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 OCTOBER 31, 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 December 13, 1999, 8,533,157 shares of common stock par value $.01
per share, of DSI Toys, Inc. were outstanding.
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet as of October 31, 1999 and
January 31, 1999...................................................1
Consolidated Statements of Operations for the Three Months and
Nine Months Ended October 31, 1999 and 1998........................2
Consolidated Statements of Cash Flows for the Nine Months Ended
October 31, 1999 and 1998..........................................3
Consolidated Statements of Shareholders' Equity.....................4
Notes to Consolidated Financial Statements..........................5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..............................................7
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS..................................................13
Item 2. CHANGE IN SECURITIES AND USE OF PROCEEDS ..........................13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...............14
Item 6. EXHIBITS AND REPORTS ON FORM 8-K...................................15
Signatures................................................................ 16
i
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DSI TOYS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
OCTOBER 31, JANUARY 31,
1999 1999
------------ ------------
(Unaudited) (Restated)
ASSETS
<S> <C> <C>
Current Assets:
Cash ........................................................ $ 258,123 $ 554,197
Restricted cash ............................................. 150,000 150,000
Accounts receivable, net .................................... 6,465,405 1,069,725
Inventories ................................................. 7,825,763 4,207,704
Prepaid expenses ............................................ 1,584,821 1,503,970
Deferred income taxes ....................................... 801,000 801,000
------------ ------------
Total current assets ................................... 17,085,112 8,286,596
Property and equipment, net ...................................... 1,841,937 1,642,672
Deferred income taxes ............................................ 760,060 1,117,000
Other assets ..................................................... 473,688 364,511
------------ ------------
$ 20,160,797 $ 11,410,779
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities .................... $ 7,760,795 $ 6,799,290
Current portion of long-term debt ........................... 2,363,518 824,675
Income taxes payable ........................................ 824,604 271,920
------------ ------------
Total current liabilities .............................. 10,948,917 7,895,885
Long-term Debt ................................................... 1,948,466 2,540,522
Deferred income taxes ............................................ 113,789 113,000
------------ ------------
Total liabilities ...................................... 13,011,172 10,549,407
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
none issued or outstanding
Common stock, $.01 par value, 35,000,000 and
20,000,000 shares authorized
8,719,000 shares issued, 8,533,157 and
6,000,000 shares outstanding ........................... 87,190 87,190
Additional paid-in capital .................................. 4,973,108 21,162,568
Common stock warrants ....................................... 102,500 102,500
Accumulated other comprehensive income/(loss) ............... (12,528) 14,296
Retained earnings ........................................... 3,558,750 2,155,410
------------ ------------
8,709,020 23,521,964
Less: treasury stock, 185,843 and 2,719,000 shares, at cost (1,559,395) (22,660,592)
------------ ------------
Total shareholders' equity ........................ 7,149,625 861,372
------------ ------------
$ 20,160,797 $ 11,410,779
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
DSI TOYS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31, NINE MONTHS ENDED OCTOBER 31,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(restated) (restated)
<S> <C> <C> <C> <C>
Net Sales .................................. $ 22,466,132 $ 24,563,262 $ 41,040,770 $ 48,014,196
Cost of goods sold ......................... 15,700,115 18,948,648 29,687,767 37,376,724
------------ ------------ ------------ ------------
Gross profit ............................... 6,766,017 5,614,614 11,353,003 10,637,472
Selling, general and administrative expenses 3,898,396 3,214,650 8,644,167 8,539,982
------------ ------------ ------------ ------------
Operating income ........................... 2,867,621 2,399,964 2,708,836 2,097,490
Interest expense ........................... 233,238 276,916 486,228 710,103
Other income ............................... (37,998) (26,963) (82,082) (64,185)
------------ ------------ ------------ ------------
Income before income taxes ................ 2,672,381 2,150,011 2,304,690 1,451,572
Provision for income taxes ................. 985,944 786,577 901,350 594,228
------------ ------------ ------------ ------------
Net income ................................. $ 1,686,437 $ 1,363,434 $ 1,403,340 $ 857,344
============ ============ ============ ============
BASIC EARNINGS PER SHARE
Earnings per share .................... $ 0.20 $ 0.23 $ 0.19 $ 0.14
============ ============ ============ ============
Weighted average shares outstanding ... 8,533,157 6,000,000 7,500,335 6,000,000
============ ============ ============ ============
DILUTED EARNINGS PER SHARE
Earnings per share .................... $ 0.19 $ 0.23 $ 0.18 $ 0.14
============ ============ ============ ============
Weighted average shares outstanding ... 8,703,569 6,000,000 7,610,291 6,000,000
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
DSI TOYS, INC
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED OCTOBER 31,
1999 1998
----------- ------------
(restated)
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 1,403,340 $ 857,344
Adjustments to reconcile net loss to net cash
provided (used) by operating activitites:
Depreciation and amortization ......................... 474,096 469,038
Amortization and write-off of
debt discount and issuance costs ................... 30,108 --
Provision for doubtful accounts ....................... 45,358 36,541
Loss on sale of equipment ............................. 628 --
Deferred income taxes ................................. 357,729 768,210
Changes in assets and liabilities:
Accounts receivable ................................ (5,441,038) 1,078,229
Inventories ........................................ (3,618,059) (359,858)
Income taxes receivable/payable .................... 552,684 422,105
Prepaid expenses ................................... (80,851) (411,704)
Accounts payable and accrued liabilities ........... 961,505 1,005,474
----------- -----------
Net cash provided (used) by operating activities (5,314,500) 3,865,379
Cash flows from investing activities:
Capital expenditures ..................................... (677,776) (686,676)
Proceeds from sale of equipment .......................... 3,787 --
Increase in other assets ................................. (53,852) (49,174)
----------- -----------
Net cash used in investing activities ........... (727,841) (735,850)
Cash flows from financing activities:
Net borrowing (repayments) under revolving lines of credit 931,473 (2,287,465)
Net borrowings on long-term debt ......................... 15,314 --
Net proceeds from issuance of common stock ............... 4,911,737 --
Debt and stock issue costs ............................... (85,433) --
----------- -----------
Net cash provided (used) by financing activities 5,773,091 (2,287,465)
Effect of exchange rate changes on cash ........................ (26,824) (12,133)
----------- -----------
Net increase/(decrease) in cash ................................ (296,074) 829,931
Cash and cash equivalents, beginning of period ................. 554,197 383,690
----------- -----------
Cash and cash equivalents, end of period ....................... $ 258,123 $ 1,213,621
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
DSI TOYS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------------- PAID-IN
SHARES AMOUNT CAPITAL WARRANTS
--------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, Jan. 31, 1998 ..... 8,719,000 $ 87,190 $ 21,162,568 $ 102,500
(As restated)
Comprehensive loss:
Net loss ............
Foreign currency
translation adj
net of tax .......
Comprehensive
loss.....
--------- ------------ ------------ ------------
Balance, Jan. 31, 1999 ..... 8,719,000 87,190 21,162,568 102,500
Issuance 566,038
Common
shares ........... (3,515,096)
Comprehensive
loss:
Net loss .........
Foreign currency
translation adj .
net of tax ........
Comprehensive
loss ....
--------- ------------ ------------ ------------
Balance, Apr. 30, 1999 ..... 8,719,000 87,190 17,647,472 102,500
Issuance 1,892,453
Common shares ...... (11,964,133)
Options exercised .... (518,189)
Stock issuance costs . (185,449)
Comprehensive
income:
Net income ...........
Foreign currency
translation adj
net of tax .......
Comprehensive
income ..
--------- ------------ ------------ ------------
Balance, July 31, 1999 .... 8,719,000 87,190 4,979,701 102,500
Stock issuance costs . (6,593)
Comprehensive
income:
Net income ...........
Foreign currency
translation adj
net of tax .......
Comprehensive
income ..
--------- ------------ ------------ ------------
Balance, Oct. 31, 1999 .... 8,719,000 $ 87,190 $ 4,973,108 $ 102,500
========= ============ ============ ============
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE RETAINED TREASURY
INCOME EARNINGS STOCK TOTALS
------------ ------------ ------------ ------------
Balance, Jan. 31, 1998 ..... $ 29,187 $ 3,159,252 $(22,660,592) $ 1,880,105
(As restated)
Comprehensive loss:
Net loss ............ (1,003,842) (1,003,842)
Foreign currency
translation adj
net of tax ....... (14,891) (14,891)
------------
Comprehensive (1,018,733)
loss ....
------------ ------------ ------------ ------------
Balance, Jan. 31, 1999 ..... 14,296 2,155,410 (22,660,592) 861,372
Issuance 566,038
Common
shares .............. 4,715,096 1,200,000
Comprehensive
loss:
Net loss ......... (498,285) (498,285)
Foreign currency
translation adj .
net of tax ........ (2,276) (2,276)
------------
Comprehensive (500,561)
loss ....
------------ ------------ ------------ ------------
Balance, Apr. 30, 1999 ..... 12,020 1,657,125 (17,945,496) 1,560,811
Issuance 1,892,453
Common shares ...... 15,764,133 3,800,000
Options exercised .... 621,968 103,779
Stock issuance costs . (185,449)
Comprehensive
income:
Net income ........... 215,188 215,188
Foreign currency
translation adj.
net of tax ....... (8,126) (8,126)
------------
Comprehensive 207,062
income ..
------------ ------------ ------------ ------------
Balance, July 31, 1999 .... 3,894 1,872,313 (1,559,395) 5,486,203
Stock issuance costs (6,593)
Comprehensive
income:
Net income ........... 1,686,437 1,686,437
Foreign currency
translation adj.
net of tax ....... (16,422) (16,422)
------------
Comprehensive 1,670,015
income ..
------------ ------------ ------------ ------------
Balance, Oct. 31, 1999 .... $ (12,528) $ 3,558,750 $ (1,559,395) $ 7,149,625
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
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 / A 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 October 31, 1999 are
not necessarily indicative of the results expected for the full year ending
January 31, 2000 (effective December 31, 1999, the Company will change its
fiscal year end from January 31 to a calendar year end).
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, 1999 JANUARY 31, 1999
---------------- ----------------
<S> <C> <C>
Trade receivables ........................................ $ 9,197,085 $ 2,984,619
Provisions for:
Discounts, markdowns and
return of defective goods ......................... (2,564,229) (1,791,436)
Doubtful accounts ...................................... (167,451) (123,458)
----------- -----------
Accounts receivable, net ................................. $ 6,465,405 $ 1,069,725
=========== ===========
</TABLE>
3. SEGMENT INFORMATION
Financial information for the nine months ended October 31, 1999 and 1998
is as follows:
<TABLE>
<CAPTION>
United States Hong Kong Consolidated
<S> <C> <C> <C>
Nine months ended October 31, 1999:
Net sales .................................. $13,859,098 $27,181,672 $41,040,770
Operating gain ............................. 758,375 1,950,461 2,708,836
Total assets at October 31, 1999 ........... 15,597,177 4,563,620 20,160,797
Nine months ended October 31, 1998:
Net sales .................................. $14,025,323 $33,988,873 $48,014,196
Operating gain ............................. 237,777 1,859,713 2,097,490
Total assets at October 31, 1998 ........... 13,928,684 5,896,558 19,825,242
</TABLE>
5
<PAGE>
4. RESTATEMENT OF FINANCIALS
The Company has restated previously reported financial results for the
periods presented herein, except for the period ending October 31, 1999, to give
effect to expensing of previously capitalized split-dollar life insurance
premium costs. All disclosures related to the periods presented have been
amended, as appropriate, to reflect the restatement and are summarized as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
1998 1998
------------------ -----------------
Selling, general and
administrative expenses
As reported ................... $ 3,148,296 $ 8,340,922
As restated ................... $ 3,214,650 $ 8,539,982
Net income
As reported ................... $ 1,429,788 $ 1,056,404
As restated ................... $ 1,363,434 $ 857,344
Basic earnings per share
As reported ................... $ 0.24 $ 0.18
As restated ................... $ 0.23 $ 0.14
Diluted earnings per share
As reported ................... $ 0.24 $ 0.18
As restated ................... $ 0.23 $ 0.14
The cumulative effect at January 31, 1998 was to reduce retained earnings
by $1,278,400.
As a result of the restatement of its financial statements as of April 30,
1999, the Company was not in compliance with a certain covenant under the
Revolver. However, as of July 31, 1999 and the date of the restated financial
statements herein, the Company was again in compliance with such covenant under
the Revolver. Sunrock Capital Corp. has executed and delivered a written waiver
of this covenant violation to the Company.
6
<PAGE>
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 /A FOR THE FISCAL YEAR ENDING 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 PERIOD ENDING JANUARY 31, 2000
[EFFECTIVE DECEMBER 31, 1999, THE COMPANY WILL CHANGE ITS FISCAL YEAR END FROM
JANUARY 31 TO A CALENDAR YEAR END]).
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 BLOCKMEN(R) construction
sets, Kawasaki(R) and Burnin' Thunder(TM) radio control vehicles, and western
and military 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.
The Company, entered into a non-binding letter of intent with Meritus
Industries, Inc., ("Meritus") effective June 24, 1999, which contemplated the
Company acquiring Meritus by means of a merger. A definitive Agreement
7
<PAGE>
and Plan of Merger was signed on October 7, 1999. Under this agreement, Meritus
will merge into the Company, with the shareholders of Meritus receiving merger
consideration consisting of shares of the Company's common stock equal to $1.86
million, $1.1 million in cash and a promissory note for $1.69 million. The
Company has provided Meritus a deposit of $300,000, which sum was used by
Meritus to reduce its existing debt. The transaction also entitles Meritus to
one board seat, which will be added to the current six-member board of the
Company. Meritus will appoint Walter S. Reiling to the board of the Company.
Subject to the satisfaction of various covenants and conditions, the merger is
anticipated to close in January 2000. Meritus is a privately held toy
manufacturer headquartered in Fairfield, NJ, with offices and distribution
facilities in Hong Kong. Meritus is involved in the manufacture and marketing of
dolls, doll accessories, and girls' toys such as the Little Darlings(R), Baby
Beans(R), and Forever Girlfriends(R) brands. Meritus products are currently sold
in more than 40 countries worldwide.
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 NINE MONTHS ENDED
------------------ -----------------
OCTOBER 31, OCTOBER 31,
----------------- -----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales .................................. 100.0% 100.0% 100.0% 100.0%
Costs of goods sold ........................ 69.9 77.1 72.3 77.8
------ ------ ------ ------
Gross profit ............................... 30.1 22.9 27.7 22.2
Selling, general and administrative expenses 17.4 13.1 21.1 17.8
------ ------ ------ ------
Operating income ........................... 12.7 9.8 6.6 4.4
Interest expense ........................... 1.0 1.1 1.2 1.5
Other income ............................... (0.2) (0.1) (0.2) (0.1)
------ ------ ------ ------
Income before income taxes ................. 11.9 8.8 5.6 3.0
Provision for income taxes ................. 4.4 3.2 2.2 1.2
------ ------ ------ ------
Net income ................................. 7.5% 5.6% 3.4% 1.8%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED OCTOBER 31, 1999 COMPARED TO THE THREE MONTHS ENDED OCTOBER
31, 1998
NET SALES. Net sales for the three months ended October 31, 1999 decreased
$ 2.1 million, or 8.5%, to $22.5 million, from $24.6 million in the comparable
period in 1998. The decrease was due primarily to decreased sales of juvenile
audio products, partially offset by increased sales of boys' and girls' toys.
Net sales of juvenile audio products during the third quarter ended
October 31, 1999 decreased $3.9 million or 21.4%, to $14.2 million, from $18.0
million compared to the similar period in 1998. This decrease was due primarily
to slower than expected transition between our previous walkie-talkies and the
new Tech-Link(TM) line in the retail segment of the marketplace and also due to
competition within the category.
Net sales of girls' toys increased $1.7 million, or 121.4%, to $3.0
million during the third quarter ended October 31, 1999 from $1.4 million in the
comparable period in 1998. The sales for the third quarter 1999 were driven by
the sales of the Sweet Faith(TM) and the Hush Li'l Baby(TM) dolls. In the third
quarter 1998, there were no major dolls introduced to the marketplace.
Net sales of boys' toys increased $343,000 or 9.1%,to $4.1 million in the
third quarter ended October 31, 1999, from $3.8 million in the comparable period
in 1998. The increase was due primarily to the continued strong sales of the
BLOCKMEN(R) construction sets.
Net sales of products in other categories during the third quarter ended
October 31, 1999 decreased $245,000 or 17.9% to $1.1 million during the third
quarter ended October 31, 1999 from $1.4 million in the comparable period in
1998. The decrease was due primarily to decreased sales of preschool toys in the
third quarter of 1999 as compared to the same period in 1998.
8
<PAGE>
International net sales for the three months ended October 31, 1999
increased $1.1 million or 22.7%, to $5.9 million, from $4.8 million in the
comparable period in 1998. The increase was due primarily to increased sales to
France, Switzerland, Poland and Canada.
GROSS PROFIT. Gross profit increased $1.2 million, or 20.5%, to $6.8
million for the third quarter ended October 31, 1999, from $5.6 million in the
comparable period in 1998. The gross profit as a percentage of net sales
increased to 30.1% in the third quarter ended October 31, 1999 from 22.9% in the
third quarter of fiscal 1998. Such increase in gross profit and gross profit as
a percentage of net sales was primarily due to increased emphasis on proprietary
products, which command higher margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $3.9 million in the third quarter ended
October 31, 1999 compared to $3.2 million for the third quarter 1998, an
increase of $684,000. The increase was due to additional expense in connection
with increased television advertising in the domestic market.
INTEREST EXPENSE. Interest expense during the third quarter ended October
31, 1999, decreased to $233,000 compared to $277,000 in the similar period in
1998 due to lower average loan balances.
OTHER INCOME. Other income increased $11,000 to $38,000 in the third
quarter ended October 31, 1999 from $27,000 in the comparable period in 1998,
reflecting the effect of changes in levels of short-term investments and foreign
exchange translation.
NINE MONTHS ENDED OCTOBER 31, 1999 COMPARED TO THE NINE MONTHS ENDED OCTOBER 31,
1998
NET SALES. Net sales for the nine months ended October 31, 1999 decreased
$7.0 million, or 14.5% to $41.0 million, from $48.0 million in the comparable
period in 1998. The decrease was due primarily to decreased sales of juvenile
audio products, partially offset by increased sales of boys' and girls' toys.
Net sales of juvenile audio products decreased $9.1 million, or 26.3 %, to
$25.6 million during the nine months ended October 31, 1999, from $34.7 million
in the comparable period in 1998. This decrease was due primarily to slower than
expected transition between our previous walkie-talkies and the new
Tech-Link(TM) line in the retail segment of the marketplace and also due to
competition within the category.
Net sales of girls' toys increased $1.6 million or 51.1% to $4.7 million
during the nine months October 31, 1999, from $3.1 million in the comparable
period in 1998. Sales for the third quarter 1999 were driven by the sales of the
Sweet Faith(TM) and Hush Li'l Baby(TM) dolls.
Net sales of boys' toys increased $1.3 million, or 18.4%, to $8.2 million
in the nine months ended October 31, 1999, from $6.9 million in the comparable
period in 1998. The increase was due primarily to the expansion of the
BLOCKMEN(R) construction sets reflecting the continued strength of BLOCKMEN(R)
in the marketplace, offset partially by lower sales of the remote control
vehicles.
Net sales of products in other categories decreased $725,000, or 22.1%, to
$2.6 million, during the nine months ended October 31, 1999, from $3.3 million
in the comparable period in 1998. The decrease was due primarily to decreased
sales of preschool toys and Hoppin' Poppin' Spaceballs(R).
