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 JULY 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 September 8, 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 July 31, 1999 and January 31, 1999....1
Consolidated Statement of Operations for the Three Months and Six
Months Ended July 31, 1999 and 1998....................................2
Consolidated Statement of Cash Flows for the Six Months Ended July
31, 1999 and 1998......................................................3
Consolidated Statement of Shareholders' Equity.........................4
Notes to Consolidated Financial Statements.............................5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................6
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.....................................................12
Item 2. CHANGE IN SECURITIES AND USE OF PROCEEDS .............................12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..................13
Item 6. EXHIBITS AND REPORTS ON FORM 8-K......................................14
Signatures....................................................................14
-i-
<PAGE>
DSI TOYS, INC.
CONSOLIDATED BALANCE SHEET
JULY 31, JANUARY 31,
1999 1999
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash ....................................... $ 701,066 $ 554,197
Restricted cash ............................ 150,000 150,000
Accounts receivable, net ................... 6,819,261 1,069,725
Inventories ................................ 7,757,936 4,207,704
Prepaid expenses ........................... 1,433,014 1,503,970
Deferred income taxes ...................... 801,000 801,000
------------ ------------
Total current assets .................. 17,662,277 8,286,596
Property and equipment, net ..................... 1,920,838 1,642,672
Advances to shareholder (life insurance premiums) 1,676,521 1,543,814
Deferred income taxes ........................... 1,388,687 1,117,000
Other assets .................................... 309,008 364,511
------------ ------------
$ 22,957,331 $ 12,954,593
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ... $ 10,293,569 $ 6,799,290
Current portion of long-term debt .......... 3,772,134 824,675
Income taxes payable ....................... 467,397 271,920
------------ ------------
Total current liabilities ............. 14,533,100 7,895,885
Long-term Debt .................................. 1,147,718 2,540,522
Deferred income taxes ........................... 113,789 113,000
------------ ------------
Total liabilities ..................... 15,794,607 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 ................. 4,979,701 21,162,568
Common stock warrants ...................... 102,500 102,500
Accumulated other comprehensive income ..... 3,894 14,296
Retained earnings .......................... 3,548,834 3,699,224
------------ ------------
8,722,119 25,065,778
Less: treasury stock, 185,843 and
2,719,000 shares, at cost ................ (1,559,395) (22,660,592)
------------ ------------
Total shareholders' equity ....... 7,162,724 2,405,186
------------ ------------
$ 22,957,331 $ 12,954,593
============ ============
See accompanying notes to consolidated financial statements.
Page 1
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DSI TOYS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31, SIX MONTHS ENDED JULY 31,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales .................................. $ 14,646,943 $ 17,524,808 $ 18,574,638 $ 23,450,934
Cost of goods sold ......................... 11,128,461 13,914,469 13,987,652 18,428,076
------------ ------------ ------------ ------------
Gross profit ............................... 3,518,482 3,610,339 4,586,986 5,022,858
Selling, general and administrative expenses 2,979,520 2,983,404 4,613,064 5,192,626
------------ ------------ ------------ ------------
Operating income (loss) .................... 538,962 626,935 (26,078) (169,768)
Interest expense ........................... 133,761 210,491 252,990 433,187
Other income ............................... (34,707) (25,850) (44,084) (37,222)
------------ ------------ ------------ ------------
Income (loss) before income taxes .......... 439,908 442,294 (234,984) (565,733)
Provision for (benefit from) income taxes .. 158,367 170,540 (84,594) (192,349)
------------ ------------ ------------ ------------
Net income (loss) .......................... $ 281,541 $ 271,754 $ (150,390) $ (373,384)
============ ============ ============ ============
BASIC EARNINGS PER SHARE
Earnings (loss) per share ............. $ 0.04 $ 0.05 $ (0.02) $ (0.06)
============ ============ ============ ============
Weighted average shares outstanding ... 7,826,635 6,000,000 6,975,365 6,000,000
============ ============ ============ ============
DILUTED EARNINGS PER SHARE
Earnings (loss) per share ............. $ 0.04 $ 0.05 $ (0.02) $ (0.06)
============ ============ ============ ============
Weighted average shares outstanding ... 7,986,090 6,000,000 6,975,365 6,000,000
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 2
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DSI TOYS, INC
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ......................................... $ (150,390) $ (373,384)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization ......................... 269,503 267,984
Amortization and write-off of
debt discount and issuance costs ................... 20,072 --
Provision for doubtful accounts ....................... 11,044 11,250
Gain on sale of equipment ............................. (989) --
Deferred income taxes ................................. (270,898) 373,063
Changes in assets and liabilities:
Accounts receivable ................................ (5,760,580) 209,220
Inventories ........................................ (3,550,232) (176,025)
Income taxes receivable/payable .................... 195,477 (524,530)
Prepaid expenses ................................... 70,956 (803,603)
Accounts payable and accrued liabilities ........... 3,494,279 2,794,883
----------- -----------
Net cash provided (used) by operating activities (5,671,758) 1,778,858
Cash flows from investing activities:
Capital expenditures ..................................... (550,467) (586,228)
Proceeds from sale of equipment .......................... 3,787 --
Life insurance premiums paid for shareholder ............. (132,707) (132,707)
Decrease in other assets ................................. 120,864 24,584
----------- -----------
Net cash used in investing activities ........... (558,523) (694,351)
Cash flows from financing activities:
Net borrowing (repayments) under revolving lines of credit 1,535,560 (711,975)
Net borrowings on long-term debt ......................... 19,095 --
Net proceeds from issuance of common stock ............... 4,918,330 --
Debt and stock issue costs ............................... (85,433) --
----------- -----------
Net cash provided (used) by financing activities 6,387,552 (711,975)
Effect of exchange rate changes on cash ........................ (10,402) (9,413)
----------- -----------
Net increase in cash ........................................... 146,869 363,119
Cash and cash equivalents, beginning of period ................. 554,197 383,690
----------- -----------
Cash and cash equivalents, end of period ....................... $ 701,066 $ 746,809
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
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DSI TOYS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------ PAID-IN COMPREHENSIVE RETAINED TREASURY
SHARES AMOUNT CAPITAL WARRANTS INCOME EARNINGS STOCK TOTALS
--------- ------- ------------ -------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, Jan. 31, 1998 ... 8,719,000 $87,190 $ 21,162,568 $102,500 $ 29,187 $ 4,437,653 $(22,660,592) $ 3,158,506
Comprehensive loss:
Net loss .......... (738,429) (738,429)
Foreign currency
translation adj
net of tax ... (14,891) (14,891)
-----------
Comprehensive
loss ........ (753,320)
--------- ------- ------------ -------- ------------- ----------- ------------ -----------
Balance, Jan. 31, 1999 ... 8,719,000 87,190 21,162,568 102,500 14,296 3,699,224 (22,660,592) 2,405,186
Issuance 566,038
common shares (3,515,096) 4,715,096 1,200,000
Comprehensive loss:
Net loss ....... (431,931) (431,931)
Foreign currency
translation adj .
