invalid or unenforceable, such invalidity or unenforceability shall not
invalidate this Agreement as a whole, but this Agreement shall be construed as
though it did not contain the particular provision held to be invalid or
unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.
12.4 SUCCESSORS. This Agreement, the other Financing Agreements and any
other document referred to herein or therein shall be binding upon and inure to
the benefit of and be enforceable by Lender, Borrower and their respective
successors and assigns, except that Borrower may not assign its rights under
this Agreement, the other Financing Agreements and any other document referred
to herein or therein without the prior written consent of Lender. Lender may,
after notice to Borrower, assign its rights and delegate its obligations under
this Agreement and the other Financing Agreements and further may assign, or
sell participations in, all or any part of the Loans or any other interest
herein to another financial institution or other person, in which event, the
assignee or participant shall have, to the extent of such assignment or
participation, the same rights and benefits as it would have if it were the
Lender hereunder, except as otherwise provided by the terms of such assignment
or participation.
12.5 ENTIRE AGREEMENT. This Agreement, the other Financing Agreements, any
supplements hereto or thereto, and any instruments or documents delivered or to
be delivered in connection herewith or therewith represents the entire agreement
and understanding concerning the subject matter hereof and thereof between the
parties hereto, and supersede all other prior agreements, understandings,
negotiations and discussions, representations, warranties, commitments,
proposals, offers and contracts concerning the subject matter hereof, whether
oral
LOAN AND SECURITY AGREEMENT - Page 37
<PAGE>
or written. In the event of any inconsistency between the terms of this
Agreement and any schedule or exhibit hereto, the terms of this Agreement shall
govern.
12.6 NONAPPLICABILITY OF CHAPTER 346. HEREBY AGREE THAT THE PROVISIONS OF
CHAPTER 346 OF THE TEXAS FINANCE CODE (REGULATING CERTAIN REVOLVING CREDIT LOANS
AND REVOLVING TRI-PARTY ACCOUNTS) SHALL NOT APPLY TO THIS AGREEMENT OR ANY OF
THE OTHER FINANCING AGREEMENTS.
12.7 WAIVER OF CONSUMER RIGHTS. BORROWER HEREBY WAIVES ITS RIGHTS UNDER
THE DECEPTIVE TRADE PRACTICES - CONSUMER PROTECTION ACT, SECTION 17.41 ET. SEQ.
BUSINESS & COMMERCE CODE, A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND
PROTECTIONS. AFTER CONSULTATION WITH AN ATTORNEY OF THE BORROWER'S OWN
SELECTION, THE BORROWER VOLUNTARILY CONSENTS TO THIS WAIVER. BORROWER EXPRESSLY
WARRANTS AND REPRESENTS THAT THE BORROWER (A) IS NOT IN A SIGNIFICANTLY
DISPARATE BARGAINING POSITION RELATIVE TO LENDER, AND (B) HAS BEEN REPRESENTED
BY LEGAL COUNSEL IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT.
12.8 ORAL AGREEMENTS INEFFECTIVE. THIS AGREEMENT AND THE OTHER FINANCING
AGREEMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND THE SAME 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, Lender and Borrower have caused these presents to be
duly executed as of the day and year first above written.
LENDER BORROWER
SUNROCK CAPITAL CORP. DSI TOYS, INC.
By: /s/ ROBERT J. KATCHA By: /s/ M. D. DAVIS
Robert J. Katcha, Senior Vice M. D. Davis, Chief Executive
President Officer
LOAN AND SECURITY AGREEMENT - Page 38
EXHIBIT 10.25
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT (this "AGREEMENT") is entered into on February
2, 1999, between DSI TOYS, INC., a Texas corporation ("PLEDGOR"), and SUNROCK
CAPITAL CORP., a Delaware corporation ("PLEDGEE").
1. For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, and as collateral security for and to secure the
prompt payment and performance in full of the Secured Obligations (hereinafter
defined), Pledgor hereby assigns to Pledgee and grants to Pledgee a continuing
security interest in 65% of the issued and outstanding shares of capital stock
(which currently are represented solely by the stock certificates identified on
SCHEDULE I attached hereto) of DSI (HK) Limited., together with all proceeds,
products and increases thereof and substitutions and replacements therefor
(collectively, the "COLLATERAL").
As used in this Agreement, the term "SECURED OBLIGATIONS" shall mean
(i) any and all obligations, liabilities and indebtedness of Pledgor to Pledgee
under that certain Loan and Security Agreement dated the date hereof by and
among Pledgee and Pledgor (as hereafter amended from time to time, the "LOAN
AGREEMENT") and (ii) any and all extensions, renewals, modifications, increases
and replacements of the foregoing. The term "SECURED OBLIGATIONS" shall include,
without limitation, all unpaid accrued interest thereon and all costs and
expenses payable as hereinafter provided: (i) whether now existing or hereafter
incurred; (ii) whether direct, indirect, primary, absolute, secondary,
contingent, secured, unsecured, matured or unmatured; (iii) whether such
indebtedness is from time to time reduced and thereafter increased, or entirely
extinguished and thereafter reincurred; (iv) whether such indebtedness was
originally contracted with Pledgee or with another or others; (v) whether or not
such indebtedness is evidenced by a negotiable or nonnegotiable instrument or
any other writing; and (vi) whether such indebtedness is contracted by Pledgor
individually or jointly or severally with another or others.
2. Pledgor represents and warrants that (i) Pledgor holds absolute
ownership of the Collateral, free and clear of all liens and encumbrances; (ii)
there are no restrictions upon the transfer of any of the Collateral, other than
as may appear and may be referenced on the face of the certificates or other
than arising under applicable state or federal securities laws; (iii) Pledgor
owns 100% of the issued and outstanding capital stock of DSI (HK) Limited; (iv)
there are no existing obligations to issue capital stock or securities
convertible into capital stock of DSI (HK) Limited, and in no event will Pledgor
permit any such stock or securities to be issued prior to payment in full of the
Secured Obligations; and (v) there are no existing securities or obligations of
DSI (HK) Limited, the amount of which obligation is based, in whole or in part,
on the value of DSI (HK) Limited's capital stock or any increase thereof, nor
will Pledgor permit any such securities or obligations to exist prior to payment
in full of the Secured Obligations.
3. In furtherance of Pledgee's security interest in the Collateral,
Pledgor agrees to deliver to Pledgee, on the date of this Agreement, the stock
certificates identified on SCHEDULE I attached hereto, together with stock
powers duly executed in blank by Pledgor.
STOCK PLEDGE AGREEMENT - Page 1
<PAGE>
4. With respect to the Collateral and all proceeds, products and increases
thereof and substitutions therefor, Pledgor hereby appoints Pledgee its
attorney-in-fact, to arrange for the transfer of the Collateral on the books of
DSI (HK) Limited to the name of Pledgee subsequent to the occurrence and during
the continuance of any Event of Default (as hereinafter defined) hereunder.
However, Pledgee shall be under no obligation to do so.
5. During the term of this Agreement, provided no Event of Default has
occurred and then exists hereunder, Pledgor shall have the right, where
applicable, to vote the Collateral on all corporate questions, and Pledgee
shall, if necessary, execute due and timely proxies in favor of Pledgor for this
purpose.
