<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NO. 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
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 ...
As of June 7, 1999, 8,383,157 shares of common stock, par value $.01 per
share, of DSI Toys, Inc. were outstanding.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of April 30, 1999 and January 31, 1999................................1
Consolidated Statement of Operations for the Three Months Ended
April 30, 1999 and 1998..........................................................................2
Consolidated Statement of Cash Flows for the Three Months Ended April 30, 1999 and 1998.............3
Consolidated Statement of Shareholders' Equity......................................................4
Notes to Consolidated Financial Statements..........................................................5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...............6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................11
Item 2. Changes in Securities and Use of Proceeds..........................................................11
Item 4. Submission of Matters to a Vote of Security Holders................................................12
Item 5. Other Information..................................................................................13
Item 6. Exhibits and Reports on Form 8-K...................................................................13
Signatures
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DSI TOYS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1999 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................................... $ 20,076 $ 554,197
Restricted cash.......................................................... 150,000 150,000
Accounts receivable, net................................................. 1,066,765 1,069,725
Inventories.............................................................. 3,973,206 4,207,704
Prepaid expenses......................................................... 1,791,053 1,503,970
Deferred income taxes.................................................... 801,000 801,000
------------ ------------
Total current assets............................................... 7,802,100 8,286,596
Property and equipment, net.................................................... 1,773,917 1,642,672
Advances to shareholder (life insurance premiums).............................. 1,610,168 1,543,814
Deferred income taxes.......................................................... 1,307,281 1,117,000
Other assets................................................................... 514,398 364,511
------------ ------------
$ 13,007,864 $ 12,954,593
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities................................. $ 5,632,005 $ 6,799,290
Current portion of long-term debt........................................ 1,609,993 824,675
Income taxes payable..................................................... 227,004 271,920
------------ ------------
Total current liabilities.......................................... 7,469,002 7,895,885
Long-term debt................................................................. 2,254,094 2,540,522
Deferred income taxes.......................................................... 113,789 113,000
------------ ------------
Total liabilities.................................................. 9,836,885 10,549,407
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, 6,566,038 shares outstanding............. 87,190 87,190
Additional paid-in capital............................................... 17,647,472 21,162,568
Common stock warrants.................................................... 102,500 102,500
Accumulated other comprehensive income................................... 12,020 14,296
Retained earnings........................................................ 3,267,293 3,699,224
------------ ------------
21,116,475 25,065,778
Less: treasury stock, 2,152,962 and 2,719,000 shares, at cost............ (17,945,496) (22,660,592)
------------ ------------
Total shareholders' equity......................................... 3,170,979 2,405,186
------------ ------------
$ 13,007,864 $ 12,954,593
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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DSI TOYS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30,
----------------------------
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Net sales...................................... $ 3,927,695 $ 5,926,126
Costs of goods sold............................ 2,859,191 4,513,607
----------- -----------
Gross profit................................... 1,068,504 1,412,519
Selling, general and administrative expenses... 1,633,544 2,209,222
----------- -----------
Operating loss................................. (565,040) (796,703)
Interest expense............................... 119,229 222,696
Other income................................... (9,377) (11,372)
----------- -----------
Loss before income taxes....................... (674,892) (1,008,027)
Benefit from income taxes...................... (242,961) (362,890)
----------- -----------
Net Loss....................................... $ (431,931) $ (645,137)
=========== ===========
Basic earnings per share
Loss per share.............................. $ (0.07) $ (0.11)
=========== ===========
Weighted average shares outstanding......... 6,095,400 6,000,000
=========== ===========
Diluted earnings per share
Loss per share.............................. $ (0.07) $ (0.11)
=========== ===========
Weighted average shares outstanding......... 6,095,400 6,000,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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DSI TOYS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30,
----------------------------
1999 1998
----------- -----------
Cash flows from operating activities: (Unaudited)
<S> <C> <C>
Net loss.................................................... $ (431,931) $ (645,137)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation............................................. 108,571 105,289
Amortization and write-off of
debt discount and issuance costs...................... 10,036 --
Provision for doubtful accounts.......................... 4,420 2,848
Gain on sale of equipment................................ (988) --
Deferred income taxes.................................... (189,492) (343,799)
Changes in assets and liabilities:
Accounts receivable................................... (1,462) 4,912,925
Inventories........................................... 234,498 1,084,418
Income taxes receivable/payable....................... (44,916) 21,482
Prepaid expenses...................................... (287,083) (532,196)
Accounts payable and accrued liabilities.............. (1,167,284) (1,922,539)
----------- -----------
Net cash provided (used) by operating activities.... (1,765,631) 2,683,291
Cash flows from investing activities:
Capital expenditures........................................ (242,614) (237,286)
Proceeds from sale of equipment............................. 3,787 --
Life insurance premiums paid for shareholder................ (66,354) (66,353)
(Increase) decrease in other assets......................... (74,490) (48,244)
----------- -----------
Net cash used in investing activities............... (379,671) (351,883)
Cash flows from financing activities:
Net borrowings (repayments) under revolving lines
of credit.................................................. 474,521 (2,402,990)
Net borrowings (repayments) on long-term debt............... 24,368 (639)
Proceeds from issuance of common stock...................... 1,200,000 --
Debt issue costs............................................ (85,433) --
----------- -----------
Net cash provided (used) by financing activities.... 1,613,456 (2,403,629)
Effect of exchange rate changes on cash........................ (2,275) (5,386)
----------- -----------
Net decrease in cash........................................... (534,121) (77,607)
Cash and cash equivalents, beginning of period................. 554,197 383,690
----------- -----------
Cash and cash equivalents, end of period....................... $ 20,076 $ 306,083
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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DSI TOYS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
------------------ Paid-in Comprehensive Retained Treasury
Shares Amount Capital Warrants Income Earnings Stock Total
--------- ------- ----------- -------- ------------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1998 ...... 8,719,000 $87,190 $21,162,568 $102,500 $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 ...... 8,719,000 87,190 21,162,568 102,500 14,296 3,699,224 (22,660,592) 2,405,186
Issuance 566,038 common
shares .................... (3,515,096) 4,715,096 1,200,000
Comprehensive loss:
Net loss .................... (431,931) (431,931)
Foreign currency
translation adjustments,
net of tax ................ (2,276) (2,276)
----------
Comprehensive loss ...... (434,207)
--------- ------- ----------- -------- ------- ---------- ------------ ----------
Balance, April 30, 1999 ........ 8,719,000 $87,190 $17,647,472 $102,500 $12,020 $3,267,293 $(17,945,496) $3,170,979
========= ======= =========== ======== ======= ========== ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 7
DSI TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of DSI
Toys, Inc. and its wholly-owned subsidiary (the "Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements and should be
read in conjunction with the financial statements and notes thereto appearing
in the Company's Annual Report on Form 10-K for the year ended January 31,
1999.
In the opinion of the Company's management, all adjustments necessary
for a fair presentation of the results of operations for all periods reported
have been included. Such adjustments consist only of normal recurring items.