net of tax .... (2,276) (2,276)
-----------
Comprehensive
loss ........ (434,207)
--------- ------- ------------ -------- ------------- ----------- ------------ -----------
Balance, Apr. 30, 1999 ... 8,719,000 87,190 17,647,472 102,500 12,020 3,267,293 (17,945,496) 3,170,979
Issuance 1,892,453
common shares (11,964,133) 15,764,133 3,800,000
Options exercised .. (518,189) 621,968 103,779
Stock issuance costs (185,449) (185,449)
Comprehensive
Income:
Net income ......... 281,541 281,541
Foreign currency
translation adj
net of tax ... (8,126) (8,126)
-----------
Comprehensive
income 273,415
--------- ------- ------------ -------- ------------- ----------- ------------ -----------
Balance, July 31, 1999 .. 8,719,000 $87,190 $ 4,979,701 $102,500 $ 3,894 $ 3,548,834 $ (1,559,395) $ 7,162,724
========= ======= ============ ======== ============= =========== ============ ===========
See accompanying notes to consolidated financial statements.
</TABLE>
Page 4
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DSI TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of DSI Toys,
Inc. and its wholly-owned subsidiary (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements and should be read in
conjunction with the financial statements and notes thereto appearing in the
Company's Annual Report on Form 10-K for the year ended January 31, 1999.
In the opinion of the Company's management, all adjustments necessary for a
fair presentation of the results of operations for all periods reported have
been included. Such adjustments consist only of normal recurring items.
The results of operations for the three months ended July 31, 1999 are not
necessarily indicative of the results expected for the full year ending January
31, 2000.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
JULY 31, 1999 JANUARY 31, 1999
------------- ----------------
Trade receivables ......................... $ 8,558,769 $ 2,984,619
Provisions for:
Discounts, markdowns and
Return of defective goods .......... (1,606,819) (1,791,436)
Doubtful accounts ....................... (132,689) (123,458)
------------- ----------------
Accounts receivable, net .................. $ 6,819,261 $ 1,069,725
============= ================
3. SEGMENT INFORMATION
Financial information for the six months ended July 31, 1999 and 1998
is as follows:
<TABLE>
<CAPTION>
UNITED STATES HONG KONG CONSOLIDATED
------------- ----------- ------------
Six months ended July 31, 1999:
<S> <C> <C> <C>
Net sales ..................... $ 5,016,759 $13,557,879 $ 18,574,638
Operating gain (loss) .......... (412,580) 386,502 (26,078)
Total assets at July 31, 1999 .. 14,149,448 8,807,883 22,957,331
Six months ended July 31, 1998:
Net sales ..................... $ 7,165,062 $16,285,872 $ 23,450,934
Operating gain (loss) .......... (296,809) 127,041 (169,768)
Total assets at July 31, 1998 .. 13,520,778 9,368,309 22,889,087
</TABLE>
Page 5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995: STATEMENTS IN THIS REPORT THAT ARE NOT HISTORICAL FACTS, INCLUDING
STATEMENTS ABOUT PLANS AND EXPECTATIONS REGARDING PRODUCTS AND OPPORTUNITIES,
DEMAND AND ACCEPTANCE OF NEW AND EXISTING PRODUCTS, CAPITAL RESOURCES AND FUTURE
FINANCIAL CONDITION AND RESULTS ARE FORWARD-LOOKING. FORWARD-LOOKING STATEMENTS
INVOLVE RISKS AND UNCERTAINTIES, WHICH MAY CAUSE THE COMPANY'S ACTUAL RESULTS IN
FUTURE PERIODS TO DIFFER MATERIALLY AND ADVERSELY FROM THOSE EXPRESSED. THESE
UNCERTAINTIES AND RISKS INCLUDE, BUT ARE NOT LIMITED TO, CHANGING CONSUMER
PREFERENCES, LACK OF SUCCESS OF NEW PRODUCTS, LOSS OF THE COMPANY'S CUSTOMERS,
COMPETITION, AND OTHER FACTORS DISCUSSED IN THIS REPORT AND FROM TIME TO TIME IN
THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 31, 1999.
EXCEPT AS OTHERWISE INDICATED, REFERENCES TO THE "COMPANY" REFER TO DSI
TOYS, INC. AND ITS WHOLLY OWNED SUBSIDIARY, DSI (HK) LTD. ("DSI (HK)"). THE
TERMS "FISCAL YEAR" AND "FISCAL" REFER TO THE COMPANY'S FISCAL YEAR WHICH IS THE
YEAR ENDING JANUARY 31 OF THE FOLLOWING CALENDAR YEAR MENTIONED (E.G., A
REFERENCE TO FISCAL 1999 IS A REFERENCE TO THE FISCAL YEAR ENDING JANUARY 31,
2000).
GENERAL
The Company designs, develops, markets and distributes toys and children's
consumer electronics. Core product categories are (i) juvenile audio products,
including Tech-Link(TM) and Digi-Tech(TM) walkie-talkies, pre-teen audio
products and Kawasaki(R) musical toys; (ii) girls' toys, including dolls, play
sets and accessories; and (iii) boys' toys, including BlockMen(R) construction
sets, Kawasaki (R) and Burning Thunder (TM) radio control vehicles, and western
and military action toys. Historically, the majority of the Company's sales have
been made to customers based in the United States. All of the Company's
international sales are denominated in United States dollars. Therefore, the
Company is not subject to exchange rate risk with respect to international
sales.