6. Upon the occurrence of any Event of Default and during the continuance
thereof, Pledgee may exercise all of the rights and privileges in connection
with the Collateral to which a transferee may be entitled as the record holder
thereof, together with the rights and privileges otherwise granted hereunder.
Pledgee shall be under no obligation to exercise any of such rights or
privileges.
7. If, with the consent of Pledgee, Pledgor shall substitute or exchange
other securities in place of those herein mentioned, all of the rights and
privileges of Pledgee and all of the obligations of Pledgor with respect to the
securities originally pledged or held as Collateral hereunder shall be forthwith
applicable to such substituted or exchanged securities.
8. Upon the occurrence of any Event of Default and during the continuance
thereof, Pledgee shall be authorized to collect all dividends, interest
payments, and other amounts (including amounts received or receivable upon
redemption or repurchase) that may be, or become, due on any of the Collateral.
If Pledgor receives any such dividends, payments or amounts after the occurrence
and during the continuance of an Event of Default, it shall immediately endorse
and deliver the same to Pledgee in the form received. All such amounts which
Pledgee receives and retains in accordance with the terms of this paragraph 8
shall be applied to reduce the principal amount outstanding on the Secured
Obligations in inverse order of maturity. Pledgee is, furthermore, authorized to
give receipts in the name of Pledgor for any amounts so received. Pledgee shall
be under no obligation to collect any such amounts.
9. In the event that, during the term of this Agreement, subscription
warrants or any other rights or options shall be issued in connection with the
Collateral, such warrants, rights, or options shall be immediately assigned, if
necessary, by Pledgor to Pledgee. If any such warrants, rights, or options are
exercised by Pledgor, all new securities so acquired by Pledgor shall be
immediately assigned to Pledgee, shall become part of the Collateral and shall
be endorsed to, delivered to and held by Pledgee under the terms of this
Agreement in the same manner as the securities originally pledged.
10. In the event that, during the term of this Agreement, any share,
dividend, reclassification, readjustment or other change is declared or made in
the capital structure of DSI (HK) Limited, new, substituted and additional
shares, or other securities, issued by reason of any such change shall become
part of the Collateral and shall be endorsed to, delivered to and held by
Pledgee under the terms of this Agreement in the same manner as the securities
originally pledged to such an
STOCK PLEDGE AGREEMENT - Page 2
<PAGE>
extent that Pledgee retains its pledge in 65% of all the issued and outstanding
capital stock of DSI (HK) Limited.
11. Pledgor authorizes Pledgee, without notice or demand, and without
affecting the liability of Pledgor hereunder, from time to time to:
(A) hold security in addition to and other than the Collateral for
the payment of the Secured Obligations or any part thereof, and exchange,
enforce, waive and release any Collateral or any part thereof, or any other such
security, or part thereof;
(B) release any of the endorsers or guarantors of the Secured
Obligations secured hereunder or any part thereof, or any other person
whomsoever liable for or on account of such Secured Obligations;
(C) on the transfer of all or any part of the Secured Obligations
secured hereunder, Pledgee may assign all or any part of Pledgee's security
interest in the Collateral and shall be fully discharged thereafter from all
liability and responsibility with respect to the Collateral so transferred,
provided that in no event shall Pledgee be liable for any act or omission or
negligent act or negligent omission with respect to the Collateral, other than
acts or omissions constituting gross negligence, willful misconduct or tortious
breach of contract. The transferee of the Collateral shall be vested with the
rights, powers and remedies of Pledgee hereunder, and with respect to any
Collateral not so transferred, Pledgee shall retain all rights, powers and
remedies hereby given; and
(D) Pledgor hereby waives any right to require Pledgee to proceed
against Pledgor, DSI (HK) Limited or any other person whomsoever, to proceed
against or exhaust any collateral or any other security held by Pledgee, or to
pursue any other remedy available to Pledgee. Pledgor further waives any defense
arising by reason of any liability or other defense of Pledgor or of any other
person. Pledgor shall have no right to require Pledgee to marshal collateral.
12. It shall not be necessary for Pledgee to inquire into the powers of
Pledgor or the officers, directors or agents acting or purporting to act on
behalf of Pledgor, and any obligations made or created in reliance on the
professed exercise of such powers shall be secured hereunder.
13. To the extent permitted by applicable law and in the Loan Agreement,
Pledgee shall be under no duty or obligation whatsoever to make or give any
presentments, demands for performance, notices of non-performance, protests,
notices of protest, or notices of dishonor in connection with the Secured
Obligations.
14. The occurrence of any of the following events shall, at the option of
Pledgee, constitute an "EVENT OF DEFAULT" under this Agreement:
(A) the occurrence of an Event of Default, as such term is defined
in the Loan Agreement; or
STOCK PLEDGE AGREEMENT - Page 3
<PAGE>
(B) the default or nonperformance by Pledgor of any term or
condition of this Agreement.
15. Upon the occurrence and during the continuance of any Event of
Default, the Secured Obligations shall, at the option of Pledgee, become
immediately due and payable, and Pledgee shall have all the rights and remedies
provided in the Uniform Commercial Code of Texas at the date of this Agreement
and, in this connection, the Pledgee may, upon ten (10) days' notice to the
Pledgor sent to the persons identified in and in the same manner as provided in
the Loan Agreement, without liability for any diminution in value or price which
may have occurred, sell all or any part of the Collateral in such manner and for
such price as Pledgee may determine. At any public sale Pledgee shall be free to
purchase all or any part of the Collateral. Pledgee shall receive the proceeds
of any such sale or sales, and, after deducting therefrom any and all reasonable
costs and expenses incurred in connection with the sale thereof, apply the net
proceeds toward the payment of the Secured Obligations secured hereunder,
including interest, reasonable attorneys' fees, and all other reasonable costs
and expenses incurred by Pledgee hereunder and under any other agreement between
Pledgor and Pledgee. If such proceeds be more than sufficient to pay the same,
then in case of a surplus, such surplus shall be accounted for and paid over to
Pledgor, provided Pledgor be not then indebted to Pledgee otherwise under this
Agreement or any Other Agreement or for any cause whatsoever.
16. Upon indefeasible repayment in full in cash of the Secured
Obligations, Pledgee will promptly, at Pledgor's expense, deliver all of the
Collateral to Pledgor along with all instruments of assignment executed in
connection therewith, and execute and deliver to Pledgor such documents as
Pledgor shall reasonably request to evidence Assignor's release of Pledgee's
security interest hereunder.
17. THIS AGREEMENT SHALL BE INTERPRETED AND THE RIGHTS AND LIABILITIES OF
THE PARTIES HERETO DETERMINED IN ACCORDANCE WITH THE LOCAL LAW OF THE STATE OF
TEXAS EXCLUDING ANY CONFLICTS OF LAW RULE OR PRINCIPLE THAT MIGHT OTHERWISE
REFER CONSTRUCTION OR INTERPRETATION OF THIS AGREEMENT TO THE SUBSTANTIVE LAW OF
ANOTHER JURISDICTION.