International net sales for the nine months ended October 31, 1999
decreased $762,000, or 2.4 %, to $10.6 million, from $10.2 million in the
comparable period in 1998. The decline was due primarily to decreased sales to
France, Spain and Hong Kong.
GROSS PROFIT. Gross profit increased $716,000, or 6.7%, to $11.4 million
for the nine months ended October 31, 1999, from $10.6 million in the comparable
period in 1998. Gross profit as a percentage of net sales increased to 27.7% in
the nine months ended October 31, 1999 from 22.2% in the first nine months of
fiscal 1998. Such increase in gross profit and gross profit as a percentage of
net sales was primarily due to increased emphasis on proprietary products, which
command higher margins.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $104,000, or 1.2% to $8.6 million in the nine
months ended October 31, 1999 from $8.5 million in the first nine months of
fiscal 1998. The increase resulted primarily from additional expense in
connection with increased television advertising in the domestic market.
INTEREST EXPENSE. As a result of debt repayment using the proceeds from
the stock sales to MVII, LLC on April 15 and June 1, 1999, interest expense
decreased $224,000, or 31.5%, to $486,000 in the nine months ended October 31,
1999 from $710,000 in the comparable period in 1998 due to lower average loan
balances.
OTHER INCOME. Other income increased $18,000, or 27.9%, to $82,000 in the
nine months ended October 31, 1999 from $64,000 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
Historically, the Company 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.
The Company's operating activities used net cash of $5.3 million during
the first nine months of fiscal year 1999, consisting primarily of increases in
accounts receivable and increases in inventories, partially offset by the
increase in accounts payable. Net cash used in investing activities was $728,000
and was primarily the result of capital expenditures. Net cash provided in
financing activities was $5.8 million representing net borrowing under revolving
lines of credit and net proceeds of $4.9 million from the sale of Common Stock.
The Company's working capital at October 31, 1999 was $6.1 million and
unrestricted cash was $258,000, and the Company's working capital at October
31, 1998, was $433,000 and unrestricted cash was $1.2 million. 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 December 13, 1999 the Company
had additional borrowing capacity of $2.4 million in the aggregate 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 $1.0 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.
On October 7, 1999, the Company entered into an Agreement and Plan of
Merger with Meritus Industries, Inc. "Meritus", a New Jersey corporation, its
wholly owned subsidiary, Meritus Industries Ltd., a Hong Kong corporation; and
its sole shareholders Walter S. Reiling and Susan Reiling, which contemplates
the merger of Meritus with and into the Company, with the Company being the
surviving corporation in the merger. Under the Agreement and Plan of Merger, the
shareholders of Meritus will receive merger consideration consisting of shares
of the Company's common stock equal to $1.86 million, $1.1 million in cash, and
a promissory note for $1.69 million. The Company has provided Meritus a deposit
of $300,000, which sum was used by Meritus to reduce its existing debt. The
transaction also entitles Meritus to one board seat, which will be added to the
current six member board of the Company. Meritus will appoint Walter S. Reiling
to the board of the Company after the closing of the merger. Subject to the
satisfaction of various convenants and conditions, the merger is anticipated to
close in January of 2000. (See Exhibit 10.45)
In addition, the Company is obligated to make future minimum royalty
payments under certain of its license agreements. As of October 31, 1999, the
Company was required to pay guaranteed royalties under these licenses of
$42,500, $297,000, $258,000, and $150,000 per year from 1999 through year 2002.
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As part of the Company's strategy, the Company will continue to evaluate
potential acquisitions of other toy businesses or product lines that the Company
believes would complement its existing business.
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 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 Company has completed its reprogramming, or replacing, and testing of
its EDI software, and such software has been determined by the Company to be Y2K
compliant. The Company has communicated with its customers to evaluate their EDI
Y2K compliance. Based on these communications, the Company understands that its
major customers have tested their EDI systems for internal, intermediary and
supplier Y2K compliance, and found them to be Y2K compliant. 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 MIS systems at the Company's U.S. headquarters and Hong Kong
subsidiary have been upgraded and successfully tested to be Y2K compliant. The
Company's local area network operating system has been upgraded and is Y2K
compliant. The Company has replaced all critical computers and software found
not to be Y2K compliant.
The Company has incurred approximately $30,000 through October 31, 1999 in
expenses in connection with making its computer systems and programs Y2K
compliant. The Company expects to incur additional Y2K costs of approximately
$60,000 during the remainder of fiscal 1999 for work which has been completed
but has not yet been billed to the Company. The Company has utilized both
internal and external sources to address Y2K Issues, and is currently in
compliance. 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 has been in direct communication
with its customers, contractors, and suppliers to evaluate their Y2K compliance.
Based upon the responses received to date from our key customers, contractors,
and suppliers, the
11
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Company has no reason to believe that they will not be Y2K compliant prior to
December 31, 1999. 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 has
addressed its non-IT systems at its various facilities and there has been no
indication that the systems are not Y2K compliant. The Company believes that in
the event of a failure of its non-IT systems, there will not be a material
adverse impact on the Company's operation.
The Company currently has not developed a detailed contingency plan to
address situations in which its major customers or suppliers are not Y2K
compliant. If the Company's 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 is 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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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 and Sale Agreement by and between the
Company and MVII, LLC ("MVII") dated as of April 15, 1999 (the "Stock
Purchase Agreement"), the Company issued to MVII 100,000 shares of Common
Stock on July 1, 1999. Consideration for these shares of Common Stock is
included in the $5 million paid by MVII to the Company under the terms of
the Stock Purchase Agreement, pursuant to which MVII purchased an
aggregate of 2,458,491 shares of Common Stock (including the 100,000
shares of Common Stock issued on July 1, 1999). The $5 million total
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 a $3.6 million indebtedness, and general operating expenses
of $1.4 million.
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.
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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.
14
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The information required by this Item 6(a) 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: The Company filed a Form 8-K on November
23, 1999, for the purpose of reporting the restatement of certain of its
financial statements.
15
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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: December 15, 1999 /s/ MICHAEL J. LYDEN
Michael J. Lyden
President and Chief Executive Officer
Dated: December 15, 1999 By: /s/ ROBERT L. WEISGARBER
Robert L. Weisgarber
Chief Financial Officer
(Principal Financial and
Accounting Officer)
16
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INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
------- -------
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 (filed as Exhibit 3.1.1 to the Quarterly Report on Form 10-Q
for the quarter ended April 30, 1999), incorporated herein by
reference.
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.
10.45 Agreement and Plan of Merger between Meritus Industries, Inc. et al,
and the Company, dated October 7, 1999.
27 Financial Data Schedule
17
EXHIBIT 10.45
AGREEMENT AND PLAN OF MERGER
BETWEEN
MERITUS INDUSTRIES, INC., A NEW JERSEY CORPORATION;
MERITUS INDUSTRIES, LTD., A HONG KONG CORPORATION;
WALTER S. REILING AND SUSAN REILING
AND
DSI TOYS, INC., A TEXAS CORPORATION
DATED AS OF OCTOBER 7 , 1999
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I
The Merger; Closing; Effective Time
1.1 THE MERGER.................................................1
1.2 CLOSING....................................................2
1.3 EFFECTIVE TIME.............................................2
1.4 FURTHER ASSURANCES.........................................2
ARTICLE II
Certificate of Incorporation and By-Laws
of the Surviving Corporation
2.1 CERTIFICATE OF INCORPORATION...............................2
2.2 BY-LAWS....................................................2
ARTICLE III
Officers and Directors
of the Surviving Corporation
3.1 DIRECTORS..................................................3
3.2 OFFICERS...................................................3
ARTICLE IV
Effect of the Merger on Capital Stock;
Exchange of Certificates
4.1 EFFECT ON CAPITAL STOCK....................................3
(a) MERGER CONSIDERATION.....................3
(b) CANCELLATION OF SHARES...................4
4.2 EXCHANGE OF CERTIFICATES FOR SHARES........................4
(a) EXCHANGE FUND............................4
(b) TRANSFERS................................4
(c) FRACTIONAL SHARES........................4
(d) LOST, STOLEN OR DESTROYED CERTIFICATES...4
(e) PERSONS..................................4
4.3 ADJUSTMENTS OF CONVERSION NUMBER..................4
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PAGE
ARTICLE V
Representations and Warranties
5.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND REILING........5
(a) ORGANIZATION, GOOD STANDING AND QUALIFICATION...........5
(b) CAPITAL STRUCTURE.......................................5
(c) CORPORATE AUTHORITY; APPROVAL AND FAIRNESS..............6
(d) GOVERNMENTAL FILINGS; NO VIOLATIONS.....................6
(e) COMPANY REPORTS; FINANCIAL STATEMENTS...................7
(f) ABSENCE OF CERTAIN CHANGES..............................8
(g) LITIGATION AND LIABILITIES..............................8
(h) EMPLOYEE MATTERS........................................8
(i) COMPLIANCE WITH LAWS; PERMITS..........................10
(j) TAKEOVER STATUTES......................................10
(k) ENVIRONMENTAL MATTERS..................................10
(l) TAX MATTERS............................................11
(m) TAXES..................................................11
(n) INTELLECTUAL PROPERTY..................................12
(o) BROKERS AND FINDERS....................................13
(p) EVENTS SUBSEQUENT TO FINANCIAL STATEMENTS..............13
(q) DISCLOSURE.............................................15
(r) REAL PROPERTY..........................................15
(s) TANGIBLE PROPERTY......................................15
(t) CONTRACTS..............................................16
(u) SUPPLIERS AND CUSTOMERS................................16
(v) ACCOUNTS RECEIVABLE....................................17
(w) POWERS OF ATTORNEY.....................................17
(x) CONDITIONS OF PROPERTY.................................17
(y) INSURANCE..............................................17
(z) GUARANTEES.............................................17
(aa) CERTAIN BUSINESS RELATIONSHIPS.........................17
(bb) INVENTORY..............................................18
(cc) QUESTIONABLE PAYMENTS..................................18
(dd) LI & FUNG DEBT.........................................18
5.2 REPRESENTATIONS AND WARRANTIES OF DSI...........................19
(a) ORGANIZATION, GOOD STANDING AND QUALIFICATION..........19
(b) CORPORATE AUTHORITY....................................19
(c) GOVERNMENTAL FILINGS; NO VIOLATIONS....................19
(d) LITIGATION AND LIABILITIES.............................20
(e) ENVIRONMENTAL MATTERS..................................20
(f) TAX MATTERS............................................20
(g) BROKERS AND FINDERS....................................21
(h) DSI SHARES.............................................21
(i) RESTRUCTURINGS/CAPITAL EVENTS..........................21
(j) DISCLOSURE OF INFORMATION..............................21
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PAGE
ARTICLE VI
Covenants
6.1 INTERIM OPERATIONS..............................................21
6.2 ACQUISITION PROPOSALS...........................................23
6.3 STOCKHOLDERS MEETING............................................23
6.4 FILINGS; OTHER ACTIONS; NOTIFICATION............................23
6.5 TAXATION........................................................24
6.6 ACCESS..........................................................25
6.7 STOCK EXCHANGE LISTING AND DE-LISTING...........................25
6.8 PUBLICITY.......................................................25
6.9 OPTIONS AND BENEFITS............................................25
(a) STOCK OPTIONS..........................................25
(b) EMPLOYEE BENEFITS......................................25
6.10 FEES AND EXPENSES...............................................25
6.11 SHAREHOLDER CLAIMS..............................................25
6.12 NOTICE OF CHANGES...............................................26
6.13 INDEMNIFICATION ARRANGEMENTS....................................26
6.14 LI & FUNG AGREEMENTS............................................26
6.15 TAKEOVER STATUTE................................................26
6.16 NOTIFICATION OF CERTAIN MATTERS.................................27
6.17 SUBSIDIARIES' STOCK TRANSFERS...................................27
ARTICLE VII
Conditions
7.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER......29
(a) STOCKHOLDER APPROVAL...................................29
(b) NASDAQ LISTING.........................................29
(c) REGULATORY CONSENTS....................................29
(d) LITIGATION.............................................29
(e) BLUE SKY APPROVALS........................................29
(f) SHAREHOLDERS' AND VOTING TRUST AGREEMENT..................29
(g) REGISTRATION RIGHTS AGREEMENT.............................30
7.2 CONDITIONS TO OBLIGATIONS OF DSI................................30
(a) REPRESENTATIONS AND WARRANTIES.........................30
(b) PERFORMANCE OF OBLIGATIONS OF MERITUS..................30
(c) CONSENTS UNDER AGREEMENTS..............................30
(d) [Intentionally omitted.]...............................30
(e) SUBSIDIARY TRANSFERS...................................30
(f) LI & FUNG..............................................30
(g) OPINION OF COUNSEL.....................................31
(h) CLOSING CERTIFICATES...................................31
(i) TOYS R US CLAIMS.......................................31
(j) AUDITED STATEMENTS.....................................31
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PAGE
(k) GENERAL RELEASE........................................31
(l) SHAREHOLDER QUESTIONNAIRE...............................31
7.3 CONDITIONS TO OBLIGATION OF MERITUS.............................31
(a) REPRESENTATIONS AND WARRANTIES.........................31
(b) PERFORMANCE OF OBLIGATIONS OF DSI......................31
(c) CONSENTS UNDER AGREEMENTS..............................32
(d) [Intentionally omitted.]...............................32
(e) OPINION OF COUNSEL.....................................32
(f) CLOSING CERTIFICATE....................................32
(g) NOTE...................................................32
(h) EMPLOYMENT AGREEMENTS..................................32
(i) LI & FUNG OLD DEBT.....................................32
ARTICLE VIII
Termination
8.1 TERMINATION.....................................................32
8.2 EFFECT OF TERMINATION...........................................34
ARTICLE IX
9.1 SURVIVAL OF REPRESENTATIONS AND COVENANTS.......................34
9.2 INDEMNIFICATION BY CONTRIBUTING SHAREHOLDERS....................34
9.3 THRESHOLD; CEILING..............................................35
9.4 NO CONTRIBUTION.................................................36
9.5 INDEMNIFICATION BY DSI..........................................36
9.6 SETOFF..........................................................36
9.7 DEFENSE OF THIRD PARTY CLAIMS...................................37
9.8 EXCLUSIVE REMEDY................................................38
ARTICLE X
Miscellaneous and General
10.1 SURVIVAL........................................................38
10.2 MODIFICATION OR AMENDMENT.......................................38
10.3 WAIVER OF CONDITIONS............................................38
10.4 COUNTERPARTS....................................................38
10.5 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL...................38
10.6 NOTICES.........................................................39
10.7 ENTIRE AGREEMENT; NO OTHER REPRESENTATIONS......................40
10.8 NO THIRD PARTY BENEFICIARIES....................................40
10.9 OBLIGATIONS OF DSI AND OF MERITUS...............................40
10.10 SEVERABILITY....................................................41
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PAGE
10.11 INTERPRETATION..................................................41
10.12 ASSIGNMENT......................................................41
10.13 SPECIFIC PERFORMANCE............................................41
10.14 ATTORNEYS' FEES.................................................41
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AGREEMENT AND PLAN OF MERGER
This Agreement, is made as of October 7 , 1999, between DSI Toys, Inc., a
Texas corporation ("DSI"), and Meritus Industries, Inc., a New Jersey
corporation ("MERITUS"), Meritus Industries, Ltd., a Hong Kong corporation
("Limited"), and beneficially Walter S. Reiling and Susan Reiling (collectively,
"Reiling"), the sole shareholders of Meritus.
RECITALS:
A. The respective Boards of Directors of each of Meritus and DSI have
approved and declared advisable the merger of Meritus with and into DSI (the
"MERGER") and approved the Merger upon the terms and subject to the conditions
set forth in this Agreement, whereby each issued and outstanding share of the
common stock, par value $.01 per share, of Meritus (a "SHARE" or, collectively,
the "SHARES"), not owned directly or indirectly by Meritus, will be converted
into shares of common stock, $ .01 par value, of DSI ("DSI COMMON STOCK"), and
certain other consideration as provided herein.
B. The respective Boards of Directors of DSI and Meritus have determined
that the Merger is in furtherance of and consistent with their respective
long-term business strategies and is fair to and in the best interests of their
respective stockholders.
C. It is intended that, for federal income tax purposes, the Merger shall
qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended, and the rules and regulations
promulgated thereunder (the "CODE");
D. For financial accounting purposes, it is intended that the Merger will
be accounted for as a "purchase;"
E. As a condition to DSI's willingness to enter into this Agreement,
Reiling, as the sole stockholders of Meritus (the "PRINCIPAL STOCKHOLDERS") have
agreed, among other things, to vote their shares of Meritus in favor of the
Merger.
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements contained herein, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
THE MERGER; CLOSING; EFFECTIVE TIME
1.1 THE MERGER. Upon the terms and subject to the conditions set forth in
this Agreement and in accordance with the Texas Business Corporation Act, as
amended (the "TBCA") and the New Jersey General Business Corporation Act, as
amended (the "NJBCA"), at the Effective Time (as defined in Section 1.3 below)
Meritus shall be merged with and into DSI and the separate corporate existence
of Meritus shall thereupon cease. DSI shall be the surviving corporation in the
Merger (sometimes hereinafter referred to as the "SURVIVING CORPORATION"), and
the separate corporate existence of DSI with all its rights,
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privileges, immunities, powers and franchises shall continue unaffected by the
Merger, except as set forth in Article III. The Merger shall have the effects
specified in the TBCA and the NJBCA.
1.2 CLOSING. The closing of the Merger (the "CLOSING") shall take place at
the offices of Graham, Curtin & Sheridan, 4 Headquarters Plaza, Morristown, New
Jersey on the date that is (i) no sooner than January 4, 2000 and no later than
January 11, 2000; or (ii) at such other place and time and/or on such other date
as Meritus and DSI may agree in writing (the "Closing Date").
1.3 EFFECTIVE TIME. As soon as practicable following the Closing, Meritus
and DSI will cause a Certificate of Merger (the "NEW JERSEY CERTIFICATE OF
MERGER") to be executed, acknowledged and filed with the Secretary of State of
New Jersey as provided in Sections 14A: 10 - 4.1 and 14A: 10-7 of the NJBCA and
Articles of Merger (the "Texas Articles of Merger") to be executed, acknowledged
and filed with the Secretary of State of Texas as provided in Article 5.04 of
the TBCA. The Merger shall become effective at the time when the New Jersey
Certificate of Merger has been duly filed with the Secretary of State of New
Jersey and the Texas Articles of Merger have been filed with the Secretary of
State of Texas or, if otherwise agreed by Meritus and DSI, such later date or
time as is established by the New Jersey Certificate of Merger and the Texas
Articles of Merger (the "EFFECTIVE TIME").
1.4 FURTHER ASSURANCES. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments or assurances or any other acts or things are necessary,
desirable or proper (i) to vest, perfect or confirm, of record or otherwise, in
the Surviving Corporation its right, title and interest in, to or under any of
the rights, privileges, powers, franchises, properties or assets of Meritus or
(ii) otherwise to carry out the purposes of this Agreement, the Surviving
Corporation and its proper officers and directors or their designees shall be
authorized to execute and deliver, in the name and on behalf of Meritus, all
such deeds, bills of sale, assignments and assurances and to do, in the name and
on behalf of Meritus, all such other acts and things as may be necessary,
desirable or proper to vest, perfect or confirm the Surviving Corporation's
right, title and interest in, to and under any of the rights, privileges,
powers, franchises, properties or assets of Meritus, in accordance with the
purposes of this Agreement.