On April 15, 1999, the Company entered into a Stock Purchase and Sale
Agreement (the "Stock Purchase Agreement") with MVII, LLC, a California limited
liability company controlled by E. Thomas Martin ("MVII"). Pursuant to the Stock
Purchase Agreement, MVII purchased 566,038 shares of Common Stock, par value
$.01 per share (the "Common Stock"), of the Company from the Company for $1.2
million on April 15, 1999, and purchased an additional 1,792,453 shares of
Common Stock from the Company for $3.8 million on June 1, 1999. Also, pursuant
to the Stock Purchase Agreement, on April 21, 1999, MVII commenced a tender
offer for 1.6 million shares of the outstanding Common Stock at $4.38 per share
net to the seller in cash (the "Offer"). On May 26, 1999, MVII accepted for
payment 1.6 million shares that were validly tendered and not withdrawn in the
Offer by the Company's shareholders. The Stock Purchase and Sale Agreement and
the transactions contemplated thereby were approved by the Company's
shareholders at the annual meeting of shareholders held on May 24, 1999.
As a result of the transactions consummated pursuant to the Stock Purchase
Agreement, MVII has made a total investment in the Company's Common Stock of $12
million. Of that $12 million, $5 million was paid by MVII directly to the
Company for Common Stock. MVII currently is the record owner of approximately
47% of the Company's outstanding shares of Common Stock. When MVII's record
ownership is combined with MVII's rights under the Shareholders' and Voting
Agreement dated April 15, 1999, by and among the Company, MVII, Messrs. Davis,
Conrad, Matlock and Smith and a limited partnership controlled by Mr. Crosby
(the "Voting Agreement"), executed in connection with the Stock Purchase
Agreement, MVII is the beneficial owner of approximately 61% of the Company's
outstanding shares of Common Stock. Furthermore, the Voting Agreement entitles
MVII to nominate all but two of the members of the Company's board of directors.
On June 1, 1999, DSI accepted the resignations of Messrs. Crosby, Smith, Conrad
and Neitz from its Board. Such vacancies have been filled by MVII's nominees,
namely Messrs. E. Thomas Martin, Robert L. Burke, Joseph S. Whitaker, and John
McSorley. At the Company's annual meeting of shareholders on May 24, 1999, the
Company's shareholders approved such appointments. On June 1, 1999, E. Thomas
Martin was appointed by the Company to serve as Chairman of the Board.
The Company, entered into a non-binding letter of intent with Meritus
Industries, Inc., ("Meritus") effective June 24, 1999, which contemplates the
Company acquiring Meritus by means of a merger. Any definitive merger agreement
will be subject to the negotiation of acceptable terms, the completion of
satisfactory due diligence investigations, board and shareholder approvals, and
the receipt of all requisite regulatory approvals. Meritus is a
Page 6
<PAGE>
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 innovative 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 SIX MONTHS ENDED
JULY 31, JULY 31,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ........................... 100.0% 100.0% 100.0% 100.0%
Costs of goods sold ................. 76.0 79.4 75.3 78.6
-------- -------- -------- --------
Gross profit ........................ 24.0 20.6 24.7 21.4
Selling, general and administrative
expenses .......................... 20.3 17.0 24.8 22.1
-------- -------- -------- --------
Operating income (loss) ............. 3.7 3.6 (0.1) (0.7)
Interest expense .................... 0.9 1.2 1.4 1.8
Other income ........................ (0.2) (0.1) (0.2) (0.2)
-------- -------- -------- --------
Income (loss) before income taxes ... 3.0 2.5 (1.3) (2.3)
Provision for (benefit from) income
taxes ............................. 1.1 1.0 (0.5) (0.8)
-------- -------- -------- --------
Net income (loss) ................... 1.9% 1.5% (0.8)% (1.5)%
======== ======== ======== ========
</TABLE>
THREE MONTHS ENDED JULY 31, 1999 COMPARED TO THE THREE MONTHS ENDED JULY 31,
1998
NET SALES. Net sales for the three months ended July 31, 1999 decreased
$2.9 million, or 16.4%, to $14.7 million, from $17.5 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 second quarter ended July
31, 1999 decreased $4.0 million or 29.8%, to $9.3 million, from $13.3 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 $629,000, or 91.6%, to $1.3 million
during the second quarter ended July 31, 1999 from $686,000 in the comparable
period in 1998. The sales for the second quarter 1999 were driven by the
introduction of the Sweet Faith(TM) doll. The absence of a new doll introduction
during the second quarter 1998 led to comparatively lower sales in girls' toys.
Net sales of boys' toys increased $628,000 or 26.3%, to $3.0 million in
the second quarter ended July 31, 1999, from $2.4 million in the comparable
period in 1998. The increase was due primarily to the expansion of the
BLOCKMEN(R) construction sets with the new Military Desert theme reflecting the
continued strength of BLOCKMEN(R) in the marketplace.
Net sales of products in other categories during the second quarter ended
July 31, 1999 decreased $179,000 or 15.0% to $1.0 million during the second
quarter ended July 31, 1999 from $1.2 million in the comparable period in 1998.
The decrease was due primarily to decreased sales of Hoppin' Poppin'
Spaceballs(R), partially offset by an increase in Spintrek(TM) sales in the
second quarter of 1999 as compared to the same period in 1998.
International net sales for the three months ended July 31, 1999 decreased
$805,000 or 17.0%, to $3.9 million, from $4.7 million in the comparable period
in 1998. The decline was due primarily to decreased sales to France and
Australia.
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<PAGE>
GROSS PROFIT. Gross profit decreased $92,000, or 2.5%, to $3.5 million
for the second quarter ended July 31, 1999, from $3.6 million in the comparable
period in 1998. This decrease was primarily due to lower sales volume. The gross
profit as a percentage of net sales increased to 24.0% in the second quarter
ended July 31, 1999 from 20.6% in the second quarter of fiscal 1998. Such
increase was primarily due to increased emphasis on proprietary products, which
typically can command a higher margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses remained at $3.0 million in the second quarter ended
July 31, 1999 compared to the similar period in 1998.