STOCK PLEDGE AGREEMENT - Page 4
<PAGE>
IN WITNESS WHEREOF, Pledgor and Pledgee have executed this Agreement as of
the date first above written.
PLEDGOR:
DSI TOYS, INC.
By: /s/ M. D. DAVIS
M.D. Davis
Chief Executive Officer
PLEDGEE:
SUNROCK CAPITAL CORP.
By: /s/ ROBERT J. KATCHA
Robert J. Katcha
Senior Vice President
STOCK PLEDGE AGREEMENT - Page 5
<PAGE>
SCHEDULE I
Stock Certificate No. 6, Register Folio 14, evidencing 6,500 shares of DSI
(HK) LIMITED, issued in the name of DSI Toys, Inc. as of November 25, 1997.
SCHEDULE I - Page 1
EXHIBIT 10.26
ASSIGNMENT OF DEPOSIT ACCOUNT
This Assignment of Deposit Account (this "ASSIGNMENT") is entered into as
of February 2, 1999, by and between DSI Toys, Inc., a Texas corporation (the
"ASSIGNOR"), whose address is 1100 West Sam Houston Parkway (North) Suite A,
Houston, Texas 77043, and Sunrock Capital Corp., a Delaware corporation (the
"LENDER"), whose address is 11 Penn Center, 1835 Market Street, Philadelphia,
Pennsylvania 19103, Attn: John Erwin.
For value received, Assignor hereby transfers to Lender, and grants Lender
a security interest in deposit account numbers 0001888592886 and 9320001085,
established in the following depository institution (the "DEPOSITORY
INSTITUTION"):
Bank One, Texas, N.A.
Bank One Center
910 Travis Street, Seventh Floor
Houston, Texas 77002
and any extensions, replacements or renewals thereof, if the account is one
which may be extended, replaced or renewed (such accounts and any extensions,
replacements or renewals being hereinafter referred to collectively as the
"ACCOUNT"), together with all of Assignor's right, title and interest in and to
the Account, all sums now or at any time hereafter on deposit therein, credited
thereto or payable thereon and all instruments, documents and other writings
evidencing the Account, on the following terms and conditions.
1. OBLIGATIONS SECURED. This Assignment shall secure all indebtedness of
Assignor to Lender (including but not limited to the indebtedness and
obligations incurred under that certain Loan and Security Agreement (the "Loan
Agreement") of even date herewith by and between Assignor and Lender and
providing for revolving advances up to a principal amount of $10,000,000 as the
same may be amended, renewed, extended, increased and/or restated from time to
time), including all renewals, extensions, modifications, increases and/or
restatements thereof.
The term "INDEBTEDNESS," as used in this PARAGRAPH 1, shall mean all
debts, obligations and liabilities of every kind and character, whether direct
or indirect, contingent, primary, secondary, joint, several, joint and several,
or otherwise, and whether now existing or hereafter arising, whether evidenced
by note, draft, acceptance, overdraft or otherwise, regardless of the manner in
which, or the person or persons in whose favor originally created, and
regardless of the manner in which acquired by Lender, and all renewals or
extensions of such items or any of them. The above debts, obligations and
liabilities are referred to hereinafter collectively as the "OBLIGATION." The
indebtedness of Assignor to Lender is unlimited as to amount.
2. REPRESENTATIONS AND WARRANTIES. Assignor represents and warrants that
(a) Assignor is the owner of the Account and has the power and authority to
execute, deliver and comply with this Assignment, (b) the obligations of
Assignor hereunder are legal, valid and binding obligations, enforceable in
accordance with their terms, (c) except for any financing statement that may
have been filed by Lender, no financing statement covering the Account, or any
ASSIGNMENT OF DEPOSIT ACCOUNT--Page 1
<PAGE>
part thereof, has been filed with any filing officer, (d) no other assignment or
security agreement has been executed with respect to the Account, (e) the
Account is not subject to any liens or offsets of any person, firm or
corporation other than Lender, and (f) except for any notice given by Lender, no
notice has been given to or received by the Depository Institution indicating
that the Account has been assigned or constitutes collateral for any obligation
or liability of Assignor or any other third party.
3. COVENANTS AND AGREEMENTS. So long as the Obligation or any part thereof
remains unpaid, Assignor covenants and agrees to: (a) from time to time promptly
execute and deliver to Lender all such other assignments, certificates,
passbooks, supplemental writings, notices and financing statements and do all
other acts or things as Lender reasonably may request in order to evidence and
perfect more fully the security interest herein created, (b) avoid making any
statement or otherwise giving any information to third parties that would lead
them to believe that Assignor has free access to the funds in the Account or
that this Assignment is not in existence and in full force and effect, (c)
promptly furnish Lender with any information or writings that Lender reasonably
may request concerning the Account, (d) promptly notify Lender of any change in
any fact or circumstances warranted or represented by Assignor herein or in any
other writing furnished by Assignor to Lender in connection with the Account or
the Obligation, (e) promptly notify Lender of any claim, action or proceeding
affecting title to the Account, or any part thereof, or the security interest
granted in the Account hereby, and, at the request of Lender, appear in and
defend any such action or proceeding, and (f) pay to Lender the amount of any
court costs and reasonable attorneys' fees assessed by a court and incurred by
Lender following default hereunder. Assignor covenants and agrees that, without
the prior consent of Lender, Assignor will not: (i) create any other security
interest in, mortgage, or otherwise encumber or assign the Account or any part
thereof, or permit the same to be or become subject to any lien, attachment,
execution, sequestration, other legal or equitable process, or any encumbrance
of any kind or character, except the lien herein created, or (ii) make or allow
to be made any withdrawals from the Account from and after the occurrence of a
Default. Should any funds payable with respect to the Account be received by
Assignor after the occurrence of a Default, such funds shall immediately upon
such receipt become subject to the lien hereof and, while in the hands of
Assignor, be segregated from all other funds of Assignor and be held in trust
for Lender. Assignor shall have absolutely no dominion or control over such
funds except to pay them immediately into the Account.
4. NO DUTY TO COLLECT. Lender shall never be liable for its failure to use
due diligence in the collection of the Obligation or any part thereof, or for
its failure to give notice to Assignor of default in the payment of the
Obligation or any part thereof, or in the payment of or upon any security,
whether pledged hereunder or otherwise.
5. OTHER COLLATERAL. Should any other person have heretofore executed or
hereafter execute in favor of Lender any deed of trust, mortgage or security
agreement, or have heretofore pledged or hereafter pledge any other property to
secure the payment of the Obligation or any part thereof, the exercise by Lender
of any right or power conferred upon it in any such instrument or by any such
pledge shall be wholly discretionary with Lender; and the exercise or failure to
exercise any such right or power shall not impair or diminish Lender's rights,
titles, interests, liens and powers existing hereunder.