The results of operations for the three months ended April 30, 1999 are
not necessarily indicative of the results expected for the full year ending
January 31, 2000.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
April 30, 1999 January 31, 1999
-------------- ----------------
<S> <C> <C>
Trade receivables.................. $ 2,364,220 $ 2,984,619
Provisions for:
Discounts, markdowns and
return of defective goods... (1,169,361) (1,791,436)
Doubtful accounts................ (128,094) (123,458)
----------- -----------
Accounts receivable, net........... $ 1,066,765 $ 1,069,725
=========== ===========
</TABLE>
3. SEGMENT INFORMATION
Financial information for the three months ended April 30, 1999 and
1998 is as follows:
<TABLE>
<CAPTION>
United States Hong Kong Consolidated
------------- ------------ ------------
<S> <C> <C> <C>
Three months ended April 30, 1999:
Net sales....................... 2,053,675 1,874,020 3,927,695
Operating loss.................. (334,024) (231,016) (565,040)
Total assets at April 30, 1999.. 9,941,959 3,065,905 13,007,864
Three months ended April 30, 1998:
Net sales....................... 3,199,664 2,726,462 5,926,126
Operating loss.................. (777,349) (19,354) (796,703)
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, but are not limited to,
changing consumer preferences, lack of success of new products, loss of the
Company's customers, competition, and other factors discussed in this report
and from time to time in the Company's filings with the Securities and Exchange
Commission, including the Company's Annual Report on Form 10-K for the fiscal
year ended January 31, 1999.
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 1999 is a reference to the fiscal year ending January 31,
2000).
GENERAL
The Company designs, develops, markets and distributes toys and
children's consumer electronics. Core product categories are (i) juvenile audio
products, including Tech-Link(TM) and Digi-Tech(TM) walkie-talkies, pre-teen
audio products and Kawasaki(R) musical toys; (ii) girls' toys, including dolls,
play sets and accessories; and (iii) boys' toys, including Kawasaki(R) and
Burnin' Thunder(TM) radio control vehicles, BlockMen(TM) construction sets 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.
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 E. Thomas Martin ("MVII"). Pursuant to the
Stock Purchase Agreement, MVII purchased 566,038 shares of Common Stock, par
value $.01 per share (the "Common Stock"), of the Company from the Company for
$1.2 million on April 15, 1999, and purchased an additional 1,792,453 shares of
Common Stock from the Company for $3.8 million on June 1, 1999. Also, pursuant
to the Stock Purchase Agreement, on April 21, 1999, MVII commenced a tender
offer for 1.6 million shares of the outstanding Common Stock at $4.38 per share
net to the seller in cash (the "Offer"). On May 26, 1999, MVII accepted for
payment 1.6 million shares that were validly tendered and not withdrawn in the
Offer by the Company's shareholders. The Stock Purchase and Sale Agreement and
the transactions contemplated thereby were approved by the Company's
shareholders at the annual meeting of shareholders held on May 24, 1999.
As a result of the transactions consummated pursuant to the Stock
Purchase Agreement, MVII has made a total investment in the Company's Common
Stock of $12 million. Of that $12 million, $5 million was paid by MVII directly
to the Company for Common Stock. MVII currently is the record owner of
approximately 47% of the Company's outstanding shares of Common Stock. When
MVII's record ownership is combined with MVII's rights under the Shareholders'
and Voting Agreement dated April 15, 1999, by and among the Company, MVII,
Messrs. Davis, Conrad, Matlock and Smith and a limited partnership controlled
by Mr. Crosby (the "Voting Agreement"), executed in connection with the Stock
Purchase Agreement, MVII is the beneficial owner of approximately 61% of the
Company's outstanding shares of Common Stock. Furthermore, the Voting Agreement
entitles MVII to nominate all but two of the members of the Company's board of
directors. On June 1, 1999, DSI accepted the resignations of Messrs. Crosby,
Smith, Conrad and Neitz from its Board. Such vacancies have been filled by
MVII's nominees, namely Messrs. E. Thomas Martin, Robert L. Burke, Joseph S.
Whitaker, and John McSorley. At the Company's annual meeting of shareholders on
May 24, 1999, the Company's shareholders approved such appointments. On June 1,
1999, E. Thomas Martin was appointed by the Company to serve as Chairman of the
Board.
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RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
income and expense items expressed as a percentage of net sales:
<TABLE>
<CAPTION>
Percent of Net Sales
--------------------
Three Months Ended
--------------------
April 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Net sales ....................................... 100.0% 100.0%
Costs of goods sold ............................. 72.8 76.2
----- -----
Gross profit .................................... 27.2 23.8
Selling, general and administrative expenses .... 41.6 37.3
----- -----
Operating (loss) profit ......................... (14.4) (13.5)
Interest expense ................................ 3.0 3.8
Other income .................................... (.2) (.2)
----- -----
(Loss) Income before income taxes ............... (17.2) (17.1)
Benefit from income taxes ....................... (6.2) (6.1)
----- -----
Net (Loss) Income ............................... (11.0)% (11.0)%
===== =====
</TABLE>
THREE MONTHS ENDED APRIL 30, 1999 COMPARED TO THE THREE MONTHS ENDED APRIL 30,
1998
Net sales. Net sales for the three months ended April 30, 1999
decreased $2.0 million, or 33.7%, to $3.9 million, from $5.9 million in the
comparable period in 1998. This decrease was due primarily to decreased sales
of juvenile audio products and girls' toys, partially offset by increased sales
of boys' toys.
Net sales of juvenile audio products decreased $1.3 million, or 38.0%,
to $2.1 million during the first quarter ended April 30, 1999, from $3.4
million in the comparable period in 1998. This decrease was due primarily to
decreased sales in walkie-talkies and electronic musical toys, reflecting the
maturity of the line and the addition of new competitors entering the
marketplace. Net sales of girls' toys decreased $696,000, or 65.0%, to $377,000
during the first quarter ended April 30, 1999, from $1.1 million in the
comparable period in 1998. This decrease was due primarily to close-out sales
of dolls during first quarter 1998. Net sales of boys' toys increased $296,000,
or 41.0%, to $1.0 million in the first quarter ended April 30, 1999, from
$721,000 in the comparable period in 1998. The increase was due primarily to
the expansion of the BlockMen(TM) construction sets with the new Military
Desert and Space Squad(TM) themes reflecting BlockMen's continued strength in
the marketplace. The radio-controlled Kawasaki(R) Ninja(R) motorcycle product
line was also a contributing factor to the increase. Net sales of products in
other categories decreased $302,000, or 41.9%, to $418,000 during the first
quarter ended April 30, 1999, from $720,000 in the comparable period in 1998.
International net sales for the three months ended April 30, 1999
increased $75,000, or 10.6%, to $787,000, from $712,000 in the comparable
period in 1998. The increase was due primarily to increased sales and marketing
efforts in France, Australia, and Denmark.
Gross profit. Gross profit decreased 24.4% to $1.1 million for the
first quarter ended April 30, 1999, from $1.4 million in the comparable period
in 1998. Gross profit as a percentage of net sales increased to 27.2% in the
first quarter ended April 30, 1999, from 23.8% in the first quarter of fiscal
1998. Such increase was primarily due to the Company's final closeout of dolls
inventory in first quarter 1998 which were at lower margin percentage.
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Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $576,000, or 26.1%, to $1.6 million in the
first quarter ended April 30, 1999, from $2.2 million in the first quarter of
fiscal 1998. The decrease resulted primarily from discounts negotiated from an
existing vendor.
Interest expense. Interest expense during the first quarter ended
April 30, 1999 decreased $103,000, or 46.5%, to $119,000 from $223,000 in the
similar period in 1998. This was primarily due to a reduction of inventory and
receivables carrying costs.
Other income. Other income decreased $2,000, or 17.5% to $9,000 in the
first quarter ended April 30, 1999, from $11,000 in the comparable period in
1998, reflecting the effect of changes in levels of short-term investments and
foreign exchange translation.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has funded its operations and capital
requirements with 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.