INTEREST EXPENSE. As a result of debt repayment using the proceeds from
the sale of stock to MVII, LLC on April 15 and June 1, 1999, interest expense
decreased $77,000, or 36.5%, to $134,000 in the second quarter ended July 31,
1999 from $211,000 in the comparable period in 1998.
OTHER INCOME. Other income increased $9,000 to $35,000 in the second
quarter ended July 31, 1999 from $26,000 in the comparable period in 1998,
reflecting the effect of changes in levels of short-term investments and foreign
exchange translation.
SIX MONTHS ENDED JULY 31, 1999 COMPARED TO THE SIX MONTHS ENDED JULY 31, 1998
NET SALES. Net sales for the six months ended July 31, 1999 decreased $4.9
million, or 20.8%, to $18.6 million, from $23.4 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 $5.3 million, or 31.5%, to
$11.4 million during the six months ended July 31, 1999, from $16.7 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 decreased $67,000, or 3.8%, to $1.7 million
during the six months July 31, 1999, from $1.8 million in the comparable period
in 1998. Sales for the second quarter 1999 were driven by the introduction of
the Sweet Faith(TM) dolls. Doll sales in the first two quarters of 1998 were
comprised solely of closeouts of existing inventory.
Net sales of boys' toys increased $924,000, or 29.7%, to $4.0 million in
the six months ended July 31, 1999, from $3.1 million in the comparable period
in 1998. The increase was due primarily to the expansion of the BLOCKMEN(R)
construction sets with the new Military Desert theme reflecting the continued
strength of BLOCKMEN(R) in the marketplace.
Net sales of products in other categories decreased $473,000, or 24.8%, to
$1.4 million, during the six months ended July 31, 1999, from $1.9 in the
comparable period in 1998. The decrease was due primarily to decreased sales of
Hoppin' Poppin' Spaceballs(R), partially offset by increase in Spintrek (TM)
sales, in the first six months of 1999 as compared to the same period in 1998.
International net sales for the six months ended July 31, 1999 decreased
$730,000, or 14.0%, to $4.7 million, from $5.5 million in the comparable period
in 1998. The decline was due primarily to decreased sales to France, Australia
and Spain, partially offset by an increase in sales to the Philippines and
Brazil.
GROSS PROFIT. Gross profit decreased $436,000, or 8.7%, to $4.6 million
for the six months ended July 31, 1999, from $5.0 million in the comparable
period in 1998. Gross profit as a percentage of net sales increased to 24.7% in
the six months ended July 31, 1999 from 21.4% in the first six months of fiscal
1998. Such increase was primarily due to increased emphasis on proprietary
products, which typically can command a higher margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $580,000, or 11.2% to $4.6 million in the six
months ended July 31, 1999 from $5.2 million in the first six months of fiscal
1998. The decrease resulted primarily from discounts negotiated with an existing
vendor.
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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 $180,000, or 41.6%, to $253,000 in the six months ended July 31, 1999
from $433,000 in the comparable period in 1998.
OTHER INCOME. Other income increased $7,000, or 18.4%, to $44,000 in the
six months ended July 31, 1999 from $37,000 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 $5.7 million during
the first six 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 $559,000
and was primarily the result of capital expenditures. Net cash provided in
financing activities was $6.4 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 July 31, 1999 was $3.1 million and unrestricted
cash was $701,000, and the Company's working capital deficit at July 31, 1998,
was $1.4 million and unrestricted cash was $747,000. On June 1, 1999, the
Company received $3.8 million from the sale of Common Stock to MVII.
The seasonal nature of the toy business results in complex working capital
needs. The Company's working capital needs, which the Company generally
satisfies through short-term borrowings, are greatest in the first two fiscal
quarters. To manage these working capital requirements, the Company maintains
credit facilities secured principally by accounts receivable and inventory. The
Company currently has a line of credit facility with State Street Bank and Trust
Company - Hong Kong Branch (the "Hong Kong Credit Facility") and a revolving
credit facility with Sunrock Capital Corp. (the "Revolver"). At September 9,
1999 the Company had additional borrowing capacity of $5.8 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.
In addition, the Company is obligated to make future minimum royalty
payments under certain of its license agreements. As of July 31, 1999, the
Company was required to pay guaranteed royalties under these licenses of
$77,000, $227,000, $220,000, and $150,000 per year from 1999 through year 2002.
As part of the Company's strategy, the Company will evaluate potential
acquisitions of other toy businesses or product lines that the Company believes
would complement its existing business.
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.
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YEAR 2000 COMPLIANCE
Many existing computer systems and programs process transactions using two
digits rather than four digits for the year of a transaction. Unless the
hardware and/or the software has been modified, a significant number of those
computer systems and programs may process a transaction with a date of the year
"2000" as the year "1900", which could cause the system or the program to fail
or create erroneous results before, on or after January 1, 2000 (the "Y2K
Issue").
The Company's principal computer systems consist of: (i) management
information software ("MIS") for accounts receivable, general ledger, payables,
order entry, sales reporting, inventory tracking, product distribution, and
production scheduling; (ii) electronic data interchange ("EDI") for
order-taking, invoicing and the like between the Company and its major
customers; and (iii) local area network and personal computer operating systems.
The MIS systems at the Company's Hong Kong subsidiary have been upgraded
and successfully tested to be Y2K compliant. The MIS systems at the Company's
U.S. headquarters are in the process of being upgraded, replaced and tested. To
date, the Company has completed approximately 90% of its upgrades and
replacements and approximately 60% of its testing. Completion of all remediation
and testing of the MIS systems is expected to be completed by October 31, 1999.
The Company is currently reprogramming, or replacing, and testing the EDI
software. The Company is communicating with its customers to evaluate their EDI
Y2K compliance. The Company believes that over the upcoming months its major
customers plan to test their EDI systems for internal, intermediary and supplier
Y2K compliance. The Company would be unable to receive and invoice orders from a
customer though EDI if the customer or its EDI intermediaries were not Y2K
compliant. Although the Company does not transmit electronic orders to its
independent manufacturers, delays or non-delivery of goods to the Company could
arise from Y2K issues affecting their businesses and presently the Company is
communicating with its independent manufacturers to evaluate their Y2K
compliance. The effect of non-compliance by independent manufacturers and other
third parties is not determinable.