ASSIGNMENT OF DEPOSIT ACCOUNT--Page 2
<PAGE>
6. DEFAULT. The term "DEFAULT," as used herein, means the occurrence of
any of the following events: (a) default in the payment of the Obligation or any
part thereof as it becomes due in accordance with the terms of the promissory
note or notes or other writings or agreements which evidence it or when
accelerated pursuant to any power to accelerate; (b) default in the punctual and
proper performance of any covenant, agreement or condition contained herein or
in any other security agreement, mortgage, deed of trust, assignment or contract
of any kind securing or assuring payment of the Obligation or any part thereof;
(c) the insolvency of Assignor; (d) the levy against the Account or any part
thereof of any execution, attachment, sequestration or other writ; (e) the
appointment of a receiver of Assignor or of the Account or any part thereof; (f)
the filing of any petition or other pleading seeking any adjustment of
Assignor's debts or any other relief under any bankruptcy, reorganization,
debtor's relief or insolvency laws now or hereafter existing; (g) when Lender in
good faith believes that the prospect of payment of the Obligation or the
performance by Assignor of any of the covenants, agreements or other duties
under any writing executed in connection therewith is impaired; or (h) the
receipt by Lender of information establishing that any representation or
warranty made by Assignor herein or by Assignor in any other writing delivered
by Assignor to Lender in connection herewith is false, misleading or erroneous.
7. REMEDIES. Upon the occurrence of a Default, Lender, in addition to any
other remedies it may have, may declare the entire unpaid balance of principal
of and all earned interest on the Obligation immediately due and payable and may
demand payment thereof from the funds in or credited to the Account. Assignor
hereby authorizes and directs Depository Institution, upon written demand from
Lender following any such Default, to make payment directly to Lender of the
funds in or credited to the Account or such part thereof as Lender may request.
Depository Institution shall be protected fully in relying upon the written
statement of Lender that the Account is at the time of such demand assigned
hereunder and that Lender is entitled to payment of the Obligation therefrom.
Lender's receipt for sums paid Lender pursuant to such demand shall be a full
and complete release, discharge and acquittance to Depository Institution to the
extent of the amount so paid. Assignor hereby authorizes Lender upon the
occurrence of a Default and so long as any part of the Obligation remains unpaid
(a) to withdraw, collect and receipt for any and all funds on deposit in or
payable on the Account, (b) on behalf of Assignor to endorse the name of
Assignor upon any checks, drafts or other instruments payable to Assignor
evidencing payment on the Account, and (c) to surrender or present for notation
of withdrawals the passbook, certificate or other documents issued to Assignor
in connection with the Account. No power granted herein to Lender by Assignor
shall terminate upon any disability of Assignor. Lender shall not be liable for
any loss of interest on or any penalty or charge assessed by the Depository
Institution against funds in, payable or credited to the Account as a result of
Lender's exercising any of its rights or remedies under this Assignment.
8. RELEASE. Lender shall be entitled to apply any and all funds received
by Lender hereunder toward payment of the Obligation in such order and manner as
Lender in its discretion may elect. If such funds are not sufficient to pay the
Obligation in full, Assignor shall remain liable for any deficiency; the
liability of each Assignor (if more than one) to be determined by Lender
following its receipt and crediting of such funds. Upon full and final payment
of the Obligation, Lender, at the written request of Assignor, shall release its
rights hereunder.
ASSIGNMENT OF DEPOSIT ACCOUNT--Page 3
<PAGE>
9. RIGHTS AND REMEDIES CUMULATIVE. All rights, titles, interest, liens and
remedies of Lender hereunder are cumulative of each other and of every other
right, title, interest, lien or remedy that Lender may otherwise have at law or
in equity or under any other contract or other writing for the enforcement of
the security interest herein or the collection of the Obligation. The exercise
of one or more rights or remedies shall not prejudice or impair the concurrent
or subsequent exercise of other right or remedies. Should Assignor have
heretofore executed or hereafter execute any other security agreement in favor
of Lender, the security interest therein created and all other rights, powers
and privileges vested in Lender by the terms thereof shall exist concurrently
with the security interest created herein.
10. NO WAIVER. Should any part of the Obligation be payable in
installments, the acceptance by Lender at any time or from time to time of part
payment of the aggregate amount of all installments then matured shall not be
deemed to be a waiver of the Default then existing. No waiver by Lender of any
Default shall be deemed to be a waiver of any other subsequent Default, nor
shall any such waiver by Lender be deemed to be a continuing waiver. No delay or
omission by Lender in exercising any right or power hereunder, or under any
other writings executed by Assignor or Assignor as security for or in connection
with the Obligation, shall impair any such right or power or be construed as a
waiver thereof or any acquiescence therein, nor shall any single or partial
exercise of any such right or power preclude other or further exercise thereof
or the exercise of any other right or power of Lender hereunder or under such
other writings.
11. INTEREST LIMITATION. No provision herein or in any promissory note,
instrument or any other loan document evidencing the Obligation shall require
the payment or permit the collection of interest in excess of the maximum
permitted by law. If any excess of interest in such respect is provided for
herein or in any such promissory note, instrument or any other loan document,
the provisions of this paragraph shall govern; and Assignor shall not be
obligated to pay the amount of such interest to the extent that it is in excess
of the amount permitted by law. The intention of parties being to conform
strictly to the applicable usury laws now in force, all promissory notes,
instruments and other loan documents evidencing the Obligation shall be held
subject to reduction to the amount allowed under said usury laws as now or
hereafter construed by the courts having jurisdiction.
12. SUCCESSORS AND ASSIGNS. This Assignment shall be binding on Assignor
and Assignor's successors and assigns. This Assignment shall inure to the
benefit of Lender, its successors and assigns.
13. INDEMNIFICATION. Assignor shall indemnify and hold Depository
Institution harmless against any loss, liability, claim, damage, injury, demand
or expense, including reasonable legal fees, arising out of or in connection
with the performance of Depository Institution's obligations hereunder,
including the costs and expenses incurred in connection with the collection of
its fees and including the costs and expenses of defending itself against any
claim or liability arising out of or in connection with the performance of its
duties hereunder, except for any loss, liability, claim, damage, injury, demand
or expense resulting from its bad faith, gross negligence or willful misconduct.
Under no circumstances shall Depository Institution be liable or responsible for
consequential, incidental or special damages.
ASSIGNMENT OF DEPOSIT ACCOUNT--Page 4
<PAGE>
14. CHOICE OF LAW. The validity, construction, interpretation and
enforcement of this Assignment shall be governed by the laws of the State of
Texas and the United States of America. Any conflicts of law rules of any
jurisdiction that require reference to the laws of any other jurisdiction
besides the State of Texas shall be disregarded. This Assignment is to be
performed in Dallas County, Texas. Any and all suits or proceedings arising out
of this Assignment may be brought in the state courts sitting in Dallas County,
Texas, or the United States court sitting in the Northern District of Texas.
Assignor hereby agrees to submit to the jurisdiction of such courts and waives
any right Assignor may have to plead forum non conveniens.
15. KNOWLEDGE OF DEPOSITORY INSTITUTION. Depository Institution shall not
be charged with knowledge of any of the terms of the Loan Agreement or of any
other document to which it is not a party, except as expressly set forth herein.
EXECUTED by Assignor on the date first above written.
ASSIGNOR:
DSI TOYS, INC.
By: /s/ M. D. DAVIS
M. D. Davis, Chief Executive Officer
ASSIGNMENT OF DEPOSIT ACCOUNT--Page 5
<PAGE>
February 2, 1999
Bank One, Texas, N.A.