For the three months ended April 30, 1999, the Company's operating
activities used net cash of $1.7 million, consisting primarily of decreases in
accounts payable and accrued liabilities, and increases in prepaid expenses,
partially offset by the decreases in inventories. Net cash used in investing
activities was $379,000 and was primarily the result of capital expenditures.
Net cash provided in financing activities was $1.6 million and represented net
borrowing under revolving lines of credit and proceeds of $1.2 million from the
sale of Common Stock. The Company's working capital at April 30, 1999, was
$333,000 and unrestricted cash was $20,000, and the Company's working capital at
April 30, 1998, was $(2.5) million and unrestricted cash was $306,000. On June
1, 1999, the Company received $3.8 million from the sale of Common Stock to
MVII.
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
credit facilities secured principally by accounts receivable and inventory. The
Company currently has a line of credit facility with State Street Bank and
Trust Company - Hong Kong Branch (the "Hong Kong Credit Facility") and a
revolving credit facility with Sunrock Capital Corp. (the "Revolver"). At June
7, 1999 the Company had a short-term loan balance of $2.0 million and had
additional borrowing capacity of an aggregate of $4.1 million under the
Revolver and the Hong Kong Credit Facility.
The Company's operating cash requirements for the remainder of fiscal
1999 include payments totaling approximately $2.0 million related to television
advertisements run in November and December 1997. The Company has projected
approximately $900,000 for capital expenditures, consisting primarily of
purchases of tools and molds for fiscal 1999.
In addition, the Company is obligated to make future minimum royalty
payments under certain of its license agreements. As of April 30, 1999, the
Company was required to pay guaranteed royalties under these licenses of
$173,000, $227,000, $222,000, and $150,000 per year from 1999 through year
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 retail 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
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<PAGE> 11
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 entire year.
YEAR 2000 COMPLIANCE
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 being upgraded, replaced and
tested. To date, the Company has completed approximately 90% of its upgrades
and replacements and approximately 60% of its testing. Completion of all
remediation and testing of the MIS systems is expected to be completed by
September 30, 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 September 30, 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
fiscal 1999. The Company is utilizing both internal and external sources to
address Y2K Issues, and the Company anticipates Y2K compliance by September 30,
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. Notwithstanding the
above, the most likely impact would be a reduced level of activity in the
latter part of the last quarter of fiscal 1999 and the early part of the first
quarter of fiscal 2000.
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
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<PAGE> 12
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.
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<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings and claims
incident to the normal conduct of its business. The Company believes that such
legal proceedings and claims, individually and in the aggregate, are not likely
to have a material adverse effect on its financial position or results of
operations. The Company maintains product liability and general liability
insurance in amounts it believes to be reasonable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) On May 24, 1999, at the Company's annual meeting of shareholders,
the shareholders approved an amendment to the Company's Amended and
Restated Articles of Incorporation to increase the number of
authorized shares of Common Stock from 20,000,000 shares to 35,000,000
shares. Such amendment was filed with the Texas Secretary of State on
May 28, 1999. The rights of the holders of Common Stock were not
modified by the amendment. However, the Company now has additional
authorized shares for issuance which, if it elects to issue in the
future, could result in a decrease in the percentage ownership of the
Company by the current holders of the Company's Common Stock.
(b) Pursuant to the Stock Purchase Agreement, MVII purchased 566,038
shares of Common Stock from the Company for $1.2 million on April 15,
1999, and purchased an additional 1,792,453 shares of Common Stock
from the Company for $3.8 million on June 1, 1999, resulting in MVII
purchasing an aggregate of 2,358,491 shares of Common Stock from the
Company for $5 million. Also, pursuant to the Stock Purchase
Agreement, on April 21, 1999, MVII commenced a tender offer for 1.6
million shares of the outstanding Common Stock of the Company at $4.38
per share net to the seller in cash. On May 26, 1999, MVII accepted
for payment 1.6 million shares validly tendered and not withdrawn in
the Offer by the Company's shareholders. MVII used funds from working
capital obtained from capital contributions by its members to
consummate all of the transactions contemplated by the Stock Purchase
Agreement, including the Offer. The proceeds received by the Company
from the stock purchases made by MVII under the Stock Purchase
Agreement have been used by the Company for the repayment of
indebtedness and general operating expenses.
The Stock Purchase Agreement, including the stock sales by the
Company to MVII thereunder, constituted a privately negotiated
transaction between the Company and MVII. MVII was organized in
connection with the transactions contemplated by the Stock Purchase
Agreement. The sales of Common Stock to MVII pursuant to the Stock
Purchase Agreement were made by the Company in reliance on the
exemption from registration set forth in Section 4(2) of the
Securities Act of 1933, as amended. The Company believes the Section
4(2) exemption from registration was available based upon the
established criteria for effecting a private offering by virtue of the
following facts, among others: (i) MVII had access to the type of
information that would be included in a registration statement and
conducted a comprehensive due diligence review in connection with the
Stock Purchase Agreement and the transactions thereunder, (ii) MVII's
principals have adequate financial means to bear the risk of MVII's
investment in the Company and can be described as sophisticated, (iii)
MVII was the only offeree in the transaction, (iv) MVII made
representations that it acquired the Common Stock for investment and
not with a view toward distribution, (v) the Stock Purchase Agreement
contains restrictions on resale of the Common Stock sold by the
Company to MVII, and (vi) no underwriters were involved nor were any
underwriters' commissions paid in connection with the transactions.
-11-
<PAGE> 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on May 24, 1999.
At that meeting, the Shareholders were presented with proposals with respect to
(i) the election of directors whose three-year terms expire in 2002, (ii) the
approval and ratification of the Stock Purchase Agreement and the transactions
contemplated thereunder, (iii) the approval of the amendment to the Company's
Amended and Restated Articles of Incorporation authorizing an increase in the
number of authorized shares of Common Stock, (iv) the approval and ratification
of the appointment of four (4) directors nominated by MVII to fill vacancies on
the board as a result of the consummation of the transactions contemplated by
the Stock Purchase Agreement, and (v) the adoption and approval of a proposal
to amend the Company's Stock Option Plan to increase from 600,000 to 900,000
the aggregate number of shares of the Company Stock reserved for issuance under
the Plan and related conforming changes. The results of the vote of the
shareholders at its annual meeting are set forth below with respect to each of
the proposals presented.
(i) Messrs. Jack R. Crosby and Barry B. Conrad were the nominees for the
class of directors whose three-year terms will expire in 2002. Shares
of the Company's Common Stock with respect to the election of such
directors were voted as follows: with respect to Mr. Crosby, the
number of votes that were cast for his election were 3,936,747 and the
number of votes withheld were 5,100; with respect to Mr. Conrad, the
number of votes that were cast for his election were 3,936,747 and the
number of votes withheld were 5,100.
Messrs. Crosby and Conrad were elected for terms expiring on the date
of the annual meeting of shareholders in 2002. Messrs. Crosby and
Conrad subsequently resigned from their board positions on June 1,
1999. Messrs. Matlock and Davis, current members of the Board, have
terms expiring on the date of the annual meeting of shareholders in
2000. As of the annual meeting of shareholders held on May 24, 1999,
Messrs. Neitz and Smith had terms expiring in 2001. However, they
resigned from their board positions on June 1, 1999. See discussion in
Item 5 regarding the Company's current Board composition.
(ii) With respect to the proposal to approve and ratify the Stock Purchase
Agreement and the transactions contemplated thereunder, shares of the
Company's Common Stock were voted as follows: the number of votes cast
for such proposal was 3,887,747, the number of votes cast against such
proposal was 42,100, and the number of votes abstaining was 12,000.