The Company's local area network operating system will require upgrades
according to vendors, but such upgrades are available at minimal cost. The
Company also intends to replace personal computers and software found not to be
Y2K compliant. The Company anticipates that these replacements will be completed
by October 31, 1999.
The Company has incurred approximately $20,000 in expenses in connection
with making its computer systems and programs Y2K compliant. The Company expects
to incur additional Y2K costs of approximately $80,000 during fiscal 1999. The
Company is utilizing both internal and external sources to address Y2K Issues,
and the Company anticipates Y2K compliance by October 31, 1999. All historical
and future costs have been and will continue to be funded out of existing cash
and cash flow from operations.
The failure to successfully address a material Y2K Issue could result in
an interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Particularly because
of the uncertainty of the Y2K readiness of customers, suppliers and contractors,
the Company is unable to assess at this time whether the consequences of the Y2K
Issue will have a material impact on the Company's results of operations,
liquidity or financial condition. The Company 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 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. The
Company assesses its Y2K status regularly and will begin to develop
comprehensive contingency plans if the Company believes it will not complete the
Y2K project in a timely manner. If the Company's Y2K project is not completed on
a timely basis, or if its major customers or suppliers fail to address all of
the Y2K Issues, the Company believes it could have a material adverse impact on
the Company's operations.
Page 10
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The cost of Y2K compliance and the referenced completion dates are based
on management's best estimates and may be updated as additional information
becomes available. Reference is made to the first paragraph of Part I of this
report, which addresses forward-looking statements made by the Company.
Page 11
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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.
Page 12
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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.
Page 13
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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 September 8,
1999, for the purpose of reporting a change in the Fiscal year end from
January 31st to December 31st.
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: September 14, 1999 /s/ MICHAEL J. LYDEN
-------------------------------------------------
Michael J. Lyden
President, Chief Executive Officer
Dated: September 14, 1999 By: /s/ ROBERT L. WEISGARBER
-------------------------------------------------
Robert L. Weisgarber
Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 14
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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.
10.38 Consulting Agreement dated June 1, 1999, between the Company and Davis
(filed as Exhibit 10.38 to the Quarterly Report on Form 10-Q for the
quarter ended April 30, 1999), incorporated herein by reference.
10.39 Amendment dated May 5, 1999, to Loan and Security Agreement, dated as of
February 2, 1999, by and between Sunrock Capital Corp. and the Company
(filed as Exhibit 10.39 to the Quarterly Report on Form 10-Q for the
quarter ended April 30, 1999), incorporated herein by reference.
10.40 Amendment No. 1, to Loan and Security Agreement, dated June 30, 1999, by
and between Sunrock Capital Corp. and the Company.
10.41 Employment Agreement dated June 17, 1999 by and between the Company and
Michael J. Lyden.
10.42 Employment Agreement dated June 1, 1999, by and between the Company and
Joseph S. Whitaker.
10.43 Amendment to 1997 Stock Option Plan dated May 24, 1999.
27 Financial Data Schedule
Page 15
EXHIBIT 10.40
AMENDMENT NO. 1 TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 1 TO LOAN AND SECURITY AGREEMENT (this "AMENDMENT"), is
entered into on this 30th day of June, 1999, by and between SUNROCK CAPITAL
CORP., a Delaware corporation ("LENDER"), and DSI TOYS, INC., a Texas
corporation ("BORROWER"), to be effective for all purposes as of the Effective
Date (as herein defined).
RECITALS
A. Borrower and Lender have entered into that certain Loan and Security
Agreement, dated as of February 2, 1999 (as the same may be amended, modified or
supplemented from time to time, the "LOAN AGREEMENT").
B. Pursuant to a letter agreement, dated as of April 8, 1999, by and
between Borrower and Lender (the "LETTER AGREEMENT"), Lender waived certain
specified provisions of the Loan Agreement in order to facilitate certain
transactions (the "CHANGE OF CONTROL TRANSACTIONS") between the Borrower, its
shareholders and a California limited liability company controlled by E. Thomas
Martin and certain of his affiliates.
C. The Letter Agreement requires certain amendments to the Loan Agreement
to provide for the continued control of Borrower by E. Thomas Martin.
D. The Change of Control Transactions occurred on June 1, 1999 (the
"EFFECTIVE DATE"), and Borrower and Lender desire to amend the Loan Agreement as
set forth herein, which amendments are to be effective for all purposes as of
the Effective Date.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties, intending to be legally bound, agree as
follows:
ARTICLE I
DEFINITIONS
1.01 Capitalized terms used in this Amendment, to the extent not otherwise
defined herein, shall have the same meaning as in the Loan Agreement, as amended
hereby.
1.02 "MVII" shall mean MVII, LLC, a California limited liability company.
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ARTICLE II
EFFECTIVE DATE
2.01 The Amendments contained in this Amendment shall each be effective as
of the Effective Date. Each of Borrower and Lender agree that the amendments set
forth herein fulfill the requirements of EXHIBIT A, SUBPARAGRAPH (C), of the
Letter Agreement.
ARTICLE III
AMENDMENTS
3.01 AMENDMENT TO DEFINITION OF "CHANGE OF CONTROL" IN SECTION 1.5 OF THE
LOAN AGREEMENT. The definition of "Change of Control" contained in SECTION 1.5
of the Loan Agreement is hereby amended and restated to read in its entirety as
follows:
"'CHANGE OF CONTROL' shall be deemed to have occurred at such time as (i)
MVII, LLC, a California limited liability company, shall fail to own,
beneficially and of record, in excess of forty-five percent (45%) of each
class of capital stock then outstanding of Borrower normally entitled to
vote in the election of directors of the Borrower; (ii) E. Thomas Martin,
in his individual capacity or through one or more wholly-owned Persons,
shall not have the ability to direct the management and policies of MVII,
LLC, a California limited liability company; or (iii) a "person" or
"group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, but excluding E. Thomas Martin and MVII,
LLC) becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of more than
thirty-four percent (34%) of the total voting power of any class of stock
then outstanding of Borrower normally entitled to vote in the election of
directors."