Bank One Center
910 Travis Street, Seventh Floor
Houston, Texas 77002
Gentlemen:
DSI Toys, Inc., a Texas corporation (the "Depositor"), has assigned to
Sunrock Capital Corp., a Delaware corporation (the "Lender"), the deposit
accounts numbered 0001888592886 and 9320001085 in Depositor's name with you,
along with any renewals and extensions thereof (such account and any renewals
and extensions thereof being referred to collectively as the "Account"),
pursuant to that certain Assignment of Deposit Account, dated February 2, 1999,
executed by Depositor in favor of Lender (the "ASSIGNMENT").
Your signature to and return of the enclosed copy of this letter shall
evidence your agreement in favor of Lender:
(a) From and after receipt of notification from Lender of a Default
under the Assignment, not to release or pay out any of the funds in
the Account to Depositor or any other party until receiving written
notification from Lender that such funds may be paid out and to whom
the funds shall be paid;
(b) To include on all written confirmations of the Account
(including renewals and extension of the Account) hereafter made by
you the following legend:
"This account has been assigned to Sunrock Capital Corp., a
Delaware corporation, as collateral for certain obligations owed by
depositor (or others) to such Lender";
(c) Not to exercise any offset rights you may have by law, at equity
or by express agreement with respect to the funds contained in the
Account; and
(d) From and after receipt of notification from Lender of a Default
under the Assignment, to make payments from the Account in
accordance with the Assignment.
ASSIGNMENT OF DEPOSIT ACCOUNT--Page 6
<PAGE>
Very truly yours,
LENDER:
SUNROCK CAPITAL CORP.
By: /s/ ROBERT J. KATCHA
Robert J. Katcha
Senior Vice President
Depositor authorizes and agrees to the instructions and terms of this letter.
DEPOSITOR:
DSI TOYS, INC.
By: /s/ M. D. DAVIS
M. D. Davis
Chief Executive Officer
The depository institution, which issued and established the Account, accepts
and agrees to the instructions and terms of this letter.
DEPOSITORY INSTITUTION:
Bank One, Texas, N.A.
By: /s/ JOHN ELAM
Name: John Elam
Its: VP
ASSIGNMENT OF DEPOSIT ACCOUNT--Page 7
Exhibit 10.27
TRADEMARK SECURITY AGREEMENT
WHEREAS, DSI Toys, Inc., a Texas corporation ("Grantor"), owns the
Trademarks, Trademark registrations, and Trademark applications listed on
SCHEDULE 1 annexed hereto, and is a party to the Trademark Licenses listed on
SCHEDULE 1 annexed hereto; and
WHEREAS, Grantor and SUNROCK CAPITAL CORP., a Delaware corporation
("GRANTEE"), are parties to a Loan and Security Agreement dated February 2, 1999
(as the same may be amended and in effect from time to time, the "LOAN
AGREEMENT"), providing that Grantee will make certain loans to Grantor; and
WHEREAS, pursuant to the terms of the Loan Agreement, Grantor has granted
to Grantee a security interest in all of the assets of Grantor including all
right, title and interest of Grantor in, to and under all of the following now
owned or hereafter created or acquired by Grantor: (a) all trademarks, trade
names, corporate names, company names, business names, fictitious business
names, trade styles, service marks, logos, other business identifiers, prints
and labels on which any of the foregoing have appeared or appear, all
registrations and recordings thereof, and all applications in connection
therewith including registrations, recordings and applications in the United
States Patent and Trademark Office or in any similar office or agency of the
United States, any State thereof or any other country or any political
subdivision thereof, including, without limitation, those described in SCHEDULE
1 annexed hereto; (b) all reissues, extensions or renewals thereof; (c) all
income, royalties, damages and payments now or hereafter due and/or payable
under any of the foregoing or with respect to any of the foregoing including
damages or payments for past or future infringements of any of the foregoing;
(d) the right to sue for past, present and future infringements of any of the
foregoing; (e) all rights corresponding to any of the foregoing throughout the
world; (f) all goodwill associated with and symbolized by any of the foregoing
(items (a) - (g) above are collectively referred to hereto as "TRADEMARK"); (g)
Trademark registrations, (h) Trademark applications and (i) any written
agreement now or hereafter in existence granting to Grantor any right to use any
Trademark, including, without limitation, the agreements described in SCHEDULE 1
annexed hereto, together with the goodwill of the business symbolized by
Grantor's Trademarks, and all proceeds thereof, to secure the payment of all
amounts owing by Grantor under the Loan Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Grantor does hereby grant to
Grantee a continuing security interest in all of Grantor's right, title and
interest in, to and under the following (all of the following items or types of
property being herein collectively referred to as the "TRADEMARK Collateral"),
whether presently existing or hereafter created or acquired:
(1) each Trademark, Trademark registration and Trademark
application, including, without limitation, the Trademarks, Trademark
registrations (together with any reissues, continuations or extensions
thereof) and Trademark applications referred to in SCHEDULE 1 annexed
hereto, and all of the goodwill of the business connected with the use of,
and symbolized by, each Trademark, Trademark registration and Trademark
application;
TRADEMARK SECURITY AGREEMENT -Page 1
<PAGE>
(2) each Trademark License and all of the goodwill of the business
connected with the use of, and symbolized by, each Trademark License; and
(3) all products and proceeds of the foregoing, including, without
limitation, any claim by Grantor against third parties for past, present
or future (a) infringement or dilution of any Trademark or Trademark
registration including, without limitation, the Trademarks and Trademark
registrations referred to in SCHEDULE 1 annexed hereto, the Trademark
registrations issued with respect to the Trademark applications referred
in SCHEDULE 1 and the Trademarks licensed under any Trademark License, or
(b) injury to the goodwill associated with any Trademark, Trademark
registration or Trademark licensed under any Trademark License.
This security interest is granted in conjunction with the security
interests granted to Grantee pursuant to the Loan Agreement. Grantor hereby
acknowledges and affirms that the rights and remedies of Grantee with respect to
the security interest in the Trademark Collateral made and granted hereby are
more fully set forth in the Loan Agreement, the terms and provisions of which
are incorporated by reference herein as if fully set forth herein.
IN WITNESS WHEREOF, Grantor has caused this Trademark Security Agreement
to be duly executed by its duly authorized officer thereunto as of the 2nd day
of February, 1999.
DSI TOYS, INC.
By: /s/ M. D. DAVIS
M.D. Davis
Chief Executive Officer
TRADEMARK SECURITY AGREEMENT -Page 2
<PAGE>
ACKNOWLEDGMENT
STATE OF TEXAS ss.
ss.
COUNTY OF DALLAS ss.
This instrument was acknowledged before me on February 2, 1999, by M.D.
Davis, Chief Executive Officer of DSI Toys, Inc., a Texas corporation, on behalf
of said corporation.
/s/ PATRICIA WILKERSON
Notary Public in and for the State
of Texas
My Commission Expires:
_________________________
[PATRICIA WILKERSON NOTARY PUBLIC STAMP]
TRADEMARK SECURITY AGREEMENT -Page 3
EXHIBIT 10.28
PATENT COLLATERAL ASSIGNMENT
THIS PATENT COLLATERAL ASSIGNMENT (this "Agreement"), dated as of February
2, 1999, is made by DSI TOYS, INC., a Texas corporation (the "Grantor"), in
favor of SUNROCK CAPITAL CORP., a Delaware corporation (the "Secured Party").