(iii) With respect to the proposal to approve an amendment to the Company's
Amended and Restated Articles of Incorporation that would increase the
number of authorized shares of Common Stock of the Company from
20,000,000 shares to 35,000,000 shares, shares of the Company's Common
Stock were voted as follows: the number of votes cast for such
proposal was 3,770,358, the number of votes cast against such proposal
was 156,400, and the number of votes abstaining was 15,089.
(iv) With respect to the proposal to approve and ratify the appointment of
Messrs. E. Thomas Martin, Robert L. Burke, Joseph S. Whitaker and John
McSorley as directors by the remaining directors to fill certain
vacancies on the Board in connection with the Stock Purchase
Agreement, shares of the Company's Common Stock were voted as follows:
the number of votes cast for such proposal was 3,880,031, the number
of votes cast against such proposal was 41,900, and the number of
votes abstaining was 19,916.
(v) With respect to the proposal to adopt and approve a proposal to amend
the Company's Stock Option Plan (a) to increase from 600,000 to
900,000 the aggregate number of shares of Common Stock of the Company
reserved for issuance under the Plan and (b) to make certain
conforming changes, shares of the Company's Common Stock were voted as
follows: the number of votes cast for such proposal was 3,754,131, the
number of votes cast against was 168,600, and the number of votes
abstaining was 19,116.
-12-
<PAGE> 15
ITEM 5. OTHER INFORMATION
Pursuant to the terms of the Stock Purchase Agreement, MVII purchased
an aggregate of 2,358,491 shares of Common Stock from the Company for an
aggregate purchase price of $5 million (at $2.12 per share). Such shares were
purchased in two transactions; the first transaction occurred on April 15,
1999, pursuant to which MVII purchased 566,038 shares of Common Stock from the
Company. The second transaction occurred on June 1, 1999, pursuant to which
MVII purchased 1,792,453 shares of Common Stock from the Company. Furthermore,
pursuant to the terms of the Stock Purchase Agreement, on April 21, 1999, MVII
commenced a tender offer for 1.6 million shares of Common Stock at $4.38 per
share net to the seller in cash from the Company's shareholders. On May 26,
1999, MVII accepted for purchase 1.6 million shares of Common Stock that were
validly tendered and not withdrawn in the Offer by the Company's shareholders.
MVII used working capital obtained from capital contributions by its members to
consummate the transactions contemplated by the Stock Purchase Agreement,
including the Offer.
In connection with the Stock Purchase Agreement, the Voting Agreement
was entered into by and among the Company, MVII, and each of Messrs. Davis,
Conrad, Matlock, Smith and Rust Capital, Ltd., a limited partnership controlled
by Mr. Crosby (each, a "Management Shareholder" and collectively, the
"Management Shareholders"). Pursuant to the terms of the Voting Agreement, MVII
has the right to nominate all but two of the directors constituting the board
of directors of the Company, with the Management Shareholders, as a group,
having the right to nominate the remaining two directors. The parties to the
Voting Agreement are contractually bound to vote all shares of Common Stock
over which they have dispositive power in favor of such nominees. Each of
Messrs. Crosby, Smith, Conrad and Neitz resigned from their board positions
effective June 1, 1999, as contemplated by the Stock Purchase Agreement, and,
pursuant to the terms of the Voting Agreement, MVII's nominees, namely Messrs.
E. Thomas Martin, Robert L. Burke, Joseph S. Whitaker and John McSorley were
appointed to fill such vacancies, which appointments have been ratified by the
Company's shareholders.
In connection with the Voting Agreement, each of the Management
Shareholders has executed an Irrevocable Proxy appointing MVII as proxy and
authorizing MVII to vote such Management Shareholder's shares of Common Stock
for the election of directors in accordance with the Voting Agreement, as well
as the right to vote on other matters subject to a shareholders' vote (subject
to certain exceptions). As an additional matter, the Voting Agreement grants the
parties thereto certain rights of first refusal in connection with the sale of
Common Stock by such parties and grants the Management Shareholders certain
co-sale rights in connection with sales of Common Stock made by MVII under
certain circumstances.
As a result of the share purchases made under the Stock Purchase
Agreement, including the Offer, and the shares subject to the Voting Agreement,
MVII currently beneficially owns 5,139,099 shares of Common Stock, representing
approximately 61% of the outstanding shares of Common Stock of the Company. As
a result of such transactions, MVII assumed effective control of the Company as
of June 1, 1999, and continues to control the Company through the present.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The information required by this Item 6(a) and by Item 7 of Form 8-K
is set forth in the Index to Exhibits accompanying this quarterly
report and is incorporated herein by reference.
(b) Reports Submitted on Form 8-K: None.
-13-
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DSI Toys, Inc.
Dated: June 14, 1999 /s/ THOMAS V. YARNELL
-----------------------------------------
Thomas V. Yarnell
Administrative Vice-President, General
Counsel and Secretary
Dated: June 14, 1999 By: /s/ ROBERT L. WEISGARBER
-----------------------------------------
Robert L. Weisgarber
Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------ -------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company (filed
as Exhibit 3.1 to the Registration Statement on Form S-1, File No.
333-23961), incorporated herein by reference.
3.1.1 Amendment to Amended and Restated Articles of Incorporation of the
Company.
3.2 Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 to
the Registration Statement on Form S-1, File No. 333-23961),
incorporated herein by reference.
3.3 Amendment to Amended and Restated Bylaws of the Company (filed as
Exhibit 3.3 to the Registration Statement on Form S-1, File No.
333-23961), incorporated herein by reference.
10.30 Stock Purchase and Sale Agreement, dated April 15, 1999, between the
Company and MVII (filed as Exhibit 99.2 to the Schedule 14D-9 filed by
the Company on April 22, 1999), incorporated herein by reference.
10.31 Shareholders' and Voting Agreement dated April 15, 1999, by and among
the Company, MVII, certain management shareholders of the Company and
a limited partnership controlled by a management shareholder (filed as
Exhibit 99.4 to the Schedule 14D-9 filed by the Company on April 22,
1999), incorporated herein by reference.
10.32 Registration Rights Agreement dated April 15, 1999, by and among the
Company, MVII, certain management shareholders of the Company and a
limited partnership controlled by a management shareholder (filed as
Exhibit 99.5 to the Schedule 14D-9 filed by the Company on April 22,
1999), incorporated herein by reference.
10.33 Irrevocable Proxy dated April 15, 1999, between MVII and Conrad.
10.34 Irrevocable Proxy dated April 15, 1999, between MVII and Davis.
10.35 Irrevocable Proxy dated April 15, 1999, between MVII and Matlock.
10.36 Irrevocable Proxy dated April 15, 1999, between MVII and Rust Capital.
10.37 Irrevocable Proxy dated April 15, 1999, between MVII and Smith.
10.38 Consulting Agreement dated June 1, 1999, between the Company and Davis.
10.39 Amendment dated May 5, 1999, to Loan and Security Agreement, dated as
of February 2, 1999, by and between Sunrock Capital Corp. and the
Company.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 3.1.1
ARTICLES OF AMENDMENT
TO THE
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
DSI TOYS, INC.
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act (the "Act"), the undersigned corporation adopts the following
Articles of Amendment to its Articles of Incorporation ("Articles of
Incorporation"):
ARTICLE ONE
The name of the corporation (hereinafter called the "Corporation") is
DSI Toys, Inc.