ARTICLE II
CERTIFICATE OF INCORPORATION AND BY-LAWS
OF THE SURVIVING CORPORATION
2.1 CERTIFICATE OF INCORPORATION. The certificate of incorporation of DSI
as in effect immediately prior to the Effective Time shall be the certificate of
incorporation of the Surviving Corporation (the "CHARTER"), until duly amended
as provided therein or by applicable law.
2.2 BY-LAWS. The by-laws of DSI in effect immediately prior to the
Effective Time shall be the by-laws of the Surviving Corporation (the
"BY-LAWS"), until thereafter amended as provided therein or by applicable law.
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ARTICLE III
OFFICERS AND DIRECTORS
OF THE SURVIVING CORPORATION
3.1 DIRECTORS. The directors of DSI immediately prior to the Effective
Time shall, from and after the Effective Time, continue to be directors of the
Surviving Corporation until their successors have been duly elected or appointed
and qualified or until their earlier death, resignation or removal in accordance
with the Charter and the By-Laws. Pursuant to the terms and conditions of the
Voting Trust Agreement (as defined in Section 6.13 below), as of the date that
is no later than thirty (30) days after the Effective Time, Mr. Walter Reiling
shall be appointed to the Board of Directors of DSI.
3.2 OFFICERS. The officers of DSI immediately prior to the Effective Time
shall, from and after the Effective Time, be the officers of the Surviving
Corporation until their successors have been duly elected or appointed and
qualified or until their earlier death, resignation or removal in accordance
with the Charter and the By-Laws.
ARTICLE IV
EFFECT OF THE MERGER ON CAPITAL STOCK;
EXCHANGE OF CERTIFICATES
4.1 EFFECT ON CAPITAL STOCK. At the Effective Time, as a result of the
Merger and without any action on the part of the holder of any capital stock of
DSI:
i. MERGER CONSIDERATION. The shares of Meritus common stock (the
"Shares") issued and outstanding immediately prior to the Effective Time (other
than Shares owned by Meritus or any other direct or indirect subsidiary of
Meritus (collectively "Meritus Companies") and not held on behalf of third
parties (collectively "Excluded Shares"), shall be converted into, and become
exchangeable for (i) Six Hundred Thousand (600,000) validly issued, fully paid
and nonassessable shares of DSI Common Stock (the "DSI Shares"), representing
Sixty Thousand (60,000) DSI Shares for each of the ten (10) Shares of Meritus
Common Stock issued and outstanding as of the Effective Time; (ii) One Million
One Hundred Thousand Dollars ($1,100,000) in cash, (the "CASH CONSIDERATION");
and (iii) DSI's Subordinated Secured Promissory Note for One Million Six Hundred
Ninety Thousand Dollars ($1,690,000.00), in the form attached to this Agreement
as EXHIBIT 4.1(A)(1) (the "Note"). DSI's obligations under the Note shall be
secured by a Letter of Credit in the form attached to this Agreement as EXHIBIT
4.1(A)(2) (the "Letter of Credit").
(i) At the Effective Time, all Shares shall no longer be
outstanding and shall be canceled and retired and shall cease to exist, and each
certificate (a "CERTIFICATE") formerly representing any of such Shares (other
than Excluded Shares) shall thereafter represent only the right to receive the
shares of DSI Common Stock into which such Shares have been converted and the
right to receive pursuant to this Section 4.1(a) One Hundred and Ten Thousand
Dollars ($110,000) in cash per Share and the right, if any, to receive pursuant
to Section 4.2(c) cash in lieu of fractional shares into which such Shares have
been converted pursuant to this Section 4.1(a).
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ii. CANCELLATION OF SHARES. Each Excluded Share issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, cease to be
outstanding, shall be canceled and retired without payment of any consideration
therefor and shall cease to exist.
4.2 EXCHANGE OF CERTIFICATES FOR SHARES.
(a) EXCHANGE FUND. As of the Effective Time, DSI shall deliver or
cause to be delivered to and in the name of each Principal Stockholder; (i)
certificates representing the shares of DSI Common Stock into which the Shares
are to be converted; (ii) the Cash Consideration; and (iii) the Note (such Cash
Consideration, certificates for shares of DSI Common Stock, and the Note being
hereinafter referred to as the "EXCHANGE FUND").
(b) TRANSFERS. After the Effective Time, there shall be no
transfers on the stock transfer books of Meritus of the Shares that were
outstanding immediately prior to the Effective Time.
(c) FRACTIONAL SHARES. No certificates or scrip representing
fractional shares of DSI Common Stock shall be issued upon the surrender for
exchange of Certificates pursuant to this Article IV; no dividend or other
distribution by DSI and no stock split, combination or reclassification shall
relate to any such fractional share; and no such fractional share shall entitle
the record or beneficial owner thereof to vote or to any other rights of a
stockholder of DSI. In lieu of any such fractional share, each holder of Shares
who would otherwise have been entitled thereto upon the surrender of
Certificate(s) for exchange pursuant to this Article IV will be paid an amount
in cash (without interest) rounded up to the nearest whole cent, determined by
multiplying (i) the per share closing price on the NASDAQ (the "NASDAQ") of DSI
Common Stock (as reported in The Wall Street Journal) on the date on which the
Effective Time shall occur (or, if the DSI Common Stock shall not trade on
NASDAQ on such date, the first day of trading in DSI Common Stock on NASDAQ
thereafter) by (ii) the fractional share to which such holder would otherwise be
entitled.
(d) LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any
Certificate shall have been lost, stolen or destroyed, upon the making and
delivery to DSI of an affidavit of that fact by the Person claiming such
Certificate to be lost, stolen or destroyed, a properly completed letter of
transmittal and, if reasonably required by DSI, the posting by such Person of a
bond in customary amount as indemnity against any claim that may be made against
it with respect to such Certificate, DSI will deliver or cause to be delivered
in exchange for such lost, stolen or destroyed Certificate the Cash
Consideration, the shares of DSI Common Stock and the Note, and any cash payable
and any unpaid dividends or other distributions in respect thereof pursuant to
Section 4.2(c) upon due surrender of, and deliverable in respect of the Shares
represented by, such Certificate pursuant to this Agreement.
(e) PERSONS. For the purposes of this Agreement, the term "PERSON"
shall mean any individual, corporation (including not-for-profit), general or
limited partnership, limited liability company, joint venture, estate, trust,
association, organization, Governmental Entity (as defined in Section 5.1(d)
below) or other entity of any kind or nature.
4.3 ADJUSTMENTS OF CONVERSION NUMBER. In the event that Meritus changes
the number of Shares or securities convertible or exchangeable into or
exercisable for Shares,
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or DSI changes the number of shares of DSI Common Stock or securities
convertible or exchangeable into or exercisable for shares of DSI Common Stock,
issued and outstanding prior to the Effective Time as a result of a
reclassification, stock split (including a reverse split), dividend or
distribution, recapitalization, merger (other than the Merger), subdivision,
issuer tender or exchange offer for the issuer's own shares (other than
repurchases by DSI between the date hereof and the Effective Time of less than
5% of the outstanding shares of DSI Common Stock pursuant to Rule 10b-18,
promulgated under the Securities Exchange Act of 1934, as amended), or other
similar transaction with a materially dilutive effect, or if a record date with
respect to any of the foregoing shall occur prior to the Effective Time, the
conversion number shall be equitably adjusted.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND REILING. Except as
set forth in the corresponding sections or subsections of the disclosure letter
delivered to DSI by Meritus on or prior to entering into this Agreement (the
"COMPANY DISCLOSURE LETTER"), Meritus and Reiling, jointly and severally, hereby
represent and warrant to DSI that:
(a) ORGANIZATION, GOOD STANDING AND QUALIFICATION. Each of Meritus
and its Subsidiaries is a corporation duly organized, validly existing and in
good standing under the laws of its respective jurisdiction of organization and
has all requisite corporate or similar power and authority to own and operate
its properties and assets and to carry on its business as presently conducted
and is qualified to do business and is in good standing as a foreign corporation
in each jurisdiction where the ownership or operation of its properties or
conduct of its business requires such qualification, except where the failure to
be so qualified or in good standing is not reasonably likely to have,
individually or in the aggregate, a Company Material Adverse Effect (as defined
below). Meritus has provided to DSI a complete and correct copy of Meritus's and
its Subsidiaries' certificates or articles of incorporation, as the case may be,
and by-laws, each as amended to date. Meritus's and its Subsidiaries'
certificates of incorporation and by-laws so delivered are in full force and
effect. SECTION 5.1(A) of the Company Disclosure Letter contains complete and
correct copies of Meritus' and its Subsidiaries' certificates or articles of
incorporation, as the case may be, and bylaws, each as amended to date.
As used in this Agreement, the term (i) "SUBSIDIARY" means, with respect
to Meritus or DSI, as the case may be, any entity, whether incorporated or
unincorporated, of which at least a majority of the securities or ownership
interests having by their terms ordinary voting power to elect a majority of the
Board of Directors or other persons performing similar functions is directly or
indirectly owned or controlled by such party or by one or more of its respective
Subsidiaries or by such party and any one or more of its respective Subsidiaries
and (ii) "COMPANY MATERIAL ADVERSE EFFECT" means a material adverse effect on
the financial condition, properties or results of operations of Meritus or its
Subsidiaries, as the case may be.
(b) CAPITAL STRUCTURE. The authorized capital stock of Meritus
consists of 1,000 shares, of which 10 shares were outstanding as of the close of
business on August 31, 1999. All of the outstanding shares have been duly
authorized and are validly issued, fully
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paid and nonassessable. Meritus has no shares or preferred shares reserved for
issuance. Except as disclosed in SECTION 5.1(b) of the Company Disclosure
Letter, each of the outstanding shares of capital stock or other securities of
each of Meritus's Subsidiaries is duly authorized, validly issued, fully paid
and nonassessable and owned by Meritus or a direct or indirect wholly-owned
subsidiary of Meritus, free and clear of any lien, pledge, security interest,
right of first refusal agreement, limitation on voting rights, claim or other
encumbrance. Except as set forth above, there are no preemptive or other
outstanding rights (other than rights accruing to Meritus or its Subsidiaries),
options, warrants, conversion rights, stock appreciation rights, redemption
rights, repurchase rights, agreements, arrangements or commitments to issue or
sell any shares of capital stock or other securities of Meritus or any of its
Subsidiaries or any securities or obligations convertible or exchangeable into
or exercisable for, or giving any Person a right to subscribe for or acquire,
any securities of Meritus or any of its Subsidiaries, and no securities or
obligations evidencing such rights are authorized, issued or outstanding.
Meritus does not have outstanding any bonds, debentures, notes, warrants, or
other obligations the holders of which have the right to vote (or convertible
into or exercisable for securities having the right to vote) with the
stockholders of Meritus on any matter.
(c) CORPORATE AUTHORITY; APPROVAL AND FAIRNESS. As of the date
hereof, the Board of Directors of Meritus has duly approved this Agreement and
all related agreements and has resolved to recommend the adoption of this
Agreement by Meritus's stockholders and directed that this Agreement be
submitted to Meritus's stockholders for approval. Meritus has all corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby and thereby, subject to the adoption of this
Agreement by the holders of at least a majority of the votes cast by the holders
of the Shares (the "COMPANY REQUISITE VOTE"). The execution, delivery and
performance of this Agreement by Meritus and the consummation by Meritus of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action on the part of Meritus, subject to adoption of this
Agreement by the stockholders of Meritus. This Agreement has been duly executed
and delivered by Meritus and (assuming the valid authorization, execution and
delivery of this Agreement by DSI) constitutes the valid and binding agreement
of Meritus enforceable against Meritus in accordance with its terms, except that
enforceability may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability relating to
or affecting creditors' rights (the "BANKRUPTCY EXCEPTION").
(d) GOVERNMENTAL FILINGS; NO VIOLATIONS.
(i) Other than the filings and/or notices (A) pursuant to
Section 1.3, (B) the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), and the Securities Act of 1933, as amended (the "SECURITIES ACT"), (C) to
comply with state securities or "blue-sky" laws, if any, and (D) required to be
made with the NASDAQ and (E) any filings pursuant to governmental requirements
of Hong Kong, no notices, reports or other filings are required to be made by
Meritus or any of its Subsidiaries with, nor are any consents, registrations,
approvals, permits or authorizations required to be obtained by Meritus or any
of its Subsidiaries from, any governmental or regulatory authority, agency,
commission, body or other governmental entity ("GOVERNMENTAL ENTITY"), in
connection with the execution and delivery of this Agreement by Meritus and the
consummation by Meritus of the Merger and the other transactions contemplated
hereby or thereby.
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(ii) The execution, delivery and performance of this Agreement
and all documents contemplated hereunder by Meritus do not, and the consummation
by Meritus of the Merger and the other transactions contemplated hereby or
thereby will not, constitute or result in (A) a breach or violation of, or a
default under, the certificate of incorporation or by-laws of Meritus or the
comparable governing instruments of any of its Subsidiaries, (B) a breach or
violation of, or a default under, the acceleration of any obligations or the
creation of a lien, pledge, security interest or other encumbrance on the assets
of Meritus or any of its Subsidiaries (with or without notice, lapse of time or
both) pursuant to, any loan or credit agreement, note, bond, warrant, indenture
or other instrument evidencing indebtedness for borrowed money ("DEBT
CONTRACTS") or any other material agreement, lease, contract, arrangement or
other obligation ("OTHER CONTRACTS") binding upon Meritus or any of its
Subsidiaries or any Law (as defined in Section 5.1(i) below) or governmental or
non-governmental permit or license to which Meritus or any of its Subsidiaries
is subject or any judgment, order or decree to which Meritus or any of its
Subsidiaries or any of its properties is subject or (C) [except as set forth in
Section 5.1(d)(1) of the Company Disclosure Letter], any change in the rights or
obligations of any party under any of the Debt Contracts or Other Contracts.
(iii) (A) There is no event of default, or event that, but for
the giving of notice or lapse of time, or both, would constitute an event of
default under any Debt Contract binding upon Meritus or any of its Subsidiaries;
and
(B) There is no event of default, or event that, but for
the giving of notice or lapse of time, or both, would constitute an event of
default under any Other Contract binding upon Meritus or any of its
Subsidiaries.
(e) COMPANY REPORTS; FINANCIAL STATEMENTS. SECTION 5.1(e) of the
Company Disclosure Letter contains true and accurate copies of the reviewed
balance sheet and related statements of operations, changes in shareholders
equity and cash flows of Meritus and its Subsidiaries for the fiscal years
1994-1998, together with internal monthly financial statements for the period
January-July 1999 (collectively, and along with the Audited Statements, as
defined in Section 6.19 below, the "COMPANY REPORTS"). As of their respective
dates and except as set forth in Section 5.1(e) of the Company Disclosure
Letter, the Company Reports did not, and any Company Reports provided by Meritus
to DSI subsequent to the date hereof will not, contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements made therein not misleading. Each of the
consolidated balance sheets included in or incorporated by reference into the
Company Reports (including the related notes and schedules) fairly presents, or
will fairly present, in all material respects, the consolidated financial
position of Meritus and its Subsidiaries as of its date and each of the
consolidated statements of income, stockholders' equity and of cash flows
included in or incorporated by reference into the Company Reports (including any
related notes and schedules) fairly presents, or will fairly present, the
results of consolidated operations, stockholders' equity and cash flows, as the
case may be, of Meritus and its Subsidiaries for the periods set forth therein
(subject, in the case of unaudited statements, to notes and normal year-end
adjustments that will not be material in amount or effect), in each case, except
as set forth in Section 5.1(e) of the Company Disclosure Letter, in accordance
with generally accepted accounting principles ("GAAP") consistently applied
during the periods involved, except as may be noted therein.
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(f) ABSENCE OF CERTAIN CHANGES. Except as may be disclosed in the
Company Reports and in Section 5.1(f) of the Company Disclosure letter, since
January 1, 1998 (the "REVIEW DATE"), Meritus and its Subsidiaries have conducted
their respective busi nesses only in, and have not entered into or engaged in
any material transaction other than in, the ordinary and usual course of such
businesses and there has not been (i) any change in the financial condition,
properties, business or results of operations of Meritus and its Subsidiaries or
any development or combination of developments of which the executive officers
of Meritus has knowledge that, individually or in the aggregate, has had or is
reasonably likely to have a Company Material Adverse Effect; (ii) any damage,
destruction or other casualty loss with respect to any asset or property owned,
leased or otherwise used by Meritus or any of its Subsidiaries, whether or not
covered by insurance except as is not reasonably likely to have, individually or
in the aggregate, a Company Material Adverse Effect; (iii) any declaration,
setting aside or payment of any dividend or other distribution in respect of the
capital stock of Meritus; or (iv) any change by Meritus in accounting
principles, practices or methods. Since the Review Date, except as provided for
herein or as disclosed in the Company Reports, there has not been any increase
in the compensation payable or that could become payable by Meritus or any of
its Subsidiaries to officers or key employees or any amendment of any of the
Compensation and Benefit Plans (as defined in Section 5.1(h) below other than
increases or amendments in the ordinary course).
(g) LITIGATION AND LIABILITIES. Except as set forth in SECTION
5.1(G) of the Company Disclosure Letter, there are no (i) civil, criminal or
administrative actions, suits, claims, hearings, investigations or proceedings
pending or, to the knowledge of the executive officers of Meritus, threatened
against Meritus or any of its Subsidiaries or any current or former director or
officer of Meritus or any of its Subsidiaries (in their capacity as such); or
(ii) obligations or liabilities, whether or not accrued, contingent or
otherwise, including those relating to matters involving any Environmental Law
(as defined in Section 5.1(k) below), that, in the case of either clause (i) or
(ii), individually or in the aggregate, are reasonably likely in either such
case to have a Company Material Adverse Effect or prevent or materially burden
or materially impair the ability of Meritus to consummate the transactions
contemplated by this Agreement. Except as disclosed in the Company Reports
issued prior to the date hereof, there are no outstanding orders, judgments,
injunctions, awards or decrees of any Governmental Entity against Meritus or any
of its Subsidiaries, any of its or their properties, assets or business, or, to
the knowledge of the executive officers of Meritus, any of its or their current
or former directors or officers, as such, that is reasonably likely to have,
individually or in the aggregate, a Company Material Adverse Effect.
(h) EMPLOYEE MATTERS.
(i) Neither Meritus nor its Subsidiaries has any labor
contracts or collective bargaining agreements with respect to any persons
employed by or otherwise performing services for Meritus or its Subsidiaries.
Neither Meritus nor its Subsidiaries has engaged in any unfair labor practice.
As of the date hereof, there is no unfair labor practice complaint pending, or
to the knowledge of the executive officers of Meritus threatened, against
Meritus or any of its Subsidiaries. There is no labor strike, dispute, slowdown,
or stoppage pending or to the knowledge of the executive officers of Meritus
threatened, against Meritus or its Subsidiaries, and neither Meritus nor its
Subsidiaries has experienced any primary work stoppage or labor difficulty
involving its employees during the last three years.