RECITALS
A. The Grantor and the Secured Party are entering into a Loan and Security
Agreement, dated as of the date hereof (as amended, modified, renewed or
extended from time to time, the "Loan Agreement"), pursuant to which the Secured
Party is extending certain credit facilities to the Grantor and the Grantor is
granting to the Secured Party a security interest in (among other things) all of
the general intangibles of the Grantor, subject to and upon the terms and
conditions of the Loan Agreement.
B. Pursuant to the Loan Agreement and as one of the conditions precedent
to the obligations of the Secured Party under the Loan Agreement, the Grantor
has agreed to execute and deliver this Agreement to the Secured Party for filing
with the United States Patent and Trademark Office and with any other relevant
recording systems in any domestic or foreign jurisdiction, and as further
evidence of and to effectuate the Secured Party's existing security interests in
the patents and other general intangibles described herein.
ASSIGNMENT
ACCORDINGLY, for valuable consideration, the receipt and adequacy of which
are hereby acknowledged, Grantor hereby agrees in favor of the Secured Party as
follows:
1. DEFINITIONS; INTERPRETATION.
(a) CERTAIN DEFINED TERMS. As used in this Agreement, the following
terms shall have the following meanings:
"EVENT OF DEFAULT" means any Event of Default under the Loan
Agreement.
"LIEN" means any pledge, security interest, assignment, charge or
encumbrance, lien (statutory or other), or other preferential arrangement
(including any agreement to give any security interest).
"LOAN DOCUMENTS" has the meaning assigned to it in the Loan
Agreement.
"OBLIGATIONS" has the meaning assigned to it in the Loan Agreement.
"PATENT COLLATERAL" has the meaning set forth in Section 2.
"PATENTS" has the meaning set forth in Section 2.
1
<PAGE>
"PERSON" means an individual, corporation, partnership, joint
venture, trust, unincorporated organization or any other juridical entity.
"PROCEEDS" means whatever is receivable or received from or upon the
sale, lease, license, collection, use, exchange or other disposition,
whether voluntary or involuntary, of any Patent Collateral, including
"proceeds" as defined at UCC Section 9.306, and all proceeds of proceeds.
Proceeds shall include without limitation, (i) any and all accounts,
chattel paper, instruments, general intangibles, cash and other proceeds,
payable to or for the account of the Grantor, from time to time in respect
of any of the Patent Collateral, (ii) any and all proceeds of any
insurance, indemnity, warranty or guaranty payable to or for the account
of the Grantor from time to time with respect to any of the Patent
Collateral, (iii) any and all claims and payments (in any form whatsoever)
made or due and payable to the Grantor from time to time in connection
with any requisition, confiscation, condemnation, seizure or forfeiture of
all or any part of the Patent Collateral by any Person acting under color
of governmental authority, and (iv) any and all other amounts from time to
time paid or payable under or in connection with any of the Patent
Collateral or for or on account of any damage or injury to or conversion
of any Patent Collateral by any Person.
"PTO" means the United States Patent and Trademark Office and any
successor thereto.
"UCC" means the Uniform Commercial Code as in effect from time to
time in the State of Texas.
"UNITED STATES" and "U.S." each mean the United States of America.
(b) TERMS DEFINED IN UCC. Where applicable and except as otherwise
defined herein, terms used in this Agreement shall have the meanings
assigned to them in the UCC.
(c) INTERPRETATION. In this Agreement, except to the extent the
context otherwise requires:
(i) Any reference to a Section or a Schedule is a reference to
a section hereof, or a schedule hereto, respectively, and to a
subsection or a clause is, unless otherwise stated, a reference to a
subsection or a clause of the Section or subsection in which the
reference appears.
(ii) The words "hereof," "herein," "hereto," "hereunder" and
the like mean and refer to this Agreement as a whole and not merely
to the specific Section, subsection, paragraph or clause in which
the respective word appears.
2
<PAGE>
(iii) The meaning of defined terms shall be equally applicable
to both the singular and plural forms of the terms defined.
(iv) The words "including," "includes" and "include" shall be
deemed to be followed by the words "without limitation."
(v) References to agreements and other contractual instruments
shall be deemed to include all subsequent amendments and other
modifications thereto.
(vi) References to statutes or regulations are to be construed
as including all statutory and regulatory provisions consolidating,
amending or replacing the statute or regulation referred to.
(vii) Any captions and headings are for convenience of
reference only and shall not affect the construction of this
Agreement.
(viii) Capitalized words not otherwise defined herein shall
have the respective meanings assigned to them in the Loan Agreement.
2. SECURITY INTEREST.
(a) ASSIGNMENT AND GRANT OF SECURITY INTEREST. As security for the
payment and performance of the Obligations, the Grantor hereby assigns,
grants, transfers and conveys to the Secured Party, for security purposes,
all of the Grantor's right, title and interest in, to and under the
following property, whether now existing or hereafter acquired or arising
(collectively, the "Patent Collateral"):
(i) all letters patent of the U.S. or any other country, all
registrations and recordings thereof, and all applications for
letters patent of the U.S. or any other country, owned, held or used
by the Grantor in whole or in part, including all existing U.S.
patents and patent applications of the Grantor which are described
in SCHEDULE A hereto, as the same may be amended or supplemented
pursuant hereto from time to time, and together with and including
all patent licenses held by the Grantor (unless otherwise prohibited
by any license or related licensing agreement under circumstances
where the granting of the security interest would have the effect
under applicable law of the termination or permitting termination of
the license for breach and where the licenser, other than any
affiliate of the Grantor, has elected such termination remedy),
together with all reissues, divisions, continuations, renewals,
extensions and continuations-in-part thereof and the inventions
disclosed therein, and all rights corresponding thereto throughout
the world, including the right to make, use, lease, sell and
otherwise transfer the inventions disclosed therein, and all
proceeds thereof, including without limitation all license royalties
and proceeds of infringement suits (collectively, the "Patents");
3
<PAGE>
(ii) all claims, causes of action and rights to sue for past,
present and future infringement or unconsented use of any of the
Patents and all rights arising therefrom and pertaining thereto;
(iii) all general intangibles (as defined in the UCC) and all
intangible intellectual or other similar property of the Grantor of
any kind or nature, whether now owned or hereafter acquired or
developed, associated with or arising out of any of the Patents and
not otherwise described above; and
(iv) all products and proceeds of any and all of the foregoing
Patent Collateral (including, without limitation, license royalties,
rights to payment, accounts receivable and proceeds of infringement
suits) and, to the extent not otherwise included, all payments under
insurance (whether or not the Secured Party is the loss payee
thereof) or any indemnity, warranty or guaranty payable by reason of
loss or damage to or otherwise with respect to the foregoing Patent
Collateral. For purposes of this Agreement, the term "proceeds"
includes whatever is receivable or received when property or
proceeds are sold, collected, exchanged or otherwise disposed of,
whether such disposition is voluntary or involuntary, and includes,
without limitation, all rights to payment, including returned
premiums, with respect to any insurance relating thereto.