ARTICLE TWO
At the annual meeting of the shareholders of the Corporation held on
May 24, 1999, the holders of at least two-thirds of the outstanding shares of
the Corporation entitled to vote thereon adopted an amendment to the
Corporation's Amended and Restated Articles of Incorporation whereby Article
Four thereof was amended to read in its entirety as follows:
ARTICLE FOUR
The aggregate number of shares that the corporation
shall have the authority to issue is 40,000,000 shares,
consisting of 35,000,000 shares of Common Stock, par value
$0.01 per share, and 5,000,000 shares of Preferred Stock, par
value $0.01 per share.
The descriptions of the different classes of capital
stock of the corporation and the preferences, designations,
relative rights, privileges and powers, and the restrictions,
limitations and qualifications thereof, of said classes of
stock are as follows:
<PAGE> 2
Division A
The shares of Preferred Stock may be divided into and issued
in one or more series, the relative rights and preferences of
which series may vary in any and all respects. The board of
directors of the corporation is hereby vested with the
authority to establish series of Preferred Stock by fixing and
determining all the preferences, limitations and relative
rights of the shares of any series so established, to the
extent not provided for in these articles of incorporation or
any amendment hereto, and with the authority to increase or
decrease the number of shares within each such series;
provided, however, that the board of directors may not
decrease the number of shares within a series below the number
of shares within such series that is then issued. The
authority of the board of directors with respect to each such
series shall include, but not be limited to, determination of
the following:
(1) the distinctive designation and number of shares
of that series;
(2) the rate of dividend (or the method of
calculation thereof) payable with respect to shares
of that series, the dates, terms and other conditions
upon which such dividends shall be payable, and the
relative rights of priority of such dividends to
dividends payable on any other class or series of
capital stock of the corporation;
(3) the nature of the dividend payable with respect
to shares of that series as cumulative, noncumulative
or partially cumulative, and if cumulative or
partially cumulative, from which date or dates and
under what circumstances;
(4) whether shares of that series shall be subject to
redemption, and, if made subject to redemption, the
times, prices, rates, adjustments and other terms and
conditions of such redemption (including the manner
of selecting shares of that series for redemption if
fewer than all shares of such series are to be
redeemed);
(5) the rights of the holders of shares of that
series in the event of voluntary or involuntary
liquidation, dissolution or winding up of the
corporation (which rights may be different if such
action is voluntary than if it is involuntary),
including the relative rights of priority in such
event as to the rights of the holders of
2
<PAGE> 3
any other class or series of capital stock of the
corporation;
(6) the terms, amounts and other conditions of any
sinking or similar purchase or other fund provided
for the purchase or redemption of shares of that
series;
(7) whether shares of that series shall be
convertible into or exchangeable for shares of
capital stock or other securities of the corporation
or of any other corporation or entity, and, if
provision be made for conversion or exchange, the
times, prices, rates, adjustments and other terms and
conditions of such conversion or exchange;
(8) the extent, if any, to which the holders of
shares of that series shall be entitled (in addition
to any voting rights provided by law) to vote as a
class or otherwise with respect to the election of
directors or otherwise;
(9) the restrictions and conditions, if any, upon the
issue or reissue of any additional Preferred Stock
ranking on a parity with or prior to shares of that
series as to dividends or upon liquidation,
dissolution or winding up;
(10) any other repurchase obligations of the
corporation, subject to any limitations of applicable
law; and
(11) notwithstanding their failure to be included in
(1) through (10) above, any other designations,
preferences, limitations or relative rights of shares
of that series.
Any of the designations, preferences, limitations or relative
rights (including the voting rights) of any series of
Preferred Stock may be dependent on facts ascertainable
outside these articles of incorporation.
Shares of any series of Preferred Stock shall have no voting
rights except as required by law or as provided in the
preferences, limitations and relative rights of such series.
3
<PAGE> 4
Division B
1. Dividends. Dividends may be paid on the Common
Stock out of any assets of the corporation available for such
dividends subject to the rights of all outstanding shares of
capital stock ranking senior to the Common Stock in respect of
dividends.
2. Distribution of Assets. In the event of any
liquidation, dissolution or winding up of the corporation,
after there shall have been paid to or set aside for the
holders of capital stock ranking senior to the Common Stock in
respect of rights upon liquidation, dissolution or winding up
the full preferential amounts to which they are respectively
entitled, the holders of the Common Stock shall be entitled to
receive, pro rata, all of the remaining assets of the
corporation available for distribution to its shareholders.
3. Voting Rights. The holders of the Common Stock
shall be entitled to one vote per share for all purposes upon
which such holders are entitled to vote.
Division C
1. No Preemptive Rights. No shareholder of the
corporation shall by reason of his holding shares of any class
have any preemptive or preferential right to acquire or
subscribe for any additional, unissued or treasury shares of
any class of the corporation now or hereafter to be
authorized, or any notes, debentures, bonds or other
securities convertible into or carrying any right, option or
warrant to subscribe to or acquire shares of any class now or
hereafter to be authorized whether or not the issuance of any
such shares, or such notes, debentures, bonds or other
securities, would adversely affect the dividends or voting or
other rights of such shareholder, and the board of directors
may issue or authorize the issuance of shares of any class, or
any notes, debentures, bonds or other securities convertible
into or carrying rights, options or warrants to subscribe to
or acquire shares of any class, without offering any such
shares of any class, either in whole or in part, to the
existing shareholders of any class.
2. Share Dividends. Subject to any restrictions in
favor of any series of Preferred Stock provided in the
relative rights and preferences of such series, the
corporation may pay a share dividend in shares of any class or
series of capital stock of the corporation to the holders of
shares of any class or series of capital stock of the
corporation.
4
<PAGE> 5
3. No Cumulative Voting. Cumulative voting for the
election of directors is expressly prohibited as to all shares
of any class or series.
ARTICLE THREE
The number of shares of all classes of capital stock of the Corporation
outstanding at the time of the adoption of the foregoing amendment was
6,506,308, and the number of shares of all such classes entitled to vote thereon
was 6,506,308.
ARTICLE FOUR
The number of shares of all classes of capital stock of the Corporation
voting for the amendment was 3,770,358, and the number of shares of all such
classes voting against the amendment was 156,400.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment on behalf of the Corporation this 28th day of May, 1999.
DSI TOYS, INC.
By: /s/ Thomas V. Yarnell
------------------------------------
Thomas V. Yarnell
Administrative Vice President
<PAGE> 1
EXHIBIT 10.33
IRREVOCABLE PROXY
Date: April 15, 1999
The undersigned hereby appoints MVII, LLC, a California limited
liability company ("MVII"), proxy, and hereby authorizes MVII to vote all of the
common shares (the "Common Shares") of DSI Toys, Inc. (the "Company") (i)
standing in the name of the undersigned as of the date hereof, (ii) that may
subsequently be acquired by the undersigned, and (iii) as to which the
undersigned is or may be appointed as proxy and has the authority to vote, for
the election of the Board of Directors of the Company as if the undersigned were
personally present and voting for such directors. The undersigned further grants
MVII the authority to vote all such Common Shares with respect to all other
matters of the Company subject to a vote of the Company's common shareholders,
however the undersigned shall retain the right to vote his or her Common Shares
with respect to matters concerning (i) a dissolution of the Company, or (ii) the
sale of a Controlling Interest (as hereinafter defined) of the Company. This is
an irrevocable proxy coupled with an interest and is granted in furtherance of
that certain Shareholders' and Voting Agreement (the "Agreement"), by and among
the Company, MVII and the undersigned and the other members of the DSI Group (as
defined in the Agreement), dated as of even date herewith. This irrevocable
proxy shall become effective and shall have the same duration as the voting
agreement found in Article I of the Agreement and shall automatically terminate
if and when the Agreement is terminated for any reason. "Controlling Interest"
shall mean the sale of all or substantially all of the assets of the Company
which requires a vote of shareholders under applicable law, the issuance by the
Company of common stock in such an amount that the rules of the exchange on
which the Company's stock is listed requires shareholder approval, or a merger
of the Company with another entity which requires a vote of shareholders under
applicable law.