ARTICLE IV
WAIVER
4.01 Borrower has notified Lender that Borrower desires to make two cash
payments to Nickelodeon, each in the amount of $985,000, on June 30, 1999, and
December 15, 1999, respectively, such cash payment to be in full satisfaction of
certain outstanding payables for which a structured payment schedule had been
agreed upon (the "RESTRICTED PAYMENT"). Absent the consent of Lender, the
Restricted Payment would violate Borrower's covenant set forth at SECTION 9.9 of
the Loan Agreement (the "COVENANT DEFAULT"). Having advised the undersigned of
its intention to make the Restricted Payment, Borrower has requested that Lender
waive the Covenant Default that will result from such Restricted Payment. In the
exercise of its discretion as a prudent lender, Lender hereby waives the
Covenant Default that would otherwise result from the Restricted Payment. Except
as expressly set forth in this SECTION 4.01, nothing contained in this Amendment
or any other communication between Lender and Borrower shall be a waiver of any
other present or future violation or Event of Default under the Loan Agreement
or any agreement, document or instrument entered into in connection therewith
(collectively, the "OTHER VIOLATIONS"). Similarly, nothing contained in this
Amendment shall directly or indirectly in any way: (i) impair, prejudice or
otherwise adversely affect Lender's right at any time to exercise any
2
<PAGE>
right, privilege or remedy in connection with the Loan Agreement or any
agreement, document or instrument entered into in connection therewith with
respect to any Other Violations, or (ii) constitute any course of dealing or
other basis for altering any obligation of Borrower under the Loan Agreement or
any agreement, document or instrument entered into in connection therewith or
any right, privilege or remedy of Lender under the Loan Agreement or any
agreement, document or instrument entered into in connection therewith with
respect to the Other Violations. Nothing in this Amendment shall be construed to
be a consent by Lender to any Other Violations.
ARTICLE V
RATIFICATIONS, REPRESENTATIONS AND WARRANTIES
5.01 RATIFICATIONS. Except as expressly modified and superseded by this
Amendment, the terms and provisions of the Loan Agreement, the Letter Agreement
are ratified and confirmed and shall continue in full force and effect. Borrower
and Lender agree that the Loan Agreement, as amended hereby, and each agreement
and instrument executed in connection therewith, shall continue to be legal,
valid, binding and enforceable in accordance with their respective terms.
5.02 REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants to Lender (a) on or prior to the Effective Date Borrower received not
less than $5 million as net consideration for the issuance or sale of common
stock, par value $.01 per share, to MVII, which consideration is not be subject
to any claim by or through MVII (other than Borrower's potential liability in
respect of indemnification obligations of the type customarily undertaken by
Persons engaged in transactions of similar size and nature to the Change of
Control Transaction); (b) all corporate proceedings taken in connection with the
Change of Control Transaction and all documents, instruments and other legal
matters incident thereto conform in all material respects to the Term Sheet (as
defined in the Letter Agreement), and concurrently with the execution of this
Amendment, Sunrock has been provided copies of all such documentation; (c) the
execution, delivery and performance of this Amendment have been authorized by
all requisite corporate action on the part of Borrower and will not violate the
Articles of Incorporation or Bylaws of Borrower; (d) the representations and
warranties contained in the Loan Agreement, as amended hereby, are true and
correct on and as of the date hereof; (e) as of the date hereof and as of the
Effective Date, no Event of Default under the Loan Agreement was or is
continuing and no event or condition exists that with the giving of notice or
the lapse of time, or both, would be an Event of Default; and (f) Borrower is in
full compliance with all covenants and agreements contained in the Loan
Agreement and each agreement and instrument entered into in connection
therewith.
ARTICLE VI
MISCELLANEOUS PROVISIONS
6.01 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties made herein and in the Loan Agreement shall survive the execution and
delivery of this Amendment, and no investigation by Lender or any closing shall
affect the representations and warranties or the right of Lender to rely upon
them.
3
<PAGE>
6.02 REFERENCE TO LOAN AGREEMENT. The Loan Agreement, as amended hereby,
and all other agreements, documents or instruments now or hereafter executed and
delivered pursuant to the terms thereof are hereby amended so that any reference
in the Loan Agreement or such other agreements, documents and instruments shall
mean a reference to the Loan Agreement, as amended hereby.
6.03 EXPENSES OF LENDER AND WAIVER FEE. In consideration of the waiver
provided in Section 4.01 hereof, Borrower shall pay to Lender a waiver fee in
the amount of $1,000 which fee shall be earned by Lender and shall be due and
payable upon execution by Lender of a counterpart of this Amendment. In addition
to such waiver fee and as provided in the Loan Agreement, Borrower agrees to pay
on demand all costs and expenses incurred by Lender in connection with the
preparation, negotiation and execution of this Amendment, including, without
limitation, the costs and fees of Lender's legal counsel, and all costs and
expenses incurred by Lender in connection with the enforcement or preservation
of any rights under the Loan Agreement, as amended hereby, or any agreement,
document or instrument executed in connection therewith.
6.04 SEVERABILITY. Any provision of this Amendment held by a court of
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
6.05 SUCCESSORS AND ASSIGNS. This Amendment is binding upon and shall
inure to the benefit of Lender and Borrower and their respective successors and
assigns, except Borrower may not assign or transfer any of its rights or
obligations hereunder without the prior written consent of Lender.
6.06 COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
6.07 EFFECT OF WAIVER. No consent or waiver, express or implied, by Lender
to or for any breach of or deviation from any covenant or condition by Borrower
shall be deemed a consent to or waiver of any other breach of the same or any
other covenant, condition or duty.
6.08 HEADINGS. The headings, captions, and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
6.09 APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS EXECUTED
PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN AND
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
TEXAS.
6.10 FINAL AGREEMENT. THE LOAN DOCUMENTS, AS AMENDED HEREBY, REPRESENT THE
ENTIRE EXPRESSION OF THE PARTIES WITH RESPECT TO
4
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THE SUBJECT MATTER HEREOF IN THE DATE THIS AMENDMENT IS EXECUTED. THE LOAN
DOCUMENTS, AS AMENDED HEREBY, MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NOT
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. NO MODIFICATION, RESCISSION,
WAIVER, RELEASE OR AMENDMENT OF ANY PROVISION OF THIS AMENDMENT SHALL BE MADE,
EXCEPT BY A WRITTEN AGREEMENT SIGNED BY BORROWER AND LENDER.