(b) CONTINUING SECURITY INTEREST. The Grantor agrees that this
Agreement shall create a continuing security interest in the Patent
Collateral which shall remain in effect until terminated in accordance
with Section 17.
(c) INCORPORATION INTO LOAN AGREEMENT. This Agreement shall be fully
incorporated into the Loan Agreement and all understandings, agreements
and provisions contained in the Loan Agreement shall be fully incorporated
into this Agreement. Without limiting the foregoing, the Patent Collateral
described in this Agreement shall constitute part of the Collateral in the
Loan Agreement.
3. FURTHER ASSURANCES; APPOINTMENT OF SECURED PARTY AS ATTORNEY-IN-FACT.
The Grantor at its expense shall execute and deliver, or cause to be executed
and delivered, to the Secured Party any and all documents and instruments, in
form and substance satisfactory to the Secured Party, and take any and all
action, which the Secured Party may reasonably request from time to time, to
perfect and continue perfected, maintain the priority of or provide notice of
the Secured Party's security interest in the Patent Collateral and to accomplish
the purposes of this Agreement. The Secured Party shall have the right to, in
the name of the Grantor, or in the name of the Secured Party or otherwise,
without notice to or assent by the Grantor, and the Grantor hereby irrevocably
constitutes and appoints the Secured Party (and any of the Secured Party's
officers or employees or agents designated by the Secured Party) as the
Grantor's true and lawful attorney-in-fact with full power and authority, (i) to
sign the name of the Grantor on all or any of such documents or instruments and
perform all other acts that the Secured Party deems necessary or advisable in
order to perfect or continue perfected, maintain the priority or enforceability
of or provide notice of the Secured Party's security interest in, the Patent
Collateral, and (ii) to execute
4
<PAGE>
any and all other documents and instruments, and to perform any and all acts and
things for and on behalf of the Grantor, which the Secured Party may deem
necessary or advisable to maintain, preserve and protect the Patent Collateral
and to accomplish the purposes of this Agreement, including (A) to defend,
settle, adjust or (after the occurrence of any Event of Default) institute any
action, suit or proceeding with respect to the Patent Collateral, (B) after the
occurrence of any Event of Default, to assert or retain any rights under any
license agreement for any of the Patent Collateral, including without limitation
any rights of the Grantor arising under Section 365(n) of the Bankruptcy Code,
and (C) after the occurrence of any Event of Default, to execute any and all
applications, documents, papers and instruments for the Secured Party to use the
Patent Collateral, to grant or issue any exclusive or non-exclusive license with
respect to any Patent Collateral, and to assign, convey or otherwise transfer
title in or dispose of the Patent Collateral; provided, however, that in no
event shall the Secured Party have the unilateral power, prior to the occurrence
and continuation of an Event of Default, to assign any of the Patent Collateral
to any Person, including itself, without the Grantor's written consent. The
foregoing shall in no way limit the Secured Party's rights and remedies upon or
after the occurrence of an Event of Default. The power of attorney set forth in
this Section 3, being coupled with an interest, is irrevocable so long as this
Agreement shall not have terminated in accordance with Section 17.
4. REPRESENTATIONS AND WARRANTIES. The Grantor represents and warrants to
the Secured Party as follows:
(a) NO OTHER PATENTS. A true and correct list of all of the existing
Patents owned, held (whether pursuant to a license or otherwise) or used
by the Grantor, in whole or in part, is set forth in SCHEDULE A.
(b) VALIDITY. Each of the Patents listed on SCHEDULE A is subsisting
and has not been adjudged invalid or unenforceable, in whole or in part,
all maintenance fees required to be paid on account of any Patents have
been timely paid for maintaining such Patents in force, and, to the best
of the Grantor's knowledge after due inquiry, each of the Patents is valid
and enforceable.
(c) OWNERSHIP OF PATENT COLLATERAL; NO VIOLATION. (i) The Grantor
has rights in and good title to the existing Patent Collateral, (ii) with
respect to the Patent Collateral shown on SCHEDULE A hereto as owned by
it, the Grantor is the sole and exclusive owner thereof, free and clear of
any Liens and rights of others (other than the security interest created
hereunder), including licenses, shop rights and covenants by the Grantor
not to sue third persons and (iii) with respect to any Patent for which
the Grantor is either a licensor or a licensee pursuant to a license or
licensee agreement regarding such Patent, each such license or licensing
agreement is in full force and effect, the Grantor is not in default of
any of its obligations thereunder and other than the parties to such
licenses or licensing agreements, no other Person has any rights in or to
any of the Patent Collateral. The past, present and contemplated future
use of the Patent Collateral by the Grantor has not, does not and will not
infringe upon or violate any right, privilege or license agreement of or
with any other Person.
5
<PAGE>
(d) NO INFRINGEMENT. To the best of the Grantor's knowledge after
due inquiry, no material infringement or unauthorized use presently is
being made of any of the Patent Collateral by any Person.
(e) POWERS. The Grantor has the unqualified right, power and
authority to pledge and to grant to the Secured Party a security interest
in all of the Patent Collateral pursuant to this Agreement, and to
execute, deliver and perform its obligations in accordance with the terms
of this Agreement, without the consent or approval of any other Person
except as already obtained.
5. COVENANTS. So long as any of the Obligations remain unsatisfied, the
Grantor agrees that it will comply with all of the covenants, terms and
provisions of the this Agreement, the Loan Agreement and the other Loan
Documents, and the Grantor will promptly give the Secured Party written notice
of the occurrence of any Event of Default.
6. FUTURE RIGHTS. Except as otherwise expressly agreed to in writing by
the Secured Party, for so long as any of the Obligations shall remain
outstanding, or, if earlier, until the Secured Party shall have released or
terminated, in whole but not in part, its interest in the Patent Collateral, if
and when the Grantor shall obtain rights to any new patentable inventions, or
become entitled to the benefit of any Patent, or any reissue, division,
continuation, renewal, extension or continuation-in-part of any Patent or Patent
Collateral or any improvement thereof (whether pursuant to any license or
otherwise), the provisions of Section 2 shall automatically apply thereto and
the Grantor shall give to the Secured Party prompt notice thereof. The Grantor
shall do all things deemed necessary or advisable by Secured Party to ensure the
validity, perfection, priority and enforceability of the security interests of
Secured Party in such future acquired Patent Collateral. The Grantor hereby
authorizes the Secured Party to modify, amend, or supplement the Schedules
hereto and to re-execute this Agreement from time to time on Grantor's behalf
and as its attorney-in-fact to include any future patents which are or become
Patent Collateral and to cause such re-executed Agreement or such modified,
amended or supplemented Schedules to be filed with the PTO.
7. SECURED PARTY'S DUTIES. Notwithstanding any provision contained in this
Agreement, the Secured Party shall have no duty to exercise any of the rights,
privileges or powers afforded to it and shall not be responsible to the Grantor
or any other Person for any failure to do so or delay in doing so. Except for
the accounting for moneys actually received by the Secured Party hereunder or in
connection herewith, the Secured Party shall have no duty or liability to
exercise or preserve any rights, privileges or powers pertaining to the Patent
Collateral.