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(ii) Set forth in SECTION 5.1(h) of the Company Disclosure
Letter is a true and complete list of each bonus, deferred compensation,
pension, retirement, profit-sharing, thrift, savings, employee stock ownership,
stock bonus, stock purchase, restricted stock, stock option, employment,
termination, severance, compensation, medical, health, welfare, fringe benefits
or other plan, agreement, policy or arrangement which Meritus or any of its
Subsidiaries maintains, or as to which Meritus or any of its Subsidiaries is or
will be required to make any payment for the benefit of any employee, director,
former employee or former director of Meritus and its Subsidiaries (the
"COMPENSATION AND BENEFIT PLANS"). Meritus has delivered to DSI, and SECTION
5.1(h) of the Company Disclosure Letter lists with respect to each Compensation
and Benefit Plan correct and complete copies, where applicable, of (i) all plan
documents and amendments thereto, trust agreements and amendments thereto and
insurance and annuity contracts and policies; (ii) the current summary plan
description; (iii) the Annual Reports (Form 5500 series) and accompanying
schedules, as filed, for the most recently completed two plan years for which
such reports have been filed; (iv) the financial statements for the most
recently completed two plan years for which statements have been prepared; (v)
the most recent determination letter issued by the Internal Revenue Service (the
"IRS") and the application submitted with respect to such letter; and (vi) all
correspondence with the IRS or Department of Labor concerning any pending
controversy. Any "change of control" or similar provisions contained in any
Compensation and Benefit Plan are specifically identified in SECTION 5.1(H) of
the Company Disclosure Letter.
(iii) All Compensation and Benefit Plans have been
administered in all material respects in accordance with their terms and are in
compliance in all material respects with all applicable laws, including to the
extent possible, the Code and the Employee Retirement Income Security Act of
1974, as amended ("ERISA"). Each Compensation and Benefit Plan that is an
"employee pension benefit plan" within the meaning of Section 3(2) of ERISA (a
"PENSION PLAN") and that is intended to be qualified under Section 401(a) of the
Code has received a favorable determination letter from the IRS, and Meritus is
not aware as of the date hereof of any circumstances likely to result in
revocation of any such favorable determination letter or of any circumstance
indicating that any such plan is not so qualified in operation. As of the date
hereof, there is no pending or, to the knowledge of the executive officers of
Meritus, material threatened litigation, claim or audit by any Person relating
to the Compensation and Benefit Plans. To the knowledge of the executive
officers of Meritus, no prohibited transaction described in Section 406 of ERISA
or Section 4975 of the Code has occurred which would be expected to result in
material liability to Meritus or its Subsidiaries, assuming that, for purposes
of determining materiality, the "taxable period" within the meaning of Section
4975 of the Code with respect to such prohibited transaction had expired as of
the date hereof.
(iv) As of the date hereof, no liability under Subtitle C or D
of Title IV of ERISA has been or is expected to be incurred by Meritus or any
Subsidiary with respect to any ongoing, frozen or terminated "single-employer
plan", within the meaning of Section 4001(a)(15) of ERISA, currently or formerly
maintained by any of them, or the single-employer plan of any entity which is
considered one employer with Meritus under Section 4001 of ERISA or Section 414
of the Code (an "ERISA AFFILIATE"). None of Meritus, its Subsidiaries and their
ERISA Affiliates have contributed, or been obligated to contribute, to a
multiemployer plan under Subtitle E of Title IV of ERISA at any time, and no
liability has been or is expected to be incurred by Meritus or any Subsidiary
with respect to any such plan. None of Meritus, any of its Subsidiaries or any
ERISA Affiliate contributes to or
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maintains a Pension Plan subject to Title IV of ERISA or has contributed to or
maintained any such plan at any time during the six-year period prior to the
date hereof.
(v) All contributions required to be made under the terms of
any Compensation and Benefit Plan as of the date hereof, have been timely made
or have been reflected on the most recent consolidated balance sheet filed or
incorporated by reference in the Company Reports prior to the date hereof.
(vi) Neither Meritus nor its Subsidiaries have any obligations
for retiree health and life benefits under any Compensation and Benefit Plan,
except as required under Part 6 of Title I of ERISA.
(vii) Except as contemplated by this Agreement or disclosed in
SECTION 5.1(H) of the Company Disclosure Letter, the consummation of the Merger
and the other transactions contemplated by this Agreement will not (x) entitle
any employees of Meritus or its Subsidiaries to severance pay, (y) accelerate
the time of payment or vesting or trigger any payment of compensation or
benefits under, increase the amount payable or trigger any other obligation
pursuant to, any of the Compensation and Benefit Plans or (z) result in any
breach or violation of, or a default under, any of the Compensation and Benefit
Plans.
(i) COMPLIANCE WITH LAWS; PERMITS. Except as set forth in the
Company Reports issued prior to the date hereof and in SECTION 5.1(i) of the
Company Disclosure Letter, the businesses of each of Meritus and its
Subsidiaries are being conducted in compliance with applicable federal, state,
local and foreign laws (collectively, "LAWS"). Meritus and its Subsidiaries each
has all permits, licenses, franchises, variances, exemptions, orders and other
governmental authorizations, consents and approvals necessary to own or lease
and operate their respective properties and conduct its business as presently
conducted.
(j) TAKEOVER STATUTES. No "fair price," "moratorium," "control
share acquisition" or other similar anti-takeover statute or regulation (each a
"TAKEOVER STATUTE") or any applicable anti-takeover provision in Meritus's
certificate of incorporation and by-laws or any shareholder rights agreement is,
or at the Effective Time will be, applicable to Meritus, the Shares, the Merger
or the other transactions contemplated by this Agreement. Assuming the accuracy
of DSI's representations and warranties contained in Section 5.2(l), the Board
of Directors of Meritus has taken all action so that DSI will not be prohibited
from entering into a "business combination" with Meritus as an "interested
stockholder" as a result of the execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby.
(k) ENVIRONMENTAL MATTERS. Except as disclosed in the Company
Reports filed prior to the date hereof and SECTION 5.1(k) of the Company
Disclosure Letter; (i) to the knowledge of the executive officers of Meritus,
Meritus and its Subsidiaries are in compliance with all applicable Environmental
Laws; (ii) Meritus and its Subsidiaries have not received any written notices
from any Governmental Entity or any other person or entity alleging the
violation of any applicable Environmental Law (as defined below); (iii) Meritus
and its Subsidiaries are not the subject of any court order, administrative
order or decree arising under any Environmental Law; (iv) to the knowledge of
the executive officers of Meritus, there has not been a release of Hazardous
Substances (as defined below) on any of the properties owned or operated by
Meritus or any of its Subsidiaries, except in compliance with
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all Environmental Laws; and (v) to the knowledge of the executive officers of
Meritus neither Meritus nor any Subsidiary has generated, stored, used, emitted,
discharged or disposed of any Hazardous Substances in violation of or giving
rise to liability under applicable Environmental Laws.
As used herein, "ENVIRONMENTAL LAW" means any federal, state or local law,
statute, ordinance, rule, regulation, code, license, permit, order, decree or
injunction relating to the protection of the environment (including air, water,
soil and natural resources), or regulating or imposing standards of care with
respect to the use, storage, handling, release or disposal of any Hazardous
Substance, including petroleum.
As used herein, "HAZARDOUS SUBSTANCE" means any substance listed, defined,
designated, regulated or classified as hazardous, toxic or radioactive under any
applicable Environmental Law, including petroleum and petroleum products.
(l) TAX MATTERS. As of the date hereof, neither Meritus nor any of
its Affiliates (as defined below) has taken or agreed to take any action, nor do
the executive officers of Meritus have any knowledge of any fact or
circumstance, that would prevent the Merger and the other transactions
contemplated by this Agreement from qualifying as a "reorganization" within the
meaning of Section 368(a) of the Code. An "Affiliate" of a party is a Person
that directly, or indirectly through one or more intermediaries, controls or is
controlled by or is under common control with it.
(m) TAXES. Meritus and each of its Subsidiaries (i) have prepared
in good faith and duly and timely filed (taking into account any extension of
time within which to file) all Tax Returns (as defined below) required to be
filed by any of them; (ii) have paid all Taxes (as defined below) that are shown
as due on such filed Tax Returns except for Taxes provided for in a reserve
which is adequate for the payment of such Taxes and is reflected in the
financial statements included in the Company Reports or the books and records of
Meritus (including provisions for 1998 fiscal year Taxes); and (iii) as of the
date hereof, have not waived any statute of limitations with respect to Taxes or
agreed to any extension of time with respect to a Tax assessment or deficiency.
There are not, any unresolved questions or claims concerning Meritus's or any of
its Subsidiaries' Tax liability that are reasonably likely to have a Company
Material Adverse Effect. Except as disclosed in Section 5.1(m) of the Company
Disclosure Letter, as of the date hereof, there are no pending or, to the
knowledge of the executive officers of Meritus, threatened audits, examinations,
investigations or other proceedings in respect of Taxes or Tax matters. Meritus
has made available to DSI true and correct copies of the United States federal
income Tax Returns filed by Meritus and its Subsidiaries for each of the fiscal
years ended 1996, 1995, and 1994. As a result of the transactions contemplated
by this Agreement, none of Meritus, DSI or their Subsidiaries will be obligated
to make a payment that would be an "excess parachute payment" to an individual
that is currently a "disqualified individual" with respect to Meritus as those
terms are defined in Section 280G of the Code, without regard to whether such
payment is reasonable compensation for personal services performed or to be
performed in the future. To the knowledge of the executive officers of Meritus,
the representations set forth in the Company Tax Certificate (as defined in
SECTION 7.2 (D)) attached to the Company Disclosure Letter are true and correct
in all material respects.
As used in this Agreement, (i) the term "TAX" (including, with correlative
meaning, the terms "TAXES", and "TAXABLE") includes all federal, state, local
and foreign income, profits,
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franchise, gross receipts, environmental, customs duty, capital stock,
severances, stamp, payroll, sales, employment, unemployment, disability, use,
property, withholding, excise, production, value added, occupancy and other
taxes, duties or assessments of any nature whatsoever, together with all
interest, penalties and additions imposed with respect to such amounts and any
interest in respect of such penalties and additions, and (ii) the term "TAX
RETURN" includes all returns and reports (including elections, declarations,
disclosures, schedules, estimates and information returns) required to be
supplied to a Tax authority relating to Taxes.
(n) INTELLECTUAL PROPERTY.
(i) SECTION 5.1(n) of the Company Disclosure Letter lists all
Intellectual Property Rights (as defined below) of Meritus and its Subsidiaries
consisting of: (a) all United States and foreign patents, patent applications,
continuations, continuations-in- part, divisions, reissues, and re-examinations;
(b) all trademarks registered with the United States Patent and Trademark Office
and its foreign and state equivalents, and all trademark applications pending
before the United States Patent and Trademark Office and its foreign and state
equivalents; and (c) all registered United States and foreign copyrights and
pending applications to register the same. Except as specifically identified in
SECTION 5.1(n) of the Company Disclosure Letter, and to the best knowledge of
the Executive Officers of Meritus, Meritus and/or each of its Subsidiaries: (a)
owns all right, title and interest to, or has the right to use, as the case may
be all Intellectual Property Rights (as defined below) used in the business of
Meritus and its Subsidiaries as presently conducted; (b) all registrations for
Intellectual Property Rights owned by Meritus or any Subsidiary are valid and in
force, except for any invalidity or unenforceability that, individually or in
the aggregate, is not reasonably likely to have a Company Material Adverse
Effect; (c) all applications for registrations of Intellectual Property Rights
filed by Meritus or any Subsidiary are pending and in good standing, all without
challenge of any kind; (d) the Intellectual Property Rights owned by Meritus or
any of its Subsidiaries are valid and enforceable; (e) Meritus or its
Subsidiaries have the sole and exclusive right to bring actions for
infringement, misappropriation or unauthorized use of Owned Software (as defined
below) and the Intellectual Property Rights owned by Meritus and its
Subsidiaries.
(ii) Except as specifically identified in SECTION 5.1(n) of
the Company Disclosure Letter:
(A) Neither Meritus nor any of its Subsidiaries is, nor
will Meritus or any of its Subsidiaries be, as a result of the execution and
delivery of this Agreement or the performance of its obligations hereunder, in
violation of any license, sublicense, or other agreement as to which Meritus or
any of its Subsidiaries is a party and pursuant to which Meritus or any of its
Subsidiaries is authorized to use any third-party Intellectual Property Rights
or computer software programs or applications;
(B) The executive officers of Meritus do not know of any
infringement, misappropriation, or violation of any Intellectual Property Rights
of any other person that exists and results in any way from the operations of
the respective businesses of Meritus or its Subsidiaries. No claim of any
infringement, misappropriation or violation of any Intellectual Property Rights
of any other person is pending or has been asserted in respect of the operations
of the respective businesses of Meritus or its Subsidiaries. Neither Meritus nor
any of its Subsidiaries has had notice of, nor do the executive officers of
Meritus have
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knowledge of any valid grounds for any bona fide claim against Meritus or its
Subsidiaries that its Intellectual Property Rights, operations, activities,
products, software, equipment, machinery or processes infringe, misappropriate
or violate any Intellectual Property Rights of any other person;
(C) Meritus or its Subsidiaries has maintained and
protected the software that each owns (the "Owned Software") including, without
limitation, all source code and system specifications associated with such
software, with such measures as are reasonably necessary to protect the
proprietary, trade secret or confidential information contained therein; and
(ii) the executive officers of Meritus do not know of any infringement,
misappropriation or violation of any Intellectual Property Rights of any other
person with respect to the Owned Software;
(D) All employees, agents, consultants, or contractors
who have contributed to or participated in the creation or development of
inventions, discoveries, trade secrets, copyrightable works, or ideas on behalf
of Meritus, any of its Subsidiaries or any predecessor in interest thereto, if
and only if necessary to vest ownership rights in such material with Meritus
and/or the Subsidiaries, either: (a) is a party to a "work-for-hire" agreement
under which Meritus, a Subsidiary (or such predecessor in interest, as
applicable), is deemed to be the original owner/author of all property rights
therein; or (b) has executed an assignment or an agreement to assign in favor of
Meritus, a Subsidiary (or such predecessor in interest, as applicable), all
right, title and interest in such inventions, discoveries, trade secrets,
copyrightable works, or ideas.
(iii) As used herein, the term "INTELLECTUAL PROPERTY RIGHTS"
shall mean: (A) all United States and foreign patents, patent applications,
continuations, continuations-in-part, divisions, reissues, patent disclosures,
extensions, re-examinations, inventions (whether or not patentable) or
improvements thereto; (B) all United States, state, foreign and common law
trademarks, service marks, domain names, logos, trade dress and trade names
(including all assumed or fictitious names under which Meritus and each
Subsidiary is conducting its-business or has within the previous five years
conducted its business), whether registered or unregistered, and pending
applications to register the foregoing; (C) all United States and foreign
copyrights, whether registered or unregistered and pending applications to
register the same; and (D) all confidential ideas, trade secrets, know-how,
concepts, methods, processes, formulae, reports, data, customer lists, mailing
lists, business plans, or other proprietary information.
(o) BROKERS AND FINDERS. Neither Meritus nor any of its officers,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders' fees in connection
with the Merger or the other transactions contemplated by this Agreement.
(p) EVENTS SUBSEQUENT TO FINANCIAL STATEMENTS. Except as set forth
in SECTION 5.1(p) of the Company Disclosure Letter, since January 1, 1998, there
has not been:
(i) Any material adverse change in the consolidated financial
condition, results of operations, business or prospective sales (meaning the
aggregate current, open purchase orders) of Meritus or any of its Subsidiaries;
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(ii) Any sale, lease conveyance, license or assignment of any
material assets, tangible or intangible, of Meritus or any of its Subsidiaries,
other than sales of inventory in the ordinary course of business;
(iii) Any damage, destruction or property loss in excess of
Twenty- Five Thousand Dollars ($25,000.00), individually or in the aggregate,
affecting adversely the properties or business of Meritus or any of its
Subsidiaries;
(iv) Any declaration or setting aside or payment of any
dividend or distribution with respect to the shares of capital stock of Meritus
or any of its Subsidiaries or any redemption, purchase or other acquisition of
any such shares other than consummating the transactions contemplated and
provided for in this Agreement;
(v) Any mortgage or pledge of, or subjection to any lien,
charge, security interest or encumbrance of any kind on any of the assets,
tangible or intangible, of Meritus or any of its Subsidiaries (other than liens
arising by operation of law which secure obligations which are not yet due and
payable), nor any incurrence of indebtedness or liability or assumption of
obligations by Meritus or any of its Subsidiaries other than those incurred in
the ordinary course of business of Meritus and its Subsidiaries, all as
specified in SECTION 5.1(P) of the Company Disclosure Letter (which disclosure
includes any and all sums owed by Meritus or its Subsidiaries to Li & Fung, Ltd.
and/or its Affiliates);
(vi) Any cancellation or satisfaction by Meritus or any of its
Subsidiaries of any debt or claim or advance, except for adjustments made in the
ordinary course of business, which in the aggregate, are not material other than
consummating the transactions contemplated or provided for in this Agreement;
(vii) Any waiver or release by Meritus or any of its
Subsidiaries of any right of any material value in excess of Fifty Thousand
Dollars ($50,000.00);
(viii) Any sale, assignment, transfer or grant by Meritus or
any of its Subsidiaries of any material rights under any concessions, leases,
licenses, agreements, patents, inventions, trademarks, trade name or copyrights;
(ix) Any arrangement, agreement or undertaking entered into by
Meritus or its Subsidiaries not terminable on thirty (30) days or less notice
without cost or liability (including, without limitation, any payment of or
promise to pay any bonus or special compensation or any increase in
compensation) with employees or any increase in compensation or benefits to
officers or directors of Meritus or any of its Subsidiaries, other than in the
ordinary course of business or consummating the transactions contemplated or
provided for in this Agreement;
(x) Any change made or authorized in the articles of
incorporation or other charter documents or bylaws (or comparable governing
instruments) of Meritus or any of its Subsidiaries other than those contemplated
or provided for in this Agreement;
(xi) Any loan to or other transaction with any officer,
director or Shareholder of Meritus or any of its Subsidiaries giving rise to any
claim or right of Meritus or any of its Subsidiaries against any such person or
of such person against Meritus or any of
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its Subsidiaries other than normal recurring travel and expense advances and
expense accounts made in the ordinary course of business;
(xii) Any acceleration, termination, modification or
cancellation or threat thereof by any party of any contract, lease or other
agreement or instrument, that individually or in the aggregate involves in
excess of Fifty Thousand Dollars ($50,000.00) to which Meritus or any of its
Subsidiaries is a party or by which it is bound;
(xiii) Any pledge or gift of any charitable or other capital
contribution outside the ordinary course of business;
(xiv) Any other transaction or commitment in excess of Fifty
Thousand Dollars ($50,000.00) or related transactions or commitments, which has
had or is reasonably likely to have a Company Material Adverse Effect on the
properties or business of Meritus or any of its Subsidiaries, other than those
contemplated or provided for in this Agreement;
(xv) Any termination, modification or cancellation of any
booked open purchase orders by any customer of Meritus in excess of Seventy-Five
Thousand Dollars ($75,000.00) for any individual order or One Hundred Thousand
Dollars ($100,000.00) in the aggregate by any single customer;
(q) DISCLOSURE. Meritus has made available to DSI and its
officers, attorneys, accountants, and representatives true and correct copies of
all material agreements, documents, and other items listed in the Company
Disclosure Letter and all books and records of Meritus and its Subsidiaries, and
neither this Agreement, the Company Disclosure Letter, nor any information,
agreements, or documents delivered to or made available to DSI or its officers,
attorneys, accountants, or representatives pursuant to this Agreement, contain
any untrue statements of a material fact or omits to sate any material fact
necessary to make the statements made herein or therein, as the case may be, not
misleading;
(r) REAL PROPERTY. SECTION 5.1(r) of the Company Disclosure Letter
contains a complete and accurate list and brief description of all real property
owned or leased by Meritus or its Subsidiaries. With respect to each lease so
set forth: (i) the lease has been validly executed and delivered by Meritus or
its Subsidiaries, as applicable, and, to the knowledge of Meritus by the other
party or parties thereto, and is in full force and effect; (ii) neither Meritus
nor its Subsidiary, as applicable, nor any other party to the lease, is in
material breach or default, and no event has occurred on the part of Meritus or
its Subsidiaries, as applicable, or, to the knowledge of Meritus on the part of
any other party, which, with notice or lapse of time, would constitute such a
breach or default or permit termination, modification or acceleration under the
lease; (iii) the lease will continue to be binding in accordance with its terms
following the Merger; (iv) neither Meritus nor its Subsidiaries has repudiated
and no other party to the lease has repudiated, any provision thereof; (v) there
are no written notices of disputes, oral agreements or delayed payment programs
in effect as to the lease; and (vi) all facilities leased thereunder have been
approved by all necessary Government Entities, and are in good condition,
working order and repair, ordinary wear and tear excepted;
(s) TANGIBLE PROPERTY. Except as set forth in SECTION 5.1(s) of
the Company Disclosure Letter, each of Meritus and its Subsidiaries has good and
legal title to,
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or a valid leasehold interest in, each item of tangible property, whether real,
personal or mixed, reflected on its books and records as owned or used by it,
subject to no encumbrances, loans, security interests, mortgages or pledges
except those which arise by matter of law or in the ordinary course of business,
and except for those assets disposed of in the ordinary course of business of
Meritus and its Subsidiaries prior to the Effective Time.