6.11 RELEASE. BORROWER HEREBY ACKNOWLEDGES THAT IT HAS NO DEFENSE,
COUNTERCLAIM, OFFSET, CROSS-COMPLAINT, CLAIM OR DEMAND OF ANY KIND OR NATURE
WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF ITS
LIABILITY TO REPAY THE OBLIGATIONS (AS DEFINED IN THE LOAN AGREEMENT) OR TO SEEK
AFFIRMATIVE RELIEF OR DAMAGES OF ANY KIND OR NATURE FROM LENDER. BORROWER HEREBY
VOLUNTARILY AND KNOWINGLY RELEASES AND FOREVER DISCHARGES LENDER, ITS
PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE
CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND
LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN, ANTICIPATED OR UNANTICIPATED,
SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN
EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS AMENDMENT IS
EXECUTED, WHICH THE BORROWER MAY NOW OR HEREAFTER HAVE AGAINST LENDER, ITS
PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, IF ANY, AND
IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION
OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING FROM ANY LOANS (AS DEFINED IN
THE LOAN AGREEMENT), INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR,
CHARGING, TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE
HIGHEST LAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER
THE LOAN AGREEMENT OR ANY AGREEMENT, DOCUMENT OR INSTRUMENT ENTERED INTO IN
CONNECTION THEREWITH.
Executed as of this 30th day of June, 1999.
DSI TOYS, INC.
By: /s/ Thomas V. Yarnell
Name: Thomas V. Yarnell
Title: Administrative Vice President
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SUNROCK CAPITAL CORP.
By: /s/ JD Erwin
Name: John D. Erwin
Title: Senior Vice President
6
EXHIBIT 10.41
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is hereby made and entered into
this 17th of June, 1999, by and between DSI Toys, Inc., a Texas corporation,
whose principal business address is 1100 West Sam Houston Parkway, Houston,
Texas 77043 ("Employer" or "Company"), and Michael J. Lyden, an individual
residing at 3 Turnberry Court, Moorestown, New Jersey 08057 ("Employee").
WITNESSETH:
A. Employer is in the business of inventing, developing, manufacturing and
marketing toys. Employer is a public company.
B. Employee has extensive experience and expertise in the toy industry.
C. Employer wishes to employ Employee and Employee wishes to become an
employee of Employer pursuant to the terms and conditions of this Agreement.
ARTICLE 1
GENERAL
1.1 EMPLOYMENT. Employer hereby employs Employee and Employee hereby
accepts such employment with Employer upon the terms and conditions hereinafter
set forth. Employee shall perform such duties and responsibilities and exercise
such powers for the Employer as may from time to time be assigned or delegated
to him by Employer's Board of Directors, including such duties as may be
customary for a Chief Executive Officer and President in the toy industry.
Employee acknowledges that Employer shall be dependent upon Employee for its
continued ongoing business operations and that the provisions hereof are
necessary for the successful conduct of the business and affairs of the Company.
1.2 POSITION. Employee shall be employed in the capacity and hold
the position of Chief Executive Officer and President of Employer. In such
capacity, Employee agrees to, at all times, exercise his best efforts for the
benefit of the Company and to thereby undertake to use and implement the
management, organizational, intellectual, technical and other skills of Employee
to the best of his ability on the Company's behalf. Employee shall be
responsible to and report to the Board of Directors of the Company.
1.3 TERM. Subject to the provisions provided for and relating to
termination set forth herein, the term of Employee's employment pursuant to this
Agreement shall be for a period beginning on June 17, 1999, and ending on June
16, 2002 (said period being hereinafter referred to as the "Employment Term").
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ARTICLE 2
REMUNERATION AND BENEFITS
2.1 BASE SALARY. For all services rendered by Employee during the
Employment Term, Employer shall pay to Employee a salary of One Hundred Eighty
Thousand Dollars ($180,000.00) per year (the "Base Salary"). The Base Salary
shall begin to accrue and be paid on the Effective Date of this Agreement and
shall be distributed in semi-monthly installments in arrears through the
Employment Term.
(a) At a minimum, the Base Salary shall be adjusted annually
on the anniversary date to reflect any increase in the Consumer Price Index -
All Urban Wage Earners (the "Index"). The Base Salary shall not be adjusted
downward to reflect any decrease in the Index.
(b) The Base Salary may also be raised at any time during the
Employment Term at the discretion of the Company's Board of Directors.
2.2 BENEFITS. Employee shall be eligible to participate in any and
all benefit plans which Employer may from time to time make generally available
to all employees of the Company, including but not limited to participation in
the Company's 401(k) plan, group life insurance and health insurance programs.
2.3 STOCK OPTIONS. Employee shall be eligible to participate in
Employer's 1997 Stock Option Plan (the "Plan") at the senior executive level.
Employee shall be granted options for the purchase of 150,000 shares of the
common stock of Employer (the "Options") pursuant to the terms and conditions of
the Plan. The Company is in the process of amending the Plan and the Options
will be issued when the amendments to the Plan are finalized.
2.4 EXTENT OF SERVICE. During the Employment Term, Employee agrees
to devote such amount of time, attention, energy and effort as is necessary to
further the business and profitability of Employer. Further, during the
Employment Term, Employee shall not be engaged in any other business activity
pursued for gain, profit or other pecuniary advantage. However, the foregoing
limitations shall not be construed as prohibiting Employee from making personal
investments in any business enterprise not competitive with that of Employer in
such form or manner as will neither require his services in the operations or
affairs of enterprises in which such investments are made, nor otherwise violate
the terms of this Agreement.
2.5 OFFICES. Employer shall provide office space for Employee, with
provisions for secretarial and other support services necessary to the
maintenance and operations of such office, and the performance of Employee's
duties hereunder.
2.6 EXPENSE ALLOWANCE. Employer shall reimburse Employee for all
approved, deductible business expenses reasonably incurred in the performance of
his duties hereunder, including reasonable expenditures for entertainment,
consistent with Employer's then existing expense reimbursement policy.