/s/ Barry B. Conrad
---------------------------
Barry B. Conrad
<PAGE> 1
EXHIBIT 10.34
IRREVOCABLE PROXY
Date: April 15, 1999
The undersigned hereby appoints MVII, LLC, a California limited
liability company ("MVII"), proxy, and hereby authorizes MVII to vote all of the
common shares (the "Common Shares") of DSI Toys, Inc. (the "Company") (i)
standing in the name of the undersigned as of the date hereof, (ii) that may
subsequently be acquired by the undersigned, and (iii) as to which the
undersigned is or may be appointed as proxy and has the authority to vote, for
the election of the Board of Directors of the Company as if the undersigned were
personally present and voting for such directors. The undersigned further grants
MVII the authority to vote all such Common Shares with respect to all other
matters of the Company subject to a vote of the Company's common shareholders,
however the undersigned shall retain the right to vote his or her Common Shares
with respect to matters concerning (i) a dissolution of the Company, or (ii) the
sale of a Controlling Interest (as hereinafter defined) of the Company. This is
an irrevocable proxy coupled with an interest and is granted in furtherance of
that certain Shareholders' and Voting Agreement (the "Agreement"), by and among
the Company, MVII and the undersigned and the other members of the DSI Group (as
defined in the Agreement), dated as of even date herewith. This irrevocable
proxy shall become effective and shall have the same duration as the voting
agreement found in Article I of the Agreement and shall automatically terminate
if and when the Agreement is terminated for any reason. "Controlling Interest"
shall mean the sale of all or substantially all of the assets of the Company
which requires a vote of shareholders under applicable law, the issuance by the
Company of common stock in such an amount that the rules of the exchange on
which the Company's stock is listed requires shareholder approval, or a merger
of the Company with another entity which requires a vote of shareholders under
applicable law.
/s/ M. D. Davis
---------------------------
M.D. Davis
<PAGE> 1
EXHIBIT 10.35
IRREVOCABLE PROXY
Date: April 15, 1999
The undersigned hereby appoints MVII, LLC, a California limited
liability company ("MVII"), proxy, and hereby authorizes MVII to vote all of the
common shares (the "Common Shares") of DSI Toys, Inc. (the "Company") (i)
standing in the name of the undersigned as of the date hereof, (ii) that may
subsequently be acquired by the undersigned, and (iii) as to which the
undersigned is or may be appointed as proxy and has the authority to vote, for
the election of the Board of Directors of the Company as if the undersigned were
personally present and voting for such directors. The undersigned further grants
MVII the authority to vote all such Common Shares with respect to all other
matters of the Company subject to a vote of the Company's common shareholders,
however the undersigned shall retain the right to vote his or her Common Shares
with respect to matters concerning (i) a dissolution of the Company, or (ii) the
sale of a Controlling Interest (as hereinafter defined) of the Company. This is
an irrevocable proxy coupled with an interest and is granted in furtherance of
that certain Shareholders' and Voting Agreement (the "Agreement"), by and among
the Company, MVII and the undersigned and the other members of the DSI Group (as
defined in the Agreement), dated as of even date herewith. This irrevocable
proxy shall become effective and shall have the same duration as the voting
agreement found in Article I of the Agreement and shall automatically terminate
if and when the Agreement is terminated for any reason. "Controlling Interest"
shall mean the sale of all or substantially all of the assets of the Company
which requires a vote of shareholders under applicable law, the issuance by the
Company of common stock in such an amount that the rules of the exchange on
which the Company's stock is listed requires shareholder approval, or a merger
of the Company with another entity which requires a vote of shareholders under
applicable law.
/s/ Joseph N. Matlock
------------------------------
Joseph N. Matlock
<PAGE> 1
EXHIBIT 10.36
IRREVOCABLE PROXY
Date: April 15, 1999
The undersigned hereby appoints MVII, LLC, a California limited
liability company ("MVII"), proxy, and hereby authorizes MVII to vote all of the
common shares (the "Common Shares") of DSI Toys, Inc. (the "Company") (i)
standing in the name of the undersigned as of the date hereof, (ii) that may
subsequently be acquired by the undersigned, and (iii) as to which the
undersigned is or may be appointed as proxy and has the authority to vote, for
the election of the Board of Directors of the Company as if the undersigned were
personally present and voting for such directors. The undersigned further grants
MVII the authority to vote all such Common Shares with respect to all other
matters of the Company subject to a vote of the Company's common shareholders,
however the undersigned shall retain the right to vote his or her Common Shares
with respect to matters concerning (i) a dissolution of the Company, or (ii) the
sale of a Controlling Interest (as hereinafter defined) of the Company. This is
an irrevocable proxy coupled with an interest and is granted in furtherance of
that certain Shareholders' and Voting Agreement (the "Agreement"), by and among
the Company, MVII and the undersigned and the other members of the DSI Group (as
defined in the Agreement), dated as of even date herewith. This irrevocable
proxy shall become effective and shall have the same duration as the voting
agreement found in Article I of the Agreement and shall automatically terminate
if and when the Agreement is terminated for any reason. "Controlling Interest"
shall mean the sale of all or substantially all of the assets of the Company
which requires a vote of shareholders under applicable law, the issuance by the
Company of common stock in such an amount that the rules of the exchange on
which the Company's stock is listed requires shareholder approval, or a merger
of the Company with another entity which requires a vote of shareholders under
applicable law.
RUST CAPITAL, LTD.,
a Texas limited partnership
By: Rust Investment Corporation,
its general partner
By: /s/ Jack R. Crosby
----------------------------
Jack R. Crosby, President
<PAGE> 1
EXHIBIT 10.37
IRREVOCABLE PROXY
Date: April 15, 1999
The undersigned hereby appoints MVII, LLC, a California limited
liability company ("MVII"), proxy, and hereby authorizes MVII to vote all of the
common shares (the "Common Shares") of DSI Toys, Inc. (the "Company") (i)
standing in the name of the undersigned as of the date hereof, (ii) that may
subsequently be acquired by the undersigned, and (iii) as to which the
undersigned is or may be appointed as proxy and has the authority to vote, for
the election of the Board of Directors of the Company as if the undersigned were
personally present and voting for such directors. The undersigned further grants
MVII the authority to vote all such Common Shares with respect to all other
matters of the Company subject to a vote of the Company's common shareholders,
however the undersigned shall retain the right to vote his or her Common Shares
with respect to matters concerning (i) a dissolution of the Company, or (ii) the
sale of a Controlling Interest (as hereinafter defined) of the Company. This is
an irrevocable proxy coupled with an interest and is granted in furtherance of
that certain Shareholders' and Voting Agreement (the "Agreement"), by and among
the Company, MVII and the undersigned and the other members of the DSI Group (as
defined in the Agreement), dated as of even date herewith. This irrevocable
proxy shall become effective and shall have the same duration as the voting
agreement found in Article I of the Agreement and shall automatically terminate
if and when the Agreement is terminated for any reason. "Controlling Interest"
shall mean the sale of all or substantially all of the assets of the Company
which requires a vote of shareholders under applicable law, the issuance by the
Company of common stock in such an amount that the rules of the exchange on
which the Company's stock is listed requires shareholder approval, or a merger
of the Company with another entity which requires a vote of shareholders under
applicable law.