8. REMEDIES. The Secured Party shall have all rights and remedies
available to it under the Loan Agreement and applicable law (which rights and
remedies are cumulative) with respect to the security interests in any of the
Patent Collateral or any other collateral. The Grantor agrees that such rights
and remedies include, but are not limited to, the right of the Secured Party as
a secured party to sell or otherwise dispose of its collateral after default,
pursuant to UCC Section 9.504. The Grantor agrees that the Secured Party shall
at all times have
6
<PAGE>
such royalty free licenses, to the extent permitted by law, for any Patent
Collateral that is reasonably necessary to permit the exercise of any of the
Secured Party's rights or remedies upon or after the occurrence of an Event of
Default with respect to (among other things) any tangible asset of the Grantor
in which the Secured Party has a security interest, including without limitation
the Secured Party's rights to sell inventory, tooling or packaging which is
acquired by the Grantor (or its successor, assignee or trustee in bankruptcy).
In addition to and without limiting any of the foregoing, upon the occurrence
and during the continuance of an Event of Default, the Secured Party shall have
the right but shall in no way be obligated to bring suit, or to take such other
action as the Secured Party deems necessary or advisable, in the name of the
Grantor or the Secured Party, to enforce or protect any of the Patent
Collateral, in which event the Grantor shall, at the request of the Secured
Party, do any and all lawful acts and execute any and all documents required by
the Secured Party in aid of such enforcement. To the extent that the Secured
Party shall elect not to bring suit to enforce such Patent Collateral, the
Grantor agrees to use all reasonable measures and its diligent efforts, whether
by action, suit, proceeding or otherwise, to prevent the infringement,
misappropriation or violations thereof by others and for that purpose agrees
diligently to maintain any action, suit or proceeding against any Person
necessary to prevent such infringement, misappropriation or violation.
9. BINDING EFFECT. This Agreement shall be binding upon, inure to the
benefit of and be enforceable by the Grantor, the Secured Party and their
respective successors and assigns.
10. NOTICES. All notices and other communications hereunder shall be in
writing and shall be mailed, sent or delivered in accordance with the Loan
Agreement.
11. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, except to the extent that the
validity or perfection of the assignment and security interests hereunder in
respect of any Patent Collateral are governed by federal law.
12. ENTIRE AGREEMENT; AMENDMENT. THIS AGREEMENT, TOGETHER WITH THE
SCHEDULES HERETO, CONTAINS THE ENTIRE AGREEMENT OF THE PARTIES WITH RESPECT TO
THE SUBJECT MATTER HEREOF AND SUPERSEDES ALL PRIOR DRAFTS AND COMMUNICATIONS
RELATING TO SUCH SUBJECT MATTER. NEITHER THIS AGREEMENT NOR ANY PROVISION HEREOF
MAY BE MODIFIED, AMENDED OR WAIVED EXCEPT BY THE WRITTEN AGREEMENT OF THE
PARTIES, AS PROVIDED IN THE LOAN AGREEMENT. NOTWITHSTANDING THE FOREGOING, THE
SECURED PARTY MAY RE-EXECUTE THIS AGREEMENT OR MODIFY, AMEND OR SUPPLEMENT THE
SCHEDULES HERETO AS PROVIDED IN SECTION 6 HEREOF.
13. SEVERABILITY. If one or more provisions contained in this Agreement
shall be invalid, illegal or unenforceable in any respect in any jurisdiction or
with respect to any party, such invalidity, illegality or unenforceability in
such jurisdiction or with respect to such party shall, to the fullest extent
permitted by applicable law, not invalidate or render illegal or unenforceable
7
<PAGE>
any such provision in any other jurisdiction or with respect to any other party,
or any other provisions of this Agreement.
14. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute but one and the same agreement.
15. LOAN AGREEMENT. The Grantor acknowledges that the rights and remedies
of the Secured Party with respect to the security interest in the Patent
Collateral granted hereby are more fully set forth in the Loan Agreement and all
such rights and remedies are cumulative.
16. NO INCONSISTENT REQUIREMENTS. The Grantor acknowledges that this
Agreement and the other Loan Documents may contain covenants and other terms and
provisions variously stated regarding the same or similar matters, and the
Grantor agrees that all such covenants, terms and provisions are cumulative and
all shall be performed and satisfied in accordance with their respective terms.
17. TERMINATION. Upon the satisfaction in full of all the Obligations,
this Agreement shall terminate and the Secured Party shall execute and deliver
such documents and instruments and take such further action reasonably requested
by the Grantor and at the Grantor's expense as shall be necessary to evidence
termination of the security interest granted by the Grantor to the Secured Party
hereunder, including cancellation of this Agreement by written notice from the
Secured Party to the PTO.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement,
as of the date first above written.
DSI TOYS, INC.,
a Texas corporation
By: /s/ M. D. DAVIS
M. D. Davis
Chief Executive Officer
SUNROCK CAPITAL CORP.,
a Delaware corporation
By: /s/ ROBERT J. KATCHA
Robert J. Katcha
Senior Vice President
8
<PAGE>
STATE OF TEXAS ss.
ss.
COUNTY OF DALLAS ss.
This instrument was acknowledged before me on February 2, 1999, by M. D.
Davis, Chief Executive Officer of DSI Toys, Inc., a Texas corporation, on behalf
of said corporation.
/s/ PATRICIA WILKERSON
Notary Public in and for the State of Texas
My Commission Expires:
________________________
[PATRICIA WILKERSON NOTARY PUBLIC STAMP]
STATE OF TEXAS ss.
ss.
COUNTY OF DALLAS ss.
This instrument was acknowledged before me on February 2, 1999, by
Robert J. Katcha, Senior Vice President of Sunrock Capital Corp., a Delaware
corporation, on behalf of said corporation.
/s/ PATRICIA WILKERSON
Notary Public in and for the State of Texas
My Commission Expires:
_________________________
[PATRICIA WILKERSON NOTARY PUBLIC STAMP]
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DSI TOYS,
INC. FINANCIAL STATEMENTS AS OF AND FOR THE TWELVE MONTHS ENDED JANUARY 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> JAN-31-1999
<CASH> 554,197
<SECURITIES> 0
<RECEIVABLES> 2,984,619
<ALLOWANCES> (123,458)
<INVENTORY> 4,207,704
<CURRENT-ASSETS> 8,286,596
<PP&E> 5,707,676
<DEPRECIATION> 4,065,004
<TOTAL-ASSETS> 12,954,593
<CURRENT-LIABILITIES> 7,895,885
<BONDS> 2,540,522
0
0
<COMMON> 87,190
<OTHER-SE> 2,317,996
<TOTAL-LIABILITY-AND-EQUITY> 12,954,593
<SALES> 52,722,517
<TOTAL-REVENUES> 52,722,517
<CGS> 42,058,919
<TOTAL-COSTS> 10,967,001
<OTHER-EXPENSES> 106,881
<LOSS-PROVISION> (17,424)
<INTEREST-EXPENSE> 874,907
<INCOME-PRETAX> (1,071,429)
<INCOME-TAX> (333,000)
<INCOME-CONTINUING> (738,429)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (738,429)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