(t) CONTRACTS. SECTION 5.1(t) of the Company Disclosure Letter
lists the following contracts and written arrangements under which Meritus or
any other person has continuing obligations or benefits, true and complete
copies of which have been delivered to DSI, to which Meritus or any of the
Subsidiaries is a party:
(i) Any contract for the lease of personal property from or to
third parties providing for lease payments in excess of Ten Thousand Dollars
($10,000.00) per annum;
(ii) Any contract for the purchase or sale of raw materials,
commodities, supplies, products manufactured by Meritus or any of its
Subsidiaries or other personal property or for the furnishing or receipt of
goods or services which contract calls for performance over a period of more
than one year and/or which involves more than the sum of Twenty Thousand Dollars
($20,000.00);
(iii) Any partnership or joint venture agreement;
(iv) Any agreement or instrument under which Meritus or any of
its Subsidiaries is or may become indebted for borrowed money in an amount
individually or in the aggregate in excess of Ten Thousand Dollars ($10,000.00);
and
(v) Any employment agreement and any non-competition agreement.
Except as otherwise described in SECTION 5.1(t) of the Company
Disclosure Letter, all material contracts and arrangements listed in SECTION
5.1(t) of the Company Disclosure Letter are valid and binding agreements and are
in full force and effect as to Meritus and its Subsidiaries. Neither Meritus nor
any of its Subsidiaries is, and no other party is in breach or default, and no
event has occurred on the part of Meritus or any of its Subsidiaries, or, to
Meritus's knowledge, on the part of any other party to any such contract or
arrangement, which with notice or lapse of time would constitute a breach or
default or permit termination under any such contract or arrangement. Except as
set forth in SECTION 5.1(t) of the Company Disclosure Letter, none of such
contracts or arrangements will be terminated or modified by the execution and
delivery of this Agreement, or the consummation of the transactions contemplated
hereby or thereby, nor will any of such actions result in or constitute a breach
or default under any such contracts or arrangements. Neither Meritus nor any of
its Subsidiaries is a party to any verbal contract or arrangement which, if
reduced to written form, would be required to be listed in SECTION 5.1(t) of the
Company Disclosure Letter under the terms of this SECTION 5.1(t) other than with
its representatives and vendors which are set out in SECTION 5.1(t) of the
Company Disclosure Letter.
(u) SUPPLIERS AND CUSTOMERS. SECTION 5.1(u) of the Company
Disclosure Letter is a true and complete list of all suppliers of Meritus and
each of the Subsidiaries to whom Meritus or any of its Subsidiaries made
payments during the fiscal year ended December 31, 1998, in excess of five
percent (5%) of the Company's and the Subsidiaries'
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consolidated cost of goods sold as reflected in the 1998, Financial Statements,
and all customers of Meritus and each of the Subsidiaries that paid the Company
or a Subsidiary, during the fiscal year ended December 31, 1998 more than five
percent (5%) of the consolidated revenues of Meritus and the Subsidiaries as
reflected in the 1998 Financial Statements. Since January 1, 1998, and until ten
(10) days prior to the Merger, no such supplier of Meritus or any of the
Subsidiaries has, or has indicated that it will, stop, or decrease the rate of,
supplying materials, products or services to Meritus or the Subsidiary, as the
case may be, and no such customer of Meritus or the Subsidiary has decreased or
caused business with Meritus or the Subsidiary, as the case may be, or has
indicated that it will decrease or cease doing business with Meritus or the
Subsidiary;
(v) ACCOUNTS RECEIVABLE. As of the date of this Agreement, there
are and as of the Closing Date, there will be, properly reflected on their
respective books and records, all notes receivable and accounts receivable of
Meritus and the Subsidiaries, each of which are and will be valid receivables
subject to no known setoffs or counterclaims, except as set forth in SECTION
5.1(v) of the Company Disclosure Letter, all of which are and will be consistent
with past practice, and, to the best knowledge of all Executive Officers of
Meritus, except as set forth in Section 5.1(v) of the Company Disclosure Letter,
collectable in the ordinary course of business for Meritus. SECTION 5.1(v) of
the Company Disclosure Letter contains a complete list of all notes receivable
and accounts receivable of Meritus and its Subsidiaries as of August 31, 1999;
(w) POWERS OF ATTORNEY. Except as set forth in SECTION 5.1(w) of
the Company Disclosure Letter, there are no outstanding powers of attorney or
similar instruments executed by Meritus or any of the Subsidiaries;
(x) CONDITIONS OF PROPERTY. Each building, fixture, machine and
piece of equipment (having a net book value of Five Thousand Dollars ($5,000.00)
or more), owned or used by Meritus or any of its Subsidiaries is listed in
SECTION 5.1(x) of the Company Disclosure Letter and is in good operating
condition and repair (ordinary wear and tear excepted), and is in good
compliance with all zoning, building and fire codes, except for such instances
of noncompliance that would not have or be reasonably likely to have a Material
Adverse Effect. Meritus or its Subsidiaries owns and has good and legal title
to, or leases under leases which are valid and under which Meritus or its
Subsidiaries are not currently in default, all buildings, machinery, equipment
and other tangible assets used in the conduct of Meritus's or such Subsidiary's
business as presently conducted, reflected in the most recent Company Reports,
and, except as set forth in SECTION 5.1(x) of the Company Disclosure Letter, are
free and clear of all liens, claims and encumbrances;
(y) INSURANCE. Meritus and its Subsidiaries are insured under the
policies listed in SECTION 5.1(y) of the Company Disclosure Letter. All such
policies have been in full force and effect since December 31, 1998, are in full
force and effect as of the date hereof, and will remain so through the Closing
Date;
(z) GUARANTEES. Except as set forth in SECTION 5.1(z) of the
Company Disclosure Letter, neither Meritus nor any of its Subsidiaries is a
guarantor or otherwise liable for any indebtedness of any other person, firm or
corporation;
(aa)CERTAIN BUSINESS RELATIONSHIPS. Except as set forth in SECTION
5.1(aa) of the Company Disclosure Letter, none of the present or former
directors, officers or
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employees of Meritus or any of its Subsidiaries, or any present or former
Shareholders, owns, directly or indirectly, any interest in any business,
corporation or other entity (other than investments in publically held
companies) which, on the date hereof or within the past twelve (12) months, has
been involved in any manner in any material business arrangement or relationship
with Meritus or any of its Subsidiaries, and none of the foregoing persons owns
any property or rights, tangible or intangible, which are used in the business
of Meritus or any of its Subsidiaries;
(bb) INVENTORY. The inventory of Meritus and its Subsidiaries (the
"Inventory") as of the date of this Agreement and as of the Closing Date does
and will consist of goods which are merchantable and fit for the purposes for
which they were procured, and, the allowance for slow-moving, obsolete, damaged
or defective Inventory reflected in the Financial Statements as of December 31,
1998 is adequate. SECTION 5.1(bb) of the Company Disclosure Letter contains a
complete listing of the Inventory as of August 31, 1999, and Meritus will
deliver to DSI an updated list of the Inventory as of the date that is three (3)
business days prior to the Closing Date;
(cc) QUESTIONABLE PAYMENTS. Neither Meritus nor any of its
Subsidiaries has directly or indirectly (i) used corporate funds for unlawful
contributions, gifts, entertainment, or for other unlawful expenses relating to
political activity; (ii) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties or
campaigns from corporate funds; (iii) violated or is in violation of any
provision or the Foreign Corrupt Practices Act of 1977 applicable to the conduct
of their business; or (iv) established or maintained any unlawful or unrecorded
fund of corporate monies or other assets;
(dd) LI & FUNG DEBT. The aged debt owed to Li & Fung, Ltd. as of
July 31, 1999 is set forth in the statement issued by Li & Fung and attached as
SECTION 5.1 (dd) of the Company Disclosure Letter, which sum is Five Million
Four Hundred Eighty Six Thousand Dollars ($5,486,000) (the "Old Li & Fung
Debt"). As of the Effective Time, the total of current debt owed to Li & Fung,
Ltd., exclusive of the Old Li & Fung Debt, shall not exceed Nine Hundred
Thousand Dollars ($900,000.00) (the "New Li & Fung Debt"). The current amount of
New Li and Fung Debt owed to Li & Fung, Ltd. as of the date of this Agreement,
including all amounts owed to factories, is set forth in the statement attached
as SECTION 5.1 (DD) of the Company Disclosure Letter;
(ee) TOYS R US DEBT. As of the date of this Agreement the total
debt owed by Meritus and its Subsidiaries to Toys R Us is no more than Four
Hundred Ninety Four Thousand Dollars ($494,000.00). As of the Effective Time the
total debt owed by Meritus and its Subsidiaries to Toys R Us shall not exceed
Four Hundred Ninety-Four Thousand Dollars ($494,000.00);
(ff) CREDITS. All sums payable to Meritus by suppliers,
manufacturers and factories doing business with Meritus and its Subsidiaries as
of the date of this Agreement, as well as the date each such amount is due and
payable to Meritus, is listed in SECTION 5.1(ff) of the Company Disclosure
Letter (the "Credits"). Each of the Credits is or will be collectable by
Meritus, its successors or assigns, in the ordinary course of business, subject
to no known setoffs or counterclaims. As of the Effective Time, the Credits
payable to Meritus shall be no less than $350,000.00, and all such sums shall be
fully credited to DSI as of the Effective Time in a form and manner acceptable
to DSI; and
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(gg)WORKING CAPITAL REPORTS. The Settlement Statement and the
Monthly Reports, defined in Section 6.20, shall not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements made therein not misleading. Each of
the Settlement Statement and the Monthly Reports will fairly present, in all
material respects, the financial position of Meritus and its Subsidiaries as of
its date. DSI acknowledges that the Monthly Reports will not be prepared in
strict accordance with GAAP.
5.2 REPRESENTATIONS AND WARRANTIES OF DSI. Except as set forth in
the corresponding sections or subsections of the disclosure letter delivered to
Meritus by DSI on or prior to entering into this Agreement (the "DSI DISCLOSURE
LETTER"), DSI represents and warrants to each of Meritus and Reiling that:
(a) ORGANIZATION, GOOD STANDING AND QUALIFICATION. DSI is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of organization and has all requisite corporate power and
authority to own and operate its properties and assets and to carry on its
business as presently conducted and is qualified to do business and is in good
standing as a foreign corporation in each jurisdiction where the ownership or
operation of its properties or conduct of its business requires such
qualification. DSI has made available to Meritus a complete and correct copy of
DSI's certificate of incor poration and by-laws, each as amended to the date
hereof. DSI's certificate of incorporation and by-laws so made available are in
full force and effect.
(b) CORPORATE AUTHORITY.
(i) The board of directors of DSI has approved this Agreement
and the Merger and the other transactions contemplated hereby. The execution,
delivery and performance of this Agreement and the ancillary agreements to which
DSI is a party by DSI and the consummation by DSI of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
corporate action on the part of DSI. This Agreement and the ancillary agreements
to which DSI is a party have been duly executed and delivered by DSI and
(assuming the valid authorization, execution and delivery of such agreements by
the other parties thereto) constitute the valid and binding agreements of DSI
enforceable against DSI in accordance with their terms.
(ii) Prior to the Effective Time, DSI will have taken all
necessary action to permit it to deliver the number of shares of DSI Common
Stock required to be delivered pursuant hereto. The DSI Common Stock, when
delivered, will be validly issued, fully paid and nonassessable, and no
stockholder of DSI will have any preemptive right of subscription or purchase in
respect thereof.
(c) GOVERNMENTAL FILINGS; NO VIOLATIONS.
(i) Other than any applicable filings and/or notices (A)
pursuant to this Agreement, (B) the Securities Act and the Exchange Act, (C) to
comply with state securities or "blue sky" laws, and (D) required to be made
with the NASDAQ, no notices, reports or other filings are required to be made by
DSI with, nor are any consents, registra tions, approvals, permits or
authorizations required to be obtained by DSI from, any Governmental Entity, in
connection with the execution and delivery of this Agreement by DSI and the
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consummation by DSI of the Merger and the other transactions contemplated hereby
and thereby.
(ii) The execution, delivery and performance of this Agreement
and the Executive Agreements to which it is a party by DSI do not, and the
consummation by DSI of the Merger and the other transactions contemplated hereby
and thereby will not, constitute or result in (A) a breach or violation of, or a
default under, the certificate or by-laws of DSI or the comparable governing
instruments of any of its Subsidiaries, (B) a breach or violation of, or a
default under, or an acceleration of any obligations or the creation of a lien,
pledge, security interest or other encumbrance on the assets of DSI (with or
without notice, lapse of time or both) pursuant to, any Debt Contracts or Other
Contracts binding upon DSI or any Law or governmental or non-governmental permit
or license to which DSI is subject or any judgment, order or decree to which DSI
or any of its properties is subject or (C) any change in the rights or
obligations of any party under any such Debt Contracts or Other Contracts,
except, in the case of clause (B) or (C) above, for any breach, violation,
default, acceleration, creation or change that, individually or in the
aggregate, is not reasonably likely to have a DSI Material Adverse Effect or
prevent, materially delay or materially impair the ability of DSI to consummate
the transactions contemplated hereby and thereby.
(d) LITIGATION AND LIABILITIES. Except as disclosed in SECTION
5.2(D) of the DSI Disclosure Letter, there are no (i) civil, criminal or
administrative actions, suits, claims, hearings, investigations or proceedings
pending or, to the knowledge of the executive officers of DSI, threatened
against DSI or any current or former director or officer of DSI (in their
capacity as such); or (ii) obligations or liabilities, whether or not accrued,
contingent or otherwise, including those relating to matters involving any
Environmental Law, that, in the case of either clause (i) or (ii), individually
or in the aggregate, are reasonably likely, in either such case, to have a
material adverse effect or prevent or materially burden or materially impair the
ability of DSI to consummate the transactions contemplated by this Agreement.
Except as disclosed in SECTION 5.2(D) of the DSI Disclosure Letter, there are no
outstanding orders, judgments, injunctions, awards or decrees of any
Governmental Entity against DSI, any of its properties, assets or business, or,
to the knowledge of the executive officers of DSI, any of its current or former
directors or officers, as such.
(e) ENVIRONMENTAL MATTERS. Except as disclosed in SECTION 5.2(E)
of the DSI Disclosure Letter: (i) to the knowledge of the executive officers of
DSI, DSI and each of its Subsidiaries is in compliance with all applicable
Environmental Laws; (ii) DSI and each of its Subsidiaries have not received any
written notice from any Governmental Entity or any third party indicating that
DSI is in violation of any Environmental Law; (iii) DSI and each of its
Subsidiaries is not subject to any court order, administrative order or decree
arising under any Environmental Law; (iv) to the knowledge of the executive
officers of DSI, there has not been a release of Hazardous Substances on any of
the properties owned or operated by DSI or any of its subsidiaries except in
compliance with all Environmental Laws; and (v) to the knowledge of the
executive officers of DSI, neither DSI nor any Subsidiary has generated, stored,
used, emitted, discharged or disposed of any Hazardous Substances in violation
of or giving rise to liability under applicable Environmental Laws.
(f) TAX MATTERS. As of the date hereof, DSI has not taken or
agreed to take any action, nor do the executive officers of DSI have any
knowledge of any fact or circumstance, that would prevent the Merger and the
other transactions contemplated by this
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Agreement from qualifying as a "reorganization" within the meaning of Section
368(a) of the Code.
(g) BROKERS AND FINDERS. Neither DSI nor any of its offices,
directors or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders' fees in connection
with the Merger or the other transactions contemplated by this Agreement.
(h) DSI SHARES. The DSI Shares to be issued and delivered to the
Principal Stockholders in accordance with this Agreement, have been duly
authorized by all requisite corporate action of DSI and, when issued and so
delivered pursuant to the terms and conditions of this Agreement, will be
validly issued and outstanding, fully paid and non-assessable.
(i) RESTRUCTURINGS/CAPITAL EVENTS. DSI has not approved nor
submitted to its shareholders for approval any proposal, agreement, undertaking
or resolution, the effect of which would result in a reclassification, stock
split (including a reverse split), dividend or distribution, recapitalization,
merger (other than the Merger), subdivision or exchange affecting the DSI Common
Stock.
(j) DISCLOSURE OF INFORMATION. DSI has been given the opportunity
to ask questions of, and to receive answers from persons acting on behalf of
Meritus concerning the terms and conditions of the Merger and the transactions
contemplated thereby, and the business, properties, prospects and financial
conditions of Meritus and its Subsidiaries.