/s/ Douglas A. Smith
-------------------------------
Douglas A. Smith
<PAGE> 1
EXHIBIT 10.38
CONSULTING AGREEMENT
This Consulting Agreement (the "Agreement") is entered into as of June
1, 1999, between DSI Toys, Inc., a Texas corporation (the "Company") and M. D.
Davis (the "Consultant").
WHEREAS, the Consultant has acquired extensive knowledge of and
experience in the businesses conducted by the Company;
WHEREAS, the Company desires to obtain the benefit of the Consultant's
knowledge and experience by retaining the Consultant, and the Consultant desires
to accept such position, for the term and upon the other conditions hereinafter
set forth;
WHEREAS, the Company and MVII, LLC have entered into that certain Stock
Purchase Agreement dated as of April 15, 1999 (the "Stock Purchase Agreement"),
pursuant to which MVII, LLC will acquire a substantial equity interest in the
Company, subject to the terms and conditions thereof; and
WHEREAS, the Consultant will cease to be an employee and officer of the
Company and of all its subsidiaries, effective as of the Second Closing (as such
term is defined in the Stock Purchase Agreement).
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained herein, the adequacy and sufficiency of which are hereby acknowledged,
the Company, Purchaser and the Consultant hereby agree as follows:
1. Term of the Agreement. The Company engages the Consultant as a
consultant, subject to the terms and conditions hereof, for the period
commencing at the Second Closing and ending on the third annual anniversary of
the Second Closing (the "Consulting Period"), subject to earlier termination
pursuant to Section 5 hereof.
2. Consulting Services; Expenses. During the Consulting Period, the
Consultant shall make himself available at times and places that are mutually
convenient to the Company and the Consultant to perform consulting services with
respect to the business conducted, or in development, by the Company. Such
consulting services shall include those matters as the Board of Directors of the
Company may reasonably request from time to time. At such mutually convenient
times and places, the Consultant shall use commercially reasonable efforts to
perform such consulting services, provided that the Consultant shall not be
required to provide such consulting services for more than twenty (20) hours per
month during the Consulting Period. The Company shall reimburse the Consultant
for all necessary travel and other reasonable out-of-pocket expenses incurred by
the Consultant in providing such consulting services in accordance with the
Company's policies for reimbursing such expenses as the same may be in effect
from time to time, subject to the reasonable approval of the Company's Board of
Directors.
<PAGE> 2
3. Independent Contractor. The Consultant shall perform the consulting
services described in Section 2 hereof as an independent contractor without the
power to bind, obligate or represent the Company for any purpose whatsoever. The
Consultant shall not, by virtue of being a consultant hereunder, be eligible to
receive any benefits for which officers or other employees of the Company are
eligible at any time, such as insurance, participation in Company pension plans
or other employee benefits. The Consultant hereby acknowledges his separate
responsibility for all federal and state withholding taxes, Federal Insurance
Contribution Act taxes, and workers' compensation and unemployment compensation
taxes, if applicable, and agrees to indemnify and hold the Company harmless from
any claim or liability therefor.
4. Compensation. As compensation for the consulting services to be
performed by the Consultant hereunder, the Company shall pay the Consultant
$450,000.00 (the "Consulting Payment"), payable in equal monthly installments of
$12,500.00. No amounts shall be payable following termination of this Agreement,
except as provided in Section 5 hereof.
5. Termination.
(a) This Agreement may be terminated at any time by the
Consultant on sixty (60) days' prior written notice to the Company. In
the event of such termination by the Consultant, the obligation of the
Company to pay compensation to the Consultant pursuant to Section 4
hereof shall cease, effective on the date of such termination.
(b) This Agreement may be terminated at any time by the
Company upon written notice to the Consultant. In the event of such
termination by the Company, the Company shall pay to the Consultant the
unpaid portion of the Consulting Payment in one lump sum within thirty
(30) days of such termination.
(c) This Agreement may be terminated by the Consultant upon
ten (10) days prior written notice to the Company in the event that the
Company shall breach any of its obligations under Section 2 or 4
hereof; provided, however, that the Consultant shall not be entitled to
terminate this Agreement pursuant to this Section 5(c) in the event
that the Company shall cure any such breach within such ten (10) day
period. In the event of such termination by Consultant, the Company
shall pay to the Consultant, the unpaid portion of the Consulting
Payment in one lump sum within thirty (30) days of such termination.
(d) This Agreement shall terminate immediately upon the death
of the Consultant or the permanent disability of the Consultant which
disability prevents him from performing the services described
hereunder. In the event of such termination by Consultant, the Company
shall pay to the Consultant, the Consultant's estate or the
Consultant's guardian, the unpaid portion of the Consulting Payment in
one lump sum within thirty (30) days of such termination.
-2-
<PAGE> 3
6. Disclosure of Information. The Consultant recognizes and
acknowledges that he has and will have access to certain confidential
information, proprietary data and trade secrets of the Company, and of entities
and individuals controlling, controlled by or under common control with the
Company ("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 the Company or received from its customers or the Consultant and
that such information is not generally available to the public and constitutes
valuable, special and unique property of the Company. The Consultant 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 Company and as otherwise may be proper in the course of
performing his services hereunder. Further, the Consultant shall maintain the
confidentiality of all such information of the Company, its affiliates or its
customers for the sole use and benefit of the Company. All files, records,
documents, drawings, plans, specifications, contracts, products, equipment or
similar items relating to the business of the Company and/or its affiliates,
whether prepared by the Consultant or otherwise coming into his possession
during the Consulting Period or hereafter, shall remain the exclusive property
of the Company and/or the affiliates, as applicable, and shall not be removed
from the premises of the Company and/or its affiliates without the prior written
consent of the Company and/or its affiliates, as applicable. The Consultant
covenants and agrees to promptly return and deliver to the Company, on written
request, 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, the Consultant shall not attempt to
retain copies or duplicates of any such property. In the event of a breach or a
threatened breach by the Consultant, the Company and/or its affiliates may seek
an injunction restraining the Consultant from disclosing, in whole or in part,
such confidential information, in addition to all other remedies made available
hereby as a matter of law or in equity. In addition to any other damages
sustained by the Company, the Consultant shall pay to the Company all profits,
payments, earnings, compensation or other emoluments paid or accruing to the
Consultant, directly or indirectly, by reason of the Consultant's disclosure of
information as provided by this Section 6. Nothing herein shall be construed as
prohibiting the Company 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 the Consultant.
7. Successors; Binding Agreement. This Agreement shall inure to the
benefit of and be enforceable by the Consultant and by his personal or legal
representatives, executors, administrators, heirs, distributees, devisees and
legatees, and by the Company and Purchaser and their respective successors and
assigns.
8. Assignment. This Agreement is personal to the Consultant and shall
not be assigned or otherwise transferred by the Consultant.
-3-
<PAGE> 4
9. Notices. All notices and other communications required or permitted
under this Agreement shall be in writing and shall be deemed to have been duly
given when personally delivered, when delivered by facsimile or by courier or
overnight express service or five days after having been sent by certified or
registered mail, postage prepaid, addressed: (a) if to the Consultant, to the
Consultant's address set forth below, or if to the Company, to Tom Martin, 654
Osos Street, San Luis Obispo, CA 93401, fax #805/545-7590, with a copy to J.
Todd Mirolla, Esq., Andre, Morris & Buttery, 1304 Pacific Street, San Luis
Obispo, CA 93401, fax #805/543- 0752, or (b) to such other address as any party
may have furnished to the other parties in writing in accordance herewith,
except that notices of change of address shall be effective only upon receipt.
10. Governing Law; Validity. The interpretation, construction and
performance of this Agreement shall be governed by and construed and enforced in
accordance with the internal laws of the State of Texas without regard to
principles of conflicts of laws. The invalidity or enforceability of any other
provisions of this Agreement, which other provisions shall remain in full force
and effect.
11. Counterparts. This Agreement may be executed in three counterparts,
each of which shall be deemed to be an original and all of which together shall
constitute one and the same instrument.
12. Miscellaneous. No provision of this Agreement may be modified or
waived unless such modification or waiver is agreed to in writing and executed
by the Consultant and by a duly authorized officer of the Company. No waiver by
any party hereto at any time of any breach by another party hereto of, or
failure to comply with, any condition or provision of this Agreement to be
performed or complied with by such other party shall be deemed a wavier of any
similar or dissimilar conditions or provisions at the same or at any prior or
subsequent time. Failure by the Consultant, the Company to insist upon strict
compliance with any provisions of this Agreement or to assert any right which
the Consultant, the Company may have hereunder shall not be deemed to be a
waiver of such provision or right or any other provision of or right under this
Agreement.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Consultant has executed this
Agreement as of the day and year first above written.
DSI TOYS, INC.
By: /s/ M.D. Davis
------------------------------------
Name: M.D. Davis
Title: C.E.O.
CONSULTANT:
/s/ M.D. Davis
------------------------------------
M. D. Davis
-4-
<PAGE> 1
EXHIBIT 10.39
SUNROCK CAPITAL CORP.
11 PENN CENTER
1835 MARKET STREET
PHILADELPHIA, PA 19103
May 5, 1999
DSI Toys, Inc.
1100 West Sam Houston Parkway (North)
Suite A
Houston, Texas 77043
Re: Temporary Increase in Advance Rates
Gentlemen:
Reference is made to the Loan and Security Agreement, dated as of
February 2, 1999 (the "Loan Agreement"), by and between Sunrock Capital Corp., a
Delaware corporation ("Sunrock"), and DSI Toys, Inc., a Texas corporation (the
"Borrower"). Unless otherwise indicated, all capitalized terms used but not
defined herein shall have the meanings assigned to them in the Loan Agreement.
Borrower has requested that Sunrock increase the advance rates set
forth in Section 2.2(ii) of the Loan Agreement in effect during the period
commencing on the date hereof and extending through June 1, 1999. Sunrock, in
the exercise of its discretion as a prudent lender, has agreed to increase such
advance rates in the manner and subject at all times to the conditions set forth
in this letter agreement.
At the request of the Borrower, Sunrock hereby agrees that in addition
to the Loans permitted under Section 2.1 of the Loan Agreement, but at all times
subject to the terms and conditions contained in the Loan Agreement (including,
without limitation, the provisions set forth in Section 2.4 of the Loan
Agreement) and this letter agreement, Sunrock agrees to make Loans to Borrower
from and after the date hereof and extending through June 1, 1999, in an amount
up to the lesser of:
(a) the Maximum Credit less Loans extended under Section 2.1 of the Loan
Agreement; and
(b) the lesser of: (i) the sum of (A) twenty percent (20%) of the Value of
Eligible Inventory and (B) twenty percent (20%) of the Value of Eligible
In-Transit Inventory; or (ii) one million dollars ($1,000,000).
<PAGE> 2
The Loans provided for in this letter agreement shall bear interest in
accordance with the Loan Agreement without regard to the terms of Section
3.1(a)(ii), until such time as an Event of Default shall occur.
The Loans provided for herein are in lieu of all Loans under Section
2.2(ii) of the Loan Agreement during the period commencing on the date hereof
and extending through June 1, 1999. In no event shall Sunrock be requested or
required to make any Loans to the Borrower pursuant to Section 2.2 of the Loan
Agreement during the period commencing on the date hereof and extending through
June 1, 1999. If an Event of Default shall occur during the period commencing on
the date hereof and extending through June 1, 1999, the provisions of this
letter agreement (other than the fee required to be paid pursuant to the next
following paragraph, which shall be fully earned upon the execution of this
letter agreement by the Borrower) shall terminate immediately, and the rights of
Borrower and Sunrock shall be determined without reference to this letter
agreement.
For and in consideration of the foregoing agreements of Sunrock, the
Borrower hereby agrees to pay to Sunrock a fee in an amount equal to $5,000.00
on June 10, 1999; provided, however, such fee shall be waived in the event: (a)
the Borrower shall have received a cash equity contribution of at least $3.8
million on or before June 10, 1999; (b) no Event of Default shall have occurred
from and after the date hereof through June 1, 1999; and (c) the Borrower shall
be in compliance with its applicable borrowing limitations under the Loan
Agreement as of June 1, 1999 (without regard to the Loans provided for herein).
Except as expressly set forth above, nothing contained in this letter
agreement or any other communication between Sunrock and the Borrower
constitutes a waiver or amendment of any term or provision of the Loan Agreement
or any other agreements entered into in connection therewith (collectively, the
"Loan Documents"). Similarly, nothing contained in this letter agreement shall
directly or indirectly in any way whatsoever either: (a) impair, prejudice or
otherwise adversely affect Sunrock's right at any time to exercise any right,
privilege or remedy in connection with the Loan Agreement or any other Loan
Document (including, without limitation, the right of Sunrock to establish
Availability Reserves pursuant to Section 2.5 of the Loan Agreement at any
time); or (b) constitute any agreement, course of dealing or other basis for
altering any obligation of Borrower under the Loan Agreement or any other Loan
Document.
Except as otherwise expressly provided herein, the Loan Agreement
remains in full force and effect. The Borrower hereby represents and warrants
that no Event of Default is continuing as of the date hereof.
This letter agreement may be executed in any number of counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which counterparts taken together shall constitute one and the same
letter agreement. Delivery of an executed copy of this letter agreement by
facsimile transmission shall have the same effect as delivery of an originally
executed copy of this letter agreement, whether an originally executed copy
shall be delivered subsequent thereto.
<PAGE> 3
This letter agreement is executed as of the date first written above.
Very truly yours,
SUNROCK CAPITAL CORP.
By: /s/ Robert J. Katcha
-------------------------
Name: Robert J. Katcha
Title: Senior Vice President
AGREED AND ACKNOWLEDGED:
DSI TOYS, INC.
By: /s/ M. D. Davis
----------------
Name: M. D. Davis
Title: CEO
<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 THREE MONTHS ENDED APRIL 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> APR-30-1999
<CASH> 20,076
<SECURITIES> 0
<RECEIVABLES> 2,364,220
<ALLOWANCES> (1,297,455)
<INVENTORY> 3,973,206
<CURRENT-ASSETS> 7,802,100
<PP&E> 5,946,308
<DEPRECIATION> (4,172,391)
<TOTAL-ASSETS> 13,007,864
<CURRENT-LIABILITIES> 7,469,002
<BONDS> 0
0
0
<COMMON> 87,190
<OTHER-SE> 3,083,789
<TOTAL-LIABILITY-AND-EQUITY> 13,007,864
<SALES> 3,927,695
<TOTAL-REVENUES> 3,927,695
<CGS> 2,859,191
<TOTAL-COSTS> 1,633,544
<OTHER-EXPENSES> 9,377
<LOSS-PROVISION> 4,420
<INTEREST-EXPENSE> 119,229
<INCOME-PRETAX> (674,892)
<INCOME-TAX> (242,961)
<INCOME-CONTINUING> (431,931)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (431,931)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