ARTICLE VI
COVENANTS
6.1 INTERIM OPERATIONS. Meritus covenants and agrees as to itself and each
of its Subsidiaries that, after the date hereof and prior to the Effective Time
(unless agreed to in this Agreement or as DSI may otherwise approve in advance
and in writing):
(a) the business of it and its Subsidiaries shall be conducted in
the ordinary and usual course and, to the extent consistent therewith, it and
its Subsidiaries shall use their best efforts to preserve all business
organization intact and maintain all existing relations and goodwill with
customers, suppliers, distributors, marketing representatives, creditors,
lessors, employees and business associates;
(b) neither it nor any of its Subsidiaries shall (i) issue, sell,
pledge, dispose of or encumber any capital stock owned by it or any of its
Subsidiaries in any of its Subsidiaries or other Affiliates; (ii) amend its
certificate or articles of incorporation or by-laws; (iii) split, combine or
reclassify its outstanding shares of capital stock; (iv) declare, set aside or
pay any dividend payable in cash, stock or property in respect of any capital
stock other than dividends from its direct or indirect wholly-owned
Subsidiaries; or (v) repurchase, redeem or otherwise acquire, except in
connection with the payment of the exercise price of any option outstanding on
the date hereof, or permit any of its Subsidiaries to purchase or otherwise
acquire, any shares of its capital stock or any securities convertible into or
exchangeable or exercisable for any shares of its capital stock;
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(c) neither it nor any of its Subsidiaries shall (i) issue, sell,
pledge, dispose of or encumber any shares of, or securities convertible into or
exchangeable or exercisable for, or options, warrants, calls, commitments or
rights of any kind to acquire, any shares of its capital stock of any class or
any other property or assets; (ii) purchase, transfer, lease, sell, mortgage,
pledge, dispose of or encumber any real property, or effect any improvements or
expansions thereon; (iii) other than the sale of inventory in the ordinary and
usual course of business, purchase, transfer, lease, license, guarantee, sell,
mortgage, pledge, dispose of or encumber any property or assets (including
capital stock of any of its Subsidiaries) or incur or modify any indebtedness or
other liability; (iv) make or authorize or commit for any capital expenditures
other than in the ordinary and usual course of business (as approved in advance
by an authorized representative of DSI); or (v) by any means, make any
acquisition of, or investment in any business, through acquisition of assets or
stock of any other Person or entity;
(d) except as may be required by applicable law, and except as
provided in Section 6.9 below, neither it nor any of its Subsidiaries shall
terminate, establish, adopt, enter into, make any new grants or awards under,
amend or otherwise modify, any Compensation and Benefit Plans or increase the
salary, wage, bonus, severance, incentive or other compensation of any
employees;
(e) neither it nor any of its Subsidiaries shall settle or
compromise any claims or litigation or enter into any Debt Contracts or Other
Contracts or modify, amend or terminate any of its Debt Contracts or Other
Contracts, or waive, release or assign any material rights or claims;
(f) neither it nor any of its Subsidiaries shall make any Tax
election or permit any insurance policy naming it as a beneficiary or
loss-payable payee to be canceled or terminated;
(g) neither it nor any of its Subsidiaries shall take any action,
other than reasonable and usual actions in the ordinary and usual course of
business consistent with GAAP and with past practice, with respect to accounting
policies or procedures;
(h) neither it nor any of its Subsidiaries shall sell, transfer,
assign or abandon any patents or trademarks which are owned or controlled
directly or indirectly by Meritus or any of its Subsidiaries;
(i) neither it nor any of its Subsidiaries shall license or
otherwise encumber any patents or trademarks which are owned or controlled
directly or indirectly by Meritus or any of its Subsidiaries;
(j) neither it nor any of its Subsidiaries shall make any
modification to employee or customer incentives or trade policies which would
reasonably be expected to cause the Company's distributors or end-user customers
to increase purchases above those levels normally required to meet their
respective needs or cause an increase or decrease in the Company's inventories
or Working Capital;
(k) it and its Subsidiaries shall use their best efforts pay and
discharge all debts, charges, taxes, assessments, contributions and governmental
charges when and as due;
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(l) it and its Subsidiaries 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 government authority
applicable to them;
(m) neither it not its Subsidiaries shall make any expenditure or
incur any obligation, without the prior written consent of DSI, which does not
arise directly from the proper business expenses of it or its Subsidiaries;
(n) it shall promptly notify DSI in writing of the details of any
loss, damage, investigation, action, suit, proceeding, or claim relating to the
business of it or its Subsidiaries or which will or might reasonably be expected
to have an economic impact in excess of $10,000.00 on the business, properties,
assets, goodwill or condition, financial or otherwise, of Meritus or its
Subsidiaries;
(o) it and its Subsidiaries shall keep proper books and records in
which true and complete entries shall be made of all dealings or transactions of
it and its Subsidiaries and Meritus shall furnish to DSI: (i) within fifteen
(15) calendar days after the end of each calendar month, monthly unaudited
financial statements (including balance sheets, statements of income and loss
and statements of cash flow), with footnote disclosure information reasonably
acceptable to DSI, and (ii) prior to the Effective Time, draft unaudited
financial statements for the calender month preceding the Effective Time;
(p) neither it not its Subsidiaries shall enter into any Debt
Contracts or Other Contracts other than in the ordinary course of business
consistent with general past practice;
(q) it and its Subsidiaries shall obtain DSI's prior written
approval of any and all business decisions which have, or shall in the future
have, a material effect on the business of Meritus or any of its Subsidiaries,
and for purposes of this Section 6.1(q) only; "material effect" shall be defined
as an economic effect of $20,000.00 or more; and
(r) neither it nor its Subsidiaries shall authorize or announce an
intention to do any of the actions prohibited in this Section 6.1, or enter into
any contract, agreement, commitment or arrangement to do any of the foregoing.
6.2 ACQUISITION PROPOSALS. From and after the date hereof, Meritus shall
not, and shall not permit any of its directors, officers, employees, attorneys,
financial advisors, agents or other representatives or those of any of its
Subsidiaries to, directly or indirectly, solicit, initiate or encourage
(including by way of furnishing information) any acquisition proposal from any
Person, or engage in or continue discussions or negotiations relating to any
acquisition proposal.
6.3 STOCKHOLDERS MEETING. Meritus will take, in accordance with applicable
law and its certificate of incorporation and by-laws, all action necessary to
convene a meeting of holders of Shares (the "STOCKHOLDERS MEETING") as promptly
as practicable after the date of this Agreement to consider and vote upon the
approval of this Agreement. Meritus's Board of Directors shall recommend such
approval and shall take all lawful action to solicit such approval.
6.4 FILINGS; OTHER ACTIONS; NOTIFICATION.
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(a) Meritus and DSI shall cooperate with each other and use (and
shall cause their respective Subsidiaries to use) their respective best efforts
to take or cause to be taken all actions, and do or cause to be done all things,
necessary, proper or advisable on its part under this Agreement and applicable
Laws to consummate and make effective the Merger and the other transactions
contemplated by this Agreement as soon as practicable, including preparing and
filing as promptly as practicable all documentation to effect all necessary
notices, reports and other filings, responding promptly to any requests for
further information and to obtain as promptly as practicable all consents,
registrations, approvals, permits and authorizations necessary or advisable to
be obtained from any third party and/or any Governmental Entity in order to
consummate the Merger or any of the other transactions contemplated by this
Agreement as promptly as practicable. Subject to applicable laws relating to the
exchange of information, DSI and Meritus shall have the right to review in
advance, and will consult the other on, all the information relating to DSI or
Meritus, as the case may be, and any of their respective Subsidiaries, that
appear in any filing made with, or written materials submitted to, any third
party and/or any Governmental Entity in connection with the Merger and the other
transactions contemplated by this Agreement. In exercising the foregoing right,
each of Meritus and DSI shall act reasonably and as promptly as possible.
(b) Meritus and DSI each shall, upon request by the other, furnish
the other with all information concerning itself, its Subsidiaries, directors,
officers and stockholders and such other matters as may be reasonably necessary
or advisable in connection with any statement, filing, notice or application
made by or on behalf of DSI, Meritus or any of their respective Subsidiaries to
any third party and/or any Governmental Entity in connection with the Merger and
the transactions contemplated by this Agreement.
(c) Meritus and DSI each shall keep the other apprised of the
status of matters relating to completion of the transactions contemplated
hereby, including promptly furnishing the other with copies of notice or other
communications received by DSI or Meritus, as the case may be, or any of its
Subsidiaries, from any third party and/or any Governmental Entity with respect
to the Merger and the other transactions contemplated by this Agreement.
(d) Without limiting the generality of the undertakings pursuant
to this Section 6.4, (i) Meritus and DSI agree to provide promptly to any and
all federal, state, local or foreign court or Government Entity with
jurisdiction over enforcement of any applicable antitrust laws ("GOVERNMENT
ANTITRUST ENTITY") information and documents requested by any Government
Antitrust Entity or necessary, proper or advisable to permit consummation of the
Merger and the transactions contemplated by this Agreement; and (ii) in
connection with any filing or submission or other action required to be made or
taken by either DSI or Meritus to effect the Merger and to consummate the other
transactions contemplated hereby or thereby, Meritus shall not, without DSI's
prior written consent, commit to any divestiture transaction, and, neither DSI
nor any of its Affiliates shall be required to divest or hold separate or
otherwise take or commit to take any action that limits its freedom of action
with respect to, or its ability to retain, Meritus or any portions thereof or
any of the business, product lines, properties or assets of DSI or any of its
Affiliates.
6.5 TAXATION. Subject to Section 6.2, neither DSI nor Meritus shall take or
cause to be taken any action, whether before or after the Effective Time, that
would disqualify the Merger as a "reorganization" within the meaning of Section
368(a) of the Code.
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6.6 ACCESS. Upon reasonable notice, and except as may otherwise be required
by applicable law, Meritus shall (and shall cause its Subsidiaries to) afford
DSI's officers, employees, counsel, accountants and other authorized
representatives ("REPRESENTATIVES") access, during normal business hours
throughout the period prior to the Effective Time, to its properties, books,
contracts and records (including its audit work papers and related documents)
and, during such period, shall (and shall cause its Subsidiaries to) furnish
promptly to DSI all information concerning its business, properties and
personnel as may reasonably be requested, PROVIDED that no investigation
pursuant to this Section shall affect or be deemed to modify any representation
or warranty made by Meritus herein. All requests for information made pursuant
to this Section shall be directed to an executive officer of Meritus or such
Person as may be designated by its officers. DSI and Meritus shall each
designate two representatives to speak on a weekly basis to discuss Meritus's
capital expenditures, inventory management, sales promotions, distribution
arrangements, construction projects, group purchasing organization contracts,
other material contracts, patent licenses and such other business matters
concerning Meritus's operations as are desired. All such information shall be
governed by the terms of the Confidentiality Agreement existing between the
parties, dated April 19, 1999.
6.7 STOCK EXCHANGE LISTING AND DE-LISTING. DSI shall use its best efforts
to cause the shares of DSI Common Stock to be issued in the Merger to be
approved for listing on the NASDAQ, subject to official notice of issuance,
prior to the Closing Date.
6.8 PUBLICITY. The initial press releases by DSI and Meritus concerning the
execution of this Agreement and the transaction contemplated hereby shall be
mutually agreed as to content prior to issuance and thereafter Meritus and DSI
shall consult with each other prior to issuing any press releases or otherwise
making public announcements with respect to the Merger and the other
transactions contemplated by this Agreement and prior to making any filings with
any third party and/or any Governmental Entity (including any national
securities exchange) with respect thereto, except as may be required by law or
by obligations pursuant to any listing agreement with or rules of any national
securities exchange.
6.9 OPTIONS AND BENEFITS.
(a) STOCK OPTIONS. At the Effective Time, any and all outstanding
options to acquire securities in Meritus which have not been exercised
shall be canceled.
(b) EMPLOYEE BENEFITS. Prior to the Effective Time, Meritus shall
by all appropriate actions of its Board of Directors and/or its
shareholders have duly adopted such resolutions as shall be necessary or
appropriate to freeze its participation in and terminate its 401 (k) Plan
(the "401(K) PLAN") on or before the Effective Time.
6.10 FEES AND EXPENSES. Except as otherwise provided in this Section 6.10,
whether or not the Merger shall be consummated, all costs and expenses incurred
in connection with this Agreement and the transactions contemplated hereby,
including, without limitation, the fees and disbursements of counsel, financial
advisors, accountants, actuaries and consultants, shall be paid by the party
incurring such costs and expenses.
6.11 SHAREHOLDER CLAIMS. Meritus shall not agree to, cause or permit the
settlement or compromise of any claim brought by any present, former or
purported holder
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of any securities of Meritus prior to the Effective Time without the prior
written consent of DSI which shall not be unreasonably withheld.
6.12 NOTICE OF CHANGES. Meritus shall inform DSI in writing within five
(5) calendar days of any change, or prior to the Effective Time if less than
five (5) days prior to the Effective Time, which occurs or is threatened (of if
any development occurs or is threatened involving a prospective change) in the
financial condition, results of operations, business, or prospective sales that
has or may reasonably be expected to have a Material Adverse Effect on the
financial condition, results of operations, business or prospective sales of
Meritus; provided, however, that the delivery of any notice pursuant to this
Section 6.12 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
6.13 INDEMNIFICATION ARRANGEMENTS. DSI agrees that for the period from the
Effective Time until three (3) years after the Effective Time, DSI shall use its
best efforts (i) to cause DSI and its Subsidiaries to maintain in effect without
any reduction in scope or coverage indemnification provisions for present and
former directors, officers, employees, and agents of DSI and its Subsidiaries
that are at least as favorable to all such persons as those contained in DSI's
Articles of Incorporation and Bylaws in effect as of the date hereof; (ii) if
available on commercially reasonable terms, to cause DSI to maintain its current
levels of errors and omissions insurance coverage for its directors and officers
in effect as of the date hereof; provided that DSI shall not be required to take
any action that prevents DSI or any of DSI's officers, directors or members from
exercising any fiduciary obligation they may have to DSI.
6.14 LI & FUNG AGREEMENTS. There shall not occur a default or breach, nor
shall there occur any fact or circumstance, which with notice or lapse of time
would constitute a breach or default or permit termination of any contract, loan
or agreement of any type, or the imposition of any monetary penalty for Meritus
or any of its Subsidiaries by Li & Fung, Ltd. Further, pursuant to subsection
6.14(a) below, Reiling, Meritus, and each of its Subsidiaries hereby authorize
DSI to negotiate directly with Li & Fung, Ltd. for the purpose of reaching terms
reasonably acceptable to DSI for the satisfaction of the Old Li & Fung Debt;
provided, however, any compromise of the payment of the amount of the Old Li &
Fung Debt (less the Deposit) shall not be a condition of the Closing. Further,
any and all contracts, loan agreements and other arrangements between Meritus or
any of its Subsidiaries and Li & Fung, Ltd. (the "Li & Fung Agreements") shall
be terminated by Meritus and Li & Fung as of the Effective Time, assuming the
satisfaction of the Old Li & Fung Debt and the New Li & Fung Debt by DSI, and
DSI shall be provided written confirmation of such termination to its
satisfaction prior to the Effective Time. In all events, however, the Li & Fung
Agreements shall be terminated no later than seven (7) days following DSI's
satisfaction of the New Li & Fung Debt existing as of the Effective Time.
(a) DSI's authorized representative for purposes of all negotiations
with Li & Fung, Ltd. shall be Tom Martin. Mr. Martin shall have no contact with
representatives of Li & Fung, Ltd. without Walter Reiling being present or
without Walter Reiling's prior consent.
(B) WITH THE EXCEPTION OF A VIOLATION OF THE PROVISIONS OF SUBSECTION
6.14(A), MERITUS, EACH OF ITS SUBSIDIARIES AND REILING HEREBY RELEASE DSI AND
EACH OF ITS DIRECTORS, OFFICERS, SHAREHOLDERS, ATTORNEYS AND AGENTS FROM ANY AND
ALL CLAIMS, CAUSES OF ACTION, LIABILITIES OR DAMAGES ARISING FROM DSI'S
NEGOTIATIONS WITH LI & FUNG, LTD.,
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INCLUDING BUT NOT LIMITED TO CLAIMS FOR INTENTIONAL OR NEGLIGENT INTERFERENCE
WITH CONTRACTUAL ADVANTAGE AND/OR LENDER LIABILITY CLAIMS.
6.15 TAKEOVER STATUTE. If any Takeover Statute is or may become applicable
to the Merger or the other transactions contemplated by this Agreement, each of
DSI and Meritus and its Board of Directors shall grant such approvals and take
such actions as are necessary so that such transactions may be consummated as
promptly as practicable on the terms contemplated by this Agreement. or by the
Merger and otherwise act to eliminate or minimize the effects of such statute or
regulation on such transactions.
6.16 NOTIFICATION OF CERTAIN MATTERS. DSI, shall give prompt notice to
Meritus, and Meritus shall give prompt notice to DSI, of: (i) the occurrence, or
non-occurrence, of any event the occurrence, or non-occurrence, of which would
cause (A) any representation or warranty contained in this Agreement to be
untrue or inaccurate in any material respect or (B) any covenant, condition or
agreement contained in this Agreement not to be complied with or satisfied in
any material respect; and (ii) any failure of DSI or Meritus, as the case may
be, to comply with any covenant or agreement to be complied with by it hereunder
in any material respect; PROVIDED, HOWEVER, that the delivery of any notice
pursuant to this Section 6.16 shall not limit or otherwise affect the remedies
available hereunder to the party receiving such notice.
6.17 SUBSIDIARIES' STOCK TRANSFERS. On or before the Effective Time,
Meritus and Reiling shall have caused all issued and outstanding capital stock
of the Subsidiaries to be transferred to Meritus' wholly owned subsidiary,
Meritus Industries, Ltd., a Hong Kong corporation or an authorized agent of DSI,
in full compliance with all applicable Hong Kong laws and regulations (the
"Subsidiary Transfer").
6.18 DEPOSIT. DSI shall authorize payment by wire transfer of immediately
available funds to Meritus or one of its Subsidiaries, the sum of Three Hundred
Thousand Dollars ($300,000.00)(the "Deposit") upon acceptable proof from Meritus
(consisting of a copy of Meritus' unnegotiated check as delivered to Li & Fung
and Li & Fung's written acknowledgment that the check was received and will be
applied as a credit toward the Old Li & Fung Debt) or any one of the
Subsidiaries of the payment to Li & Fung, Ltd. of $300,000.00 as a credit
against the Old Li & Fung Debt, to secure the performance of DSI's obligations
under this Agreement. If this Agreement is terminated by DSI due to a breach of
this Agreement by Meritus, Reiling or the Subsidiaries, or the rejection of the
Audited Statements by DSI or PriceWaterhouseCoopers in accordance with the terms
and conditions of this Agreement, Meritus and Reiling shall pay to DSI, within
fifteen (15) calendar days after such termination, the full amount of the
Deposit, in cash. If this Agreement is terminated due to any other reason, the
benefit of the Deposit shall enure to Meritus as liquidated damages for
termination of this Agreement, in full settlement of any damages of any nature
or kind that Meritus may suffer or allege to have suffered as a result of
termination of this Agreement. The Deposit shall be Meritus' sole and exclusive
remedy in the event of any such breach by DSI. Meritus and DSI hereby
acknowledge that actual damages resulting from termination of this Agreement
would be difficult to ascertain and that the amount to be paid pursuant to this
Section 16.18 is a fair and equitable amount to reimburse Meritus for damages
sustained therefrom. Upon the Closing, the Deposit shall be retained by Li &
Fung, Ltd., and the benefit of the Deposit shall enure to DSI as a partial
payment of the Old Li & Fung Debt.
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6.19 AUDIT OF COMPANY REPORTS. Meritus shall deliver to DSI copies of the
balance sheet and related statements of operations, changes in shareholders
equity and cash flows of Meritus and its Subsidiaries for the fiscal years 1997,
1998 and quarters one through three of fiscal year 1999, prepared in accordance
with GAAP and audited by the accounting firm of Amper, Politziner & Mattia, P.A.
(the "Audited Statements"). Meritus shall be responsible, at its sole cost, for
engaging Amper, Politziner & Mattia, P.A. to prepare the Audited Statements.
Meritus shall deliver the Audited Statements for fiscal years 1997 and 1998 to
DSI no later than October 30, 1999, and Meritus shall deliver a separate Audited
Statement for quarters one through three of fiscal year 1999 to DSI no later
than November 30, 1999.
(a) At the Effective Time, DSI shall reimburse Meritus for one-half
(1/2) of the fees incurred by Meritus to produce the Audited Statements;
provided; however, DSI's portion of such fees shall not exceed Forty Thousand
Dollars ($40,000.00).
(b) If the Closing does not occur, other than by reason of a material
breach of this Agreement by Meritus or Reiling or the rejection of the Audited
Statement in accordance with the terms and conditions of this Agreement, then
DSI shall pay the entire cost of the production of the Audited Statements, up to
a maximum of Eighty Thousand Dollars ($80,000.00).
6.20 WORKING CAPITAL; NET WORTH. In the event that as of the Effective
Time, the Working Capital (as defined below), is less than the Base Amount (as
defined below), or the Debt (as defined below) is in excess of the Debt Cap (as
defined below), then DSI shall have the unilateral right to (i) terminate this
Agreement; or, in the alternative, (ii) to decrease the amount of the Cash
Consideration by the excess of the Base Amount over the amount of Working
Capital or the excess of the Debt over the Debt Cap as of the Effective Time.
"WORKING CAPITAL" shall mean current assets (consisting of cash, accounts
receivable, inventories, rebates and prepaids, and specifically excluding,
without limitation, any and all artwork, models, molds, fixtures and equipment)
less current liabilities (consisting of accounts payable, accrued payables and
liabilities, including without limitation any deferred taxes and required
contributions to any 401(k) plan, the New Li & Fung Debt, and any and all other
obligations incurred as of the Effective Time, and specifically excluding the
Old Li & Fung Debt) of Meritus and its Subsidiaries. The term "BASE AMOUNT"
shall mean One Hundred Thirty-Five Thousand Five Hundred Sixteen Dollars
($135,516.00). The term "Debt" shall mean any and all debt historically
maintained on the balance sheet of Meritus and its Subsidiaries in accordance
with GAAP, other than debt included in Working Capital or debt incurred upon the
prior written consent of DSI. The term "Debt Cap" shall mean Five Million Four
Hundred Eighty-Six Thousand Dollars ($5,486,000.00), exclusive of the payment of
the Deposit to Li & Fung, Ltd. The parties acknowledge and agree that for
purposes of calculating the Base Amount it is assumed that (i) the Deposit is
paid by DSI and it is applied to the Old Li & Fung Debt and, that (ii) current
assets at the Effective Time for purposes of calculating Working Capital at the
Effective Time shall include the difference between $5,200,000.00 and the amount
of the Old Li & Fung Debt as of that date, all as detailed in SECTION 6.20 of
the Company Disclosure Letter. Nothing in this SECTION 6.20 is intended to
affect or amend the representations and warranties of Meritus and Reiling
contained in SECTION 5.1.
(i) Section 6.20(i) of the Company Disclosure Letter contains
the good faith estimate of Meritus and Reiling of the amount of Working Capital
and Debt for
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Meritus and its Subsidiaries for each month from the date of this Agreement
through January 2, 2000 (the "Forecast"). From the date of this Agreement until
the Effective Time, Meritus shall deliver to DSI monthly statements that provide
DSI with the Working Capital and Debt of Meritus and its Subsidiaries for the
prior month (the "Monthly Reports"). Meritus shall deliver to DSI no later than
the fifteenth (15th) calendar day of each month, the Monthly Reports for the
period ending on the last day of the prior month. DSI shall have the unilateral
right to terminate this Agreement for cause if any Monthly Report shows a
variance in actual Working Capital or Debt in excess of ten percent (10%) from
the corresponding month's Working Capital and Debt set forth in the Forecast.
(ii)Within five (5) business days prior to the Effective Time,
Meritus shall deliver to DSI a statement (together with appropriate schedules
and other supporting documentation, the "Settlement Statement") that provides
DSI with a good faith determination of the Working Capital and Debt as of the
Effective Time. The Settlement Statement shall be acceptable to DSI in the
reasonable discretion of DSI and its certified public accountants,
Pricewaterhouse Coopers. If the Settlement Statement is unacceptable to DSI or
PriceWaterhouseCoopers, DSI shall have the unilateral right to terminate this
Agreement.
6.21 REMODELING EXPENSES. DSI shall reimburse Meritus for its actual
remodeling expenses in restoring its showroom(s) to an original condition in the
event DSI undertakes any remodeling activities in any showroom of Meritus or the
Subsidiaries prior to the Effective Time and the Merger does not occur.
6.22 HONG KONG EMPLOYEES. Except for a termination for cause, DSI shall
not terminate the employment of Patrick Tam or Steven Tse for 180 days following
the Effective Time. DSI makes no further employment or financial commitments
with regard to the existing employees of Meritus or its Subsidiaries, other than
the Employment Agreements to be executed between DSI and Beth Reiling and Joe
Reiling, respectively, on the Closing Date.
6.23 NEW YORK CITY TAX CLAIM. On or before December 31, 1999, Meritus
and/or Reiling shall satisfy and pay in full any and all taxes claimed due by
the City of New York to the reasonable satisfaction of DSI, and all such
payments shall not be included in the Working Capital calculations required by
Section 6.20 above. The amount claimed due by the City of New York is
approximately $40,000.00. Further, if at any time after the Effective Time DSI
should incur any expense or liability as a result of the foregoing claims
(including attorneys' fees), any and all such expenses or liabilities shall be
borne by Reiling on a dollar-for-dollar basis, exclusive of the threshold and
ceiling on Damages contained in Section 9.3 above. DSI shall have the option of
recovering any and all such Damages by means of a direct setoff against any and
all sums due Reiling under the Note.
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ARTICLE VII
CONDITIONS
7.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver at or prior to the Effective Time of each of the
following conditions:
(a) STOCKHOLDER APPROVAL. This Agreement shall have been duly approved
by holders of Shares constituting Meritus requisite vote in accordance with
applicable law and the certificate of incorporation and by-laws of Meritus.
(b) NASDAQ LISTING. The shares of DSI Common Stock deliverable to the
Principal Stockholders pursuant to this Agreement shall have been authorized for
listing on the NASDAQ upon official notice of issuance.
(c) REGULATORY CONSENTS. Other than the filing provided for in Section
1.3, all notices, reports and other filings required to be made prior to the
Effective Time by Meritus or DSI or any of their respective Subsidiaries with,
and all consents, registrations, approvals, permits and authorizations required
to be obtained prior to the Effective Time by Meritus or DSI or any of their
respective Subsidiaries from, any Governmental Entity (collectively,
"GOVERNMENTAL CONSENTS") in connection with the execution and delivery of this
Agreement and the consummation of the Merger and the other transactions
contemplated hereby by Meritus, DSI shall have been made or obtained (as the
case may be).
(d) LITIGATION. No court or Governmental Entity of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
law, statute, ordinance, rule, regulation, judgment, decree, injunction or other
order (whether temporary, preliminary or permanent) that is in effect and
restrains, enjoins or otherwise prohibits consummation of the Merger
(collectively, an "ORDER").
(e) BLUE SKY APPROVALS. DSI shall have received all state securities
and "blue sky" permits and approvals, if any, necessary to consummate the
transactions contemplated hereby.
(f) SHAREHOLDERS' AND VOTING TRUST AGREEMENT. As a condition to
Meritus's, the Principal Stockholders' and DSI's willingness to enter into this
Agreement, the Principal Stockholders', MVII, LLC, a California limited
liability company ("MVII") and DSI shall have entered into that certain
Shareholders' and Voting Trust Agreement in the form attached hereto as EXHIBIT
7.1(F) (the "Voting Trust Agreement").
(g) REGISTRATION RIGHTS AGREEMENT. As a condition to DSI's willingness
to enter into this Agreement, DSI shall have entered into that certain
Registration Rights Agreement by and among DSI, Meritus, and Reiling in the form
attached hereto as EXHIBIT 7.1(G).
7.2 CONDITIONS TO OBLIGATIONS OF DSI. The obligations of DSI to effect the
Merger are also subject to the satisfaction or waiver by DSI, at or prior to the
Effective Time, of the following conditions:
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(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of Meritus contained in this Agreement shall have been true and
correct when made and shall be true and correct at and as of the Closing Date as
if made at and as of the Closing Date, in each case except as contemplated or
permitted by this Agreement, except for such disclosures made by Meritus and
delivered to DSI in a revised Company Disclosure Letter at or prior to Closing
(the "Revised Disclosure Letter"); and DSI shall have received a certificate
signed on behalf of Meritus by its President and its Treasurer to such effect.
Notwithstanding anything in this Section 7.2(a) or this Agreement to the
contrary, no matter disclosed in the Revised Disclosure Letter shall be based on
events, facts or circumstances arising prior to the date of this Agreement, nor
shall any matter raised constitute a breach of this Agreement by Meritus or
Reiling. Any and all matters set forth in the Revised Disclosure Letter shall
address only those matters which have arisen between the date of this Agreement
and the Effective Time. Further, if Meritus and/or Reiling shall present a
Revised Disclosure Letter, DSI shall have the right to terminate this Agreement
based upon any matter disclosed therein, in the sole and absolute discretion of
DSI. Upon any such termination of this Agreement by DSI, DSI shall have no
further duties or obligations to Meritus or Reiling.
(b) PERFORMANCE OF OBLIGATIONS OF MERITUS. Meritus shall have performed
in all material respects all obligations required to be performed by it under
this Agreement at or prior to the Closing Date and DSI shall have received a
certificate signed on behalf of Meritus by its Chief Executive Officer and its
Chief Financial Officer to such effect.
(c) CONSENTS UNDER AGREEMENTS. Each and every consent or approval which
shall be required in order to consummate the transactions contemplated by this
Agreement under any Debt Contract or Other Contract to which Meritus or any of
its Subsidiaries is a party is listed in SECTION 7.2(C) of the Company
Disclosure Letter (collectively, the "Consents"). Meritus shall have obtained
each of the Consents.
(d) [Intentionally omitted.]
(e) SUBSIDIARY TRANSFERS. The Subsidiary Transfers shall have been
completed.
(f) LI & FUNG. The covenants contained in Section 6.14 above shall have
been performed in full and the Li & Fung Old Debt as of the Effective Time shall
not exceed Five Million One Hundred Eighty Six Thousand Dollars ($5,186,000.00),
after application of the Deposit pursuant to Section 6.18 above.
(g) OPINION OF COUNSEL. Meritus shall have caused to be delivered to
DSI a favorable opinion of counsel dated the Effective Time substantially in the
form of EXHIBIT 7.2(G).
(h) CLOSING CERTIFICATES. As of the Effective Time, Meritus or its
Shareholders, as applicable, shall have delivered to DSI the following:
(i) A certificate executed on behalf of Meritus by its President
and its Treasurer, dated as of the Effective Time, to the effect that each of
the conditions specified above in Section 7.2(a)-(c) is satisfied in all
respects;
(ii) Certified copies of the resolutions duly adopted by Meritus
and the Shareholders approving this Agreement and all transactions contemplated
hereby; and
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(iii) Such other usual and customary documents as DSI may
reasonably request in connection with the transactions contemplated hereby.
(i) TOYS R US CLAIMS. Meritus shall have fixed the amount due Toys R.
Us in an amount and in a manner reasonably satisfactory to DSI, which amount
shall be presumed reasonable if it does not exceed $494,000.00.
(j) AUDITED STATEMENTS. The Audited Statements shall have been
delivered to DSI in accordance with Section 6.19, and the form and content of
the Audited Statements shall be reasonably acceptable to DSI and
PriceWaterhouseCoopers.
(k) GENERAL RELEASE. The Principal Stockholders, Beth Reiling and
Joseph Reiling shall have executed and delivered to DSI the General Release in
the form attached to this Agreement as EXHIBIT 7.2 (K).
(l) SHAREHOLDER QUESTIONNAIRE. The Principal Stockholders shall have
executed and delivered to DSI the Shareholder Questionnaire in the form attached
to this Agreement as EXHIBIT 7.2 (L).
(m) The Principal Stockholders shall have executed and delivered to DSI
the Noncompetition Agreement in the form attached to this Agreement as EXHIBIT
7.2(M).
7.3 CONDITIONS TO OBLIGATION OF MERITUS. The obligation of Meritus and
Reiling to effect the Merger is also subject to the satisfaction or waiver by
Meritus and Reiling, at or prior to the Effective Time, of the following
conditions:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of DSI contained in this Agreement shall have been true and correct
when made and shall be true and correct in all material respects at and as of
the Closing Date as if made at and as of the Closing Date, in each case except
as contemplated or permitted by this Agreement; and Meritus shall have received
a certificate signed on behalf of DSI by its Chief Executive Officer and its
Chief Financial Officer.
(b) PERFORMANCE OF OBLIGATIONS OF DSI. DSI shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date and Meritus shall have received a
certificate signed on behalf of DSI by its Chief Executive Officer and its Chief
Financial Officer to such effect.
(c) CONSENTS UNDER AGREEMENTS. DSI shall have obtained the consent or
approval of each Person whose consent or approval shall be required in order to
consummate the transactions contemplated by this Agreement under any Debt
Contract or Other Contract to which DSI or any of its Subsidiaries is a party.
(d) [Intentionally omitted.]
(e) OPINION OF COUNSEL. DSI shall have caused to be delivered to
Meritus a favorable opinion of counsel dated the Effective Time substantially in
the form of EXHIBIT 7.3(E).
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(f) CLOSING CERTIFICATE. As of the Effective Time, DSI will have
delivered to Meritus:
(i) A certificate executed on behalf of DSI by its Chief Executive
Officer and Chief Financial Officer, dated as of the Effective time, to the
effect that each of the conditions specified above in Section 7.3(a) and (b) is
satisfied in all respects;
(ii) Certified copies of resolutions duly adopted by DSI approving
this Agreement and all transactions contemplated hereby; and
(iii) Such other usual and customary documents as the Company may
reasonably request in connection with the transactions contemplated hereby.
(g) NOTE. DSI shall have duly executed and delivered the Note (and
cause to be issued its corresponding letter of credit) to the Principal
Stockholders.
(h) EMPLOYMENT AGREEMENTS. DSI shall have entered into employment
agreements with Beth Reiling and Joseph Reiling, in the form of EXHIBITS 7.3(H)A
AND 7.3(H)B, respectively.
(i) LI & FUNG OLD DEBT. DSI will have satisfied in full the Li & Fung
Old Debt, which, after the payment of the Deposit to Li & Fung, Ltd., shall not
be in excess of Five Million One Hundred Eighty Six Thousand Dollars
($5,186,000.00), and Reiling shall have received from Li & Fung, Ltd. a full
discharge of such indebtedness arising from the Agency Agreement between Meritus
and Li & Fung, Ltd. dated January 29, 1997, in the form attached hereto as
EXHIBIT 6.14.
(j) MATERIAL ADVERSE EFFECT. There shall not have occurred a material
adverse effect on the finances, condition, results of operations, business or
prospective sales of Meritus or its Subsidiaries; provided, however, any such
material adverse effect shall not be the result of the action or inaction of
Meritus, its Subsidiaries or the Principal Stockholders.
(k) STOCK PRICE. The closing price for DSI's stock at the close of the
market on the day prior to the Effective Time (the "Closing Price") shall be no
less than $3.10 per share resulting in an aggregate value for the DSI Shares of
no less than $1,860,000.00 (the "Floor Price"); provided, however, DSI shall
have the unilateral right to cover the difference between the Closing Price and
the Floor Price by issuing additional DSI stock to Reiling so that the aggregate
value of the DSI Shares, together with any such additional DSI stock, is not
less than the Floor Price at the Effective Time.
ARTICLE VIII
TERMINATION
8.1 TERMINATION. This Agreement may be terminated, and the Merger
abandoned, at any time prior to the Effective Time, whether before or after any
approval by the stockholders of Meritus of the matters presented in connection
with the Merger:
(a) by mutual written consent of DSI and Meritus.
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(b) by DSI, by written notice to Meritus, if (i) Meritus shall have
failed to comply in any material respect with any of its covenants or agreements
contained in this Agreement required to be complied with prior to the date of
such termination, which failure to comply has not been cured within five (5)
business days after receipt by Meritus of written notice of such failure to
comply; or (ii) the stockholders of Meritus shall not approve the Merger at the
Stockholder Meeting or any adjournment thereof;
(c) by Meritus, by written notice to DSI, if DSI shall have failed to
comply in any material respect with any of its respective covenants or
agreements contained in this Agreement required to be complied with prior to the
date of such termination, which failure to comply has not been cured within five
(5) business days after receipt by DSI of written notice of such failure to
comply;
(d) by either DSI or Meritus, by written notice from the terminating
party to the other parties, if there has been a breach by the other of any
representation or warranty made as of the date hereof;
(e) by either DSI or Meritus, by written notice from the terminating
party to the other parties, if: (i) the Merger has not been effected on or prior
to the time limitation date set forth in Section 1.2, as may be extended in
accordance with Section 1.2, whether such date is before or after the date of
approval by the stockholders of Meritus; PROVIDED, HOWEVER, that the right to
terminate this Agreement pursuant to this clause (e) shall not be available to
any party whose failure to fulfill any obligation of this Agreement has been the
cause of, or resulted in, the failure of the Merger to have occurred on or prior
to such date; or (ii) any court or other Governmental Entity having jurisdiction
over a party hereto shall have issued an order, decree or ruling or taken any
other action permanently enjoining, restraining or otherwise prohibiting the
transactions contemplated by this Agreement and such order, decree, ruling or
other action shall have become final and nonappealable;
(f) by DSI, by written notice to Meritus, if (i) the Board of Directors
of Meritus shall not have recommended the Merger to Meritus's stockholders, or
shall have resolved not to make such recommendation, or shall have modified in a
manner adverse to DSI or rescinded its recommendation of the Merger to Meritus's
stockholders as being advisable and fair to and in the best interests of Meritus
and its stockholders, or shall have modified or rescinded its approval of the
Agreement, or shall have resolved to do any of the foregoing; (ii) the Board of
Directors of Meritus shall have recommended to the stockholders of Meritus any
Takeover Proposal (other than by DSI or an Affiliate of DSI) or shall have
resolved to do so; or (iii) Meritus or any of its Subsidiaries, without having
received prior written consent from DSI, shall have entered into, authorized,
recommended, proposed, or publicly announced its intention to enter into,
authorize, recommend or propose to its shareholders an agreement, arrangement,
understanding or letter of intent with any Person (other than DSI or any of its
Affiliates) to (A) effect a merger or consolidation or similar transaction
involving Meritus or any of its Subsidiaries, (B) purchase, lease, or otherwise
acquire all or a substantial portion of the assets of Meritus or any of its
Subsidiaries or (C) purchase or otherwise acquire (including by way of merger,
consolidation, share exchange or similar transaction) beneficial ownership of
securities representing twenty percent (20%) or more of the voting power of
Meritus (in each case other than any such merger, consolidation, purchase, lease
or other transaction involving only Meritus and one or more of its Subsidiaries
or involving only any two or more of its Subsidiaries); and
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The right of DSI or Meritus, to terminate this Agreement pursuant to this
Section 8.1 shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of such party, whether prior to or after
the execution of this Agreement.
8.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement by either DSI or Meritus as provided in Section 8.1, this Agreement
shall forthwith become void without any liability hereunder on the part of
Meritus or DSI or their respective directors or officers, unless otherwise
provided in Section 6.18 or elsewhere herein; PROVIDED, HOWEVER, that nothing
contained in this Section 8.2 shall relieve any party hereto from any liability
for any breach of this Agreement.
ARTICLE IX
9.1 SURVIVAL OF REPRESENTATIONS AND COVENANTS.
(a) Except for the Specified Representations which shall survive
indefinitely and the representations and warranties contained in Section 5.1(m)
which shall expire concurrently with the expiration of the relevant statute of
limitations, the representations and warranties made by Meritus and Reiling in
this Agreement (including the representations and warranties set forth in
Section 5.1), and the representations and warranties set forth in the Company
Disclosure Letter and Closing Certificate, shall survive the Closing and shall
expire three (3) years after the Closing Date; PROVIDED, HOWEVER, that if, at
any time prior to the expiration of a representation or warranty, DSI delivers
to Meritus or Reiling a written notice alleging the existence of an inaccuracy
in or a breach of any such representation or warranties and asserting a claim
for recovery under this Article IX based on such alleged inaccuracy or breach,
then the claim asserted in such notice shall survive the expiration of such
representation or warranty until such time as such claim is fully and finally
resolved.
(i) For purposes of this Article IX, "Specified Representations"
shall mean the representations and warranties set forth in Sections 5.1(a),
5.1(b), 5.1(c), 5.1(k), and 5.1(o).
(b) The representations, warranties, covenants and obligations of
Meritus and Reiling, and the rights and remedies that may be exercised by DSI,
shall not be limited or otherwise affected by or as a result of any information
furnished to, or any investigation made by or knowledge of, any of DSI or any
its representatives.
(c) For purposes of this Agreement, each statement or other item of
information set forth in the Company Disclosure Letter shall be deemed to be a
representation and warranty made by Meritus and Reiling in this Agreement.
9.2 INDEMNIFICATION BY CONTRIBUTING SHAREHOLDERS.
(a) Subject to the limitations set forth in Section 9.3 below, Meritus
and Reiling, jointly and severally, shall hold harmless and indemnify DSI from
and against, and shall compensate and reimburse DSI for, any Damages which are
directly or indirectly suffered or incurred by DSI or to which DSI may otherwise
become subject at any time (regardless of whether or not such Damages related to
any third-party claim) and which arise directly or indirectly from or as a
direct or indirect result of, or are directly or indirectly connected with: (i)
any breach of any representation, warranty or covenant made by Meritus or
Reiling in this
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Agreement, the Closing Certificate or the Company Disclosure Letter (without
giving effect to any "materiality" or "material adverse effect" qualification or
similar qualification contained in such representations and warranties
information); or (ii) any Proceeding relating directly or indirectly to any
breach, alleged breach, liability or matter of the type referred to in clause
"(i)," above (including any proceeding commenced by DSI for the purpose of
enforcing any of its rights under this Article IX).
(i) For purposes of this Article IX, "Damages" shall include any
loss, damage, injury, liability, claim, demand, settlement, judgment, award,
fine, penalty, Tax, fee (including reasonable attorneys' fees), cost or expense
of any nature.
(b) Meritus and Reiling acknowledge and agree that, if there is any
breach of any representation, warranty or other provision relating to Meritus or
Meritus' business, condition, assets, liabilities, operations, financial
performance, net income or prospects (or any aspect of portion thereof), then
DSI itself shall be deemed to have incurred Damages as a result of such breach
or liability.
9.3 THRESHOLD; CEILING.
(a) Subject to Section 9.3(c), Meritus and/or Reiling shall not be
required to make any indemnification payment pursuant to Section 9.2 for any
breach of any of either of their representations and warranties until such time
as the total amount of all Damages (including the Damages arising from such
breach and all other Damages arising from any other breaches of any
representations or warranties) that have been directly or indirectly suffered or
incurred by DSI, or to which DSI has or will otherwise become subject, exceeds
One Hundred Twenty Five Thousand Dollars ($125,000.00) in the aggregate. At such
time as the total amount of such Damages exceeds One Hundred Twenty Five
Thousand Dollars ($125,000.00) in the aggregate, DSI shall be entitled to be
indemnified against all amount of such Damages in excess of $125,000.00 subject
to the limitations set forth in Section 9.3(b) and 9.3(d) below.
(b) Subject to Section 9.3(c), the maximum liability of Meritus or
Reiling and DSI under Section 9.2 and Section 9.5, respectively, shall be Five
Million Dollars ($5,000,000.00).
(c) The limitations on the indemnification obligations of Meritus and
Reiling that are set forth in Section 9.3(a) and 9.3(b) shall not apply to (i)
any breach of the Specified Representations; or (ii) any fraud or willful
misrepresentation by a Contributing Stockholder.
(d) DSI shall not be entitled to recover under Section 9.2 unless a
claim for Damages has been asserted by written notice, specifying the details of
the alleged claim and the grounds for indemnification, delivered to Reiling
within the applicable survival period specified in Section 9.1 above.
9.4 NO CONTRIBUTION. Each Principal Stockholder waives, and acknowledges
and agrees that such party shall not have and shall not exercise or assert or
attempt to exercise or assert, any right of contribution or right of indemnity
or any other right or remedy against Meritus in connection with any
indemnification obligation or any other liability to which such Principal
Stockholder may become subject under this Agreement or otherwise in connection
with any of the transactions contemplated by this Agreement.
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9.5 INDEMNIFICATION BY DSI. Except as set forth in Section 6.18, DSI shall
hold harmless and indemnify Reiling from and against, and shall compensate and
reimburse Reiling for, any Damages which are suffered or incurred by Reiling or
to which Reiling may otherwise become subject at any time (regardless of whether
or not such Damages are related to any third-party claim) as a result of,
arising from or in connection with (i) any breach of any representation,
warranty or covenant made by DSI in this Agreement, or (ii) any Proceeding
relating directly or indirectly to any breach, alleged breach, liability or
matter of the type referred to in clause "(i)" above (including any proceeding
commenced by Reiling for the purpose of enforcing any of their rights under this
Article IX).
9.6 SETOFF. Subject to the conditions set forth in this Section 9.6 and
the Note, DSI shall have the right to set off any amount that may be owed to
Meritus or Reiling under this Article IX against any amount otherwise payable by
DSI hereunder to any of the Principal Stockholders, including any amounts owed
to the Principal Shareholders under the Note, subject to the terms and
conditions of the Note.
(a) Notwithstanding the foregoing, DSI may not exercise any right of
setoff against Reiling, whether at common law or otherwise, including with
respect to any amounts owed under the Note, except in connection with its rights
to indemnification under this Article IX and unless it shall; simultaneously
provide Reiling with written notice setting forth the Damages for which
indemnification is sought under this Article IX (including a statement of the
claim for Damages in relation to the threshold amount of One Hundred and Twenty-
Five Thousand Dollars ($125,000.00) under Section 9.3(a), which statement may be
amended from time to time by DSI)(the "Setoff Notice"). From the date of the
Setoff Notice until such time as any dispute between the parties as to the
setoff has been resolved as provided herein, DSI may exercise its right of
set-off hereunder, if, and only if, payments owed to Reiling under the Note
after the date of the Setoff Notice through the date on which such dispute has
been resolved as provided herein are paid by DSI when otherwise due under the
Note into an escrow fund (the "Escrow Fund") held by an escrow agent mutually
acceptable to the parties, (the "Escrow Agent").
(b) The parties hereto designate and appoint Escrow Agent to serve in
accordance with the terms and conditions hereof. Reiling and DSI hereby instruct
Escrow Agent to release the Escrow Fund (i) in the manner instructed by Reiling
and DSI in writing to Escrow Agent, or (ii) in accordance with (a) the written
direction of the arbitrator appointed to resolve the dispute as provided herein
or (b) any order, judgment or writ issued by any court of competent
jurisdiction. Reiling and DSI hereby agree and acknowledge that Escrow Agent
shall not be liable for any error or judgment, for any act done or step taken or
omitted by it in good faith, or for any mistake of fact or law, or for anything
which it may do or refrain from doing in connection herewith, excepting only its
own intentional and willful misconduct. In the event that Escrow Agent in good
faith is in doubt as to what action it should take hereunder with respect to the
Escrow Fund, the Escrow Agent may, at its option, refuse to comply with any
demands or directions upon it, and in such event Escrow Agent shall not be or
become liable in any way to any person for its failure to act. Escrow Agent may
at any time resign hereunder by giving at least five (5) days' written notice
thereof to Reiling and DSI. On the effective date of such resignation, the
Escrow Fund held in escrow by the Escrow Agent shall be delivered to a joint
designee of Reiling and DSI. Upon arranging for such delivery, all obligations
of the Escrow Agent hereunder shall cease and terminate. If no such person shall
have been designated by the date of Escrow Agent's resignation, all obligations
of Escrow Agent hereunder shall nevertheless cease and terminate.
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(c) Reiling and DSI hereby agree that all disputes relating to the release
of the Escrow Fund must be resolved in accordance with procedures set forth in
this Section 9.6. Within fourteen (14) days of the Setoff Notice, having been
submitted to Reiling, the parties will meet to attempt to amicably resolve the
dispute and, failing such resolution, either or both of the parties may submit
the matter to mandatory and binding arbitration in Houston Texas, and in
accordance with the commercial arbitration rules of the American Arbitration
Association ("AAA"). The issue(s) in dispute shall be settled by a panel of
three (3) arbitrators (the "Panel"). The only issue(s) to be determined by the
Panel will be those issues specifically submitted to the Panel that properly
arise under this Section 9.6. The arbitration will be governed by the United
States Arbitration Act, 9 U.S.C. Sections 1-16, and judgment upon the award
rendered by the Panel may be entered by any court having jurisdiction thereof. A
determination of the Panel shall be by majority vote.
(d) Promptly following receipt of the request for arbitration, AAA shall
convene the parties in person or by telephone to attempt to select the
arbitrators by agreement of the parties. If agreement is not reached, DSI shall
select one (1) arbitrator and Reiling shall select one (1) other arbitrator.
These two arbitrators shall select a third arbitrator. If these two arbitrators
are unable to select a third arbitrator by mutual agreement, AAA shall submit to
the parties a list of not less than eleven (11) candidates. Such list shall
include a brief statement of each candidate's qualifications. Each party shall
number the candidates in order of preference, shall note any objection they may
have to any candidate, and shall deliver the candidate list so marked to AAA.
The party failing without good cause to return the candidate list so marked
within ten (10) days after receipt shall be deemed to have assented to all
candidates listed thereon. AAA shall designate the arbitrator willing to serve
for whom the parties collectively have indicated the highest preference and who
does not appear to have a conflict of interest. If a tie should result between
two candidates, AAA may designate either candidate.
(e) The agreement to arbitrate contained in this Section 9.6 is
specifically enforceable. Judgment upon any award rendered by the Panel may be
entered by any court of competent jurisdiction. The decision of the Panel within
the scope of the submission is final and binding on all parties, and any right
to judicial action on any matter subject to arbitration hereunder is hereby
waived, except suit to enforce this arbitration award. If the rules of the AAA
differ from those of this Section 9.6, the provisions of this Section 9.6 will
control.
(f) The provisions of this Section 9.6 shall survive the Effective Time
and the consummation of the merger pursuant to the terms and conditions of this
Agreement.
9.7 DEFENSE OF THIRD PARTY CLAIMS. In the event that any legal proceedings
shall be instituted or that any claim or demand shall be asserted by any Person
in respect of which payment may be sought by any party hereto (an "Indemnified
Party") from any other party hereto (an "Indemnifying Party") under the
provisions of this Article IX, the Indemnified Party shall promptly cause
written notice of the assertion of any claim of which it has knowledge which is
covered by this indemnity to be forwarded to the Indemnifying Party and the
Indemnifying Party shall have the right, at its option and at its own expense,
to be represented by counsel of its choice, which must be reasonably
satisfactory to the Indemnified Party, and to defend against, negotiate, settle
or otherwise deal with any proceeding, claim or demand which relates to any
claim indemnified against hereunder; PROVIDED, HOWEVER, that no settlement shall
be made without the prior written consent of the Indemnified Party, which
consent shall not be unreasonably withheld or delayed; and PROVIDED, FURTHER,
that the
38
<PAGE>
Indemnified Party may participate in any such proceeding with counsel of its
choice and at its expense. The parties hereto agree to cooperate fully with each
other in connection with the defense, negotiation or settlement of any such
legal proceeding, claim or demand. In the event the Indemnifying Party does not
elect to undertake the defense of the claim for which indemnification is sought
as provided herein within five (5) days after receipt from the Indemnified Party
of notice of such claim, the Indemnified Party shall have the right to conduct
such defense and shall have the right to settle, adjust or compromise such claim
or proceeding with the prior written consent of the Indemnifying Party,
PROVIDED, HOWEVER, that the Indemnifying Party shall not unreasonably withhold
or delay such consent.
9.8 EXCLUSIVE REMEDY. DSI, Meritus and Reiling hereby agree and
acknowledge that, except as set forth in Section 6.18, the foregoing
indemnification provisions contained in this Article IX shall be the exclusive
remedy of the parties for monetary damages; provided, however, that nothing
herein shall be construed to limit any party's right to seek and receive
equitable rights and remedies.
ARTICLE X
MISCELLANEOUS AND GENERAL
10.1 SURVIVAL. Notwithstanding any right of DSI to fully investigate the
affairs of Meritus and notwithstanding any knowledge of facts determined or
determinable by DSI pursuant to such investigation or right of investigation,
DSI has the unrestricted right to rely upon the representations, warranties and
covenants of Meritus set forth in this Agreement.
10.2 MODIFICATION OR AMENDMENT. Subject to the provisions of the
applicable law, at any time prior to the Effective Time, the parties hereto may
modify or amend this Agreement, by written agreement executed and delivered by
duly authorized officers of the respective parties.
10.3 WAIVER OF CONDITIONS. The conditions to each of the parties'
obligations to consummate the Merger are for the sole benefit of such party and
may be waived by such party in whole or in part to the extent permitted by
applicable law.
10.4 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each such counterpart being deemed to be an original instrument,
and all such counterparts shall together constitute the same agreement.
10.5 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL. THIS AGREEMENT SHALL
BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL BE INTERPRETED, CONSTRUED AND
GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE STATE OF TEXAS WITHOUT REGARD
TO THE CONFLICT OF LAW PRINCIPLES THEREOF. The parties hereby irrevocably
submit to the jurisdiction of the courts of the State of Texas and the Federal
courts of the United States of America located in the State of Texas solely in
respect of the interpretation and enforcement of the provisions of this
Agreement and of the documents referred to in this Agreement, and in respect of
the transactions contemplated hereby, and hereby waive, and agree not to assert,
as a defense in any action, suit or proceeding for the interpretation or
enforcement hereof or of any such document, that it is not subject thereto or
that such action, suit or proceeding may not be brought or is not maintainable
in said courts or that the venue thereof may not be appropriate or that this
Agreement or any such document may not be enforced in or by such courts, and the
parties hereto irrevocably agree that all claims with respect to such action or
proceeding shall be heard and determined in such a Texas State or
39
<PAGE>
Federal court. The parties hereby consent to and grant any such court
jurisdiction over the person of such parties and over the subject matter of such
dispute and agree that mailing of process or other papers in connection with any
such action or proceeding in the manner provided in Section 9.6 below or in such
other manner as may be permitted by law shall be valid and sufficient service
thereof.
(a) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY
ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT
ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY
WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT,
OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY
MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER
INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 9.5.
10.6 NOTICES. Any notice, request, instruction or other document to be
given hereunder by any party to the others shall be in writing and delivered
personally or sent by registered or certified mail, postage prepaid, or by
facsimile:
IF TO DSI:
President, DSI Toys, Inc.
1100 W. Sam Houston Parkway North, Suite A
Houston, TX 77043
fax: 713/365-9911
with a copy to:
J. Todd Mirolla, Esq.
Andre, Morris & Buttery
1102 Laurel Lane
San Luis Obispo, CA 93401
fax: 805/543-0752
IF TO MERITUS:
Walter Reiling
25 Notch Hill Drive
Livingston, NJ 07039
fax: (973) 994-1613
with a copy to
Robert P. Regimbal, Esq.
Graham, Curtin & Sheridan
4 Headquarters Plaza
P.O. Box 1991
Morristown, NJ 07962-1991
Fax: (973) 292-1767
40
<PAGE>
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
10.7 ENTIRE AGREEMENT; NO OTHER REPRESENTATIONS. This Agreement (including
any exhibits hereto), the Company Disclosure Letter and, the DSI Disclosure
Letter, constitute the entire agreement, and supersede all other prior
agreements, understandings, representations and warranties both written and
oral, among the parties, with respect to the subject matter hereof. EACH PARTY
HERETO AGREES THAT, EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES CONTAINED IN
THIS AGREEMENT, NEITHER DSI AND NOR Meritus MAKES ANY OTHER REPRESENTATIONS OR
WARRANTIES, AND EACH HEREBY DISCLAIMS ANY OTHER REPRESENTATIONS OR WARRANTIES
MADE BY ITSELF OR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, FINANCIAL
AND LEGAL ADVISORS OR OTHER REPRESENTATIVES, WITH RESPECT TO THE EXECUTION AND
DELIVERY OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY,
NOTWITHSTANDING THE DELIVERY OR DISCLOSURE TO THE OTHER OR THE OTHER'S
REPRESENTATIVES OF ANY DOCUMENTATION OR OTHER INFORMATION WITH RESPECT TO ANY
ONE OR MORE OF THE FOREGOING.
10.8 NO THIRD PARTY BENEFICIARIES. Except as provided in Section 6.13
(Indemnification Arrangements), this Agreement is not intended to confer upon
any Person other than the parties hereto any rights or remedies hereunder.
10.9 OBLIGATIONS OF DSI AND OF MERITUS. Whenever this Agreement requires a
Subsidiary of DSI to take any action, such requirement shall be deemed to
constitute an undertaking on the part of DSI to cause such Subsidiary to take
such action. Whenever this Agreement requires a Subsidiary of Meritus to take
any action, such requirement shall be deemed to constitute an undertaking on the
part of Meritus to cause such Subsidiary to take such action.
10.10 SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability or the other provisions hereof. If any
provision of this Agreement, or the application thereof to any Person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other Persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
10.11 INTERPRETATION. The table of contents and headings herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
Where a reference in this Agreement is made to a Section or Exhibit, such
reference shall be to a Section of or Exhibit to this Agreement unless otherwise
indicated. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation."
41
<PAGE>
10.12 ASSIGNMENT. This Agreement shall not be assignable by operation of
law or otherwise.
10.13 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable
damage would occur in the event that any of the terms or provisions of this
Agreement were not performed in accordance with their specific wording or were
otherwise breached. It is accordingly agreed that each of the parties hereto
shall be entitled to an injunction or injunctions to prevent breaches of this
Agreement and to enforce specifically the terms and provisions hereof in any
court of the United States of America or any state having jurisdiction, such
remedy being in addition to any other remedy to which any party may be entitled
at law or in equity.
10.14 ATTORNEYS' FEES. If any legal proceeding, arbitration or other
action is brought or threatened for the enforcement or interpretation of this
Agreement, or because of any alleged dispute, breach, default or
misrepresentation in connection with any of the provisions of this Agreement,
and the prevailing party in any such action should incur any legal fees,
including, but not limited to, attorneys' fees, paralegal fees, expert witness
fees, and other similar costs, a successful prevailing party or parties to any
such dispute or action will be entitled to recover their reasonable attorneys'
fees and additional legal costs incurred, together with any other relief to
which he/it may otherwise be entitled, as determined by an arbitrator, judgment
at trial, upon appeal or petition.
42
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by the
duly authorized officers of the parties hereto as of the date first written
above.
"DSI"
DSI TOYS, INC., A TEXAS CORPORATION
By: /s/ E. THOMAS MARTIN
Name: E. Thomas Martin
Title: Chairman of the Board
"MERITUS"
MERITUS INDUSTRIES, INC., A NEW JERSEY
CORPORATION
By: /s/ WALTER S. REILING
Name:_________________________________
Title:________________________________
MERITUS INDUSTRIES, LTD., A HONG KONG
CORPORATION
By: /s/ WALTER S. REILING
Name:_________________________________
Title:________________________________
"REILING"
By: /s/ WALTER S. REILING
Walter S. Reiling
By: /s/ Susan Reiling
SUSAN REILING
43
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