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2.7 VACATIONS AND HOLIDAYS. Employee shall be entitled to fifteen
(15) vacation days annually in accordance with the policies established by
Employer's Board of Directors, as well as those public holidays duly observed by
Employer; provided, however, no more than ten (10) consecutive vacation days
shall be taken at any one time.
2.8 INSURANCE. Employee shall be provided group life, disability and
health insurance coverages by Employer throughout the term of this Agreement.
Employee shall be provided a group life insurance policy with a death benefit of
no less than $200,000.00.
2.9 BUSINESS TRAVEL. Employee shall be entitled to travel portal to
portal via business class on all international air travel performed for the
Company. All domestic travel performed for the Company shall be via coach class.
2.10 AUTOMOBILE ALLOWANCE. Employee shall be entitled to an
automobile allowance of Nine Hundred Dollars ($900.00) per month.
ARTICLE 3
TERMINATION
3.1 DEATH. In the event of the Employee's death during the
Employment Term, the Employer shall pay to Employee's executor(s),
administrator(s) or personal representative(s) an amount equal to the
installment of his Base Salary payable for the month in which he dies and for no
period thereafter. Employer shall have no other liabilities or other obligations
of any kind or character under this Agreement to Employee's executor(s),
administrator(s) or personal representative(s) except such accrued salary and
unused vacation that Employee is entitled at the time of death.
(a) It is expressly understood and agreed that the Company may
maintain key man term life insurance for the benefit of the Company on the life
of Employee. Additionally, the Company may maintain such other life insurance
for the benefit of Employer, the Company's shareholders, as from time to time
the Board of Directors of the Company deems reasonable and appropriate.
(b) Upon the death of Employee, all vested employee benefits
accrued for the benefit of Employee shall be distributed in accordance with the
provisions set forth in the subject plan agreement or arrangement providing the
applicable benefits, and otherwise distributed in accordance with applicable
laws.
3.2 DISABILITY; FAILURE TO PERFORM DUTIES. In the event of Employee's
failure to perform his duties hereunder by reason of illness or disability for a
period equal to or in excess of ninety (90) consecutive days during the
Employment Term or for ninety (90) days during any twelve (12) month period
throughout the Employment Term, Employer shall have the option to terminate this
Agreement by giving thirty (30) days written notice of termination to Employee.
Upon such notice of termination, Employer shall pay to Employee an amount equal
to the installments of his Base Salary payable up to the time this Agreement is
terminated, and Employer shall distribute any
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and all accrued employee benefits as of the date of termination to Employee in
accordance with the provision of the applicable benefit plan, agreement or
arrangement giving rise to the applicable benefits. Upon the termination of this
Agreement as a result of such disability, Employer shall have no other
liabilities or obligations of any kind or character to Employee under this
Agreement.
3.3 TERMINATION FOR CAUSE. Employee may be terminated for cause by
Employer upon written notice to Employee. For purposes of this Agreement, "for
cause" shall be if Employee:
(a) Neglects the performance of his duties required to be
performed under the terms of this Agreement to the economic detriment of the
Company;
(b) Fails or refuses in the opinion of the Board of Directors
to comply with the reasonable policies, standards and regulations of the Company
which from time to time may be established;
(c) Is convicted of a crime or is charged with committing a
felony;
(d) Materially breaches any of the terms or conditions of this
Agreement; or
(e) Performs any action constituting fraud or an intentional
misrepresentation.
Upon such determination, Employer may, at its option, terminate this
Agreement immediately without prejudice to any other remedy to which Employer
may be entitled either at law or in equity, or under this Agreement. In such
event, any of the obligations of Employer under this Agreement shall be
terminated as of the date given in the notice of termination referred to
hereinabove, following payment by Employer to Employee of that portion of the
Base Salary and vacation then accrued, due and owing in accordance with Section
2.1 hereof.
3.4 TERMINATION WITHOUT CAUSE. Employer may terminate this Agreement
without cause upon prior written notice to Employee. In such event, Employee
shall be paid his regular Base Salary from the date of termination for a period
of three (3) months, but no other severance shall be paid to the Employee.
Further, upon payment by Employer to Employee of the three (3) months' Base
Salary, Employee shall have no further rights and Employer no other liabilities
or other obligations of any kind or nature under this Agreement except for
accrued employee benefits to which Employee may otherwise be entitled.
ARTICLE 4
COVENANTS
4.1 DISCLOSURE OF INFORMATION. Employee recognizes and acknowledges
that he has and will have access to certain confidential information,
proprietary data and trade secrets of Employer, and of entities and individuals
controlling, controlled by or under common control with Employer ("affiliates"),
including but not limited to, contracts, patterns, devices, calculations,
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drawings, productions, plans, specifications, records, compilations or
information, and other confidential information and data either compiled by
Employer or received from its customers or Employer, and that such information
is not generally available to the public and constitutes valuable, special and
unique property of the Employer. Employee shall not, during or after the term of
this Agreement, undertake in any fashion, to take commercial or proprietary
advantage of or profit from any such confidential information to any person or
firm, corporation, association or other entity for any reason or purpose
whatsoever, except to authorized representatives of Employer and as otherwise
may be proper in the course of performing his employment hereunder. Further,
Employee shall maintain the confidentiality of all such information of Employer,
its affiliates or its customers for the sole use and benefit of Employer. All
files, records, documents, drawings, plans, specifications, contracts, products,
equipment or similar items relating to the business of Employer and/or the
affiliates shall not be removed from the premises of Employer and/or its
affiliates without the prior consent of Employer and/or its affiliates, as
applicable.
(a) Employee further covenants and agrees to promptly return
and deliver to Employer all documents, information, or other material or
property of any kind or character which in any way relate to the business of
Employer or any of its affiliates or customers, whether or not asserted to be
the exclusive property of Employer; and, further, Employee shall not attempt to
retain copies or duplicates of any such property. In the event of a breach or a
threatened breach of these covenants by Employee, Employer and/or its
affiliates, in addition to all other remedies made available hereby or as a
matter of law or in equity, may seek an injunction restraining Employee from
disclosing, in whole or in part, such confidential information. In addition to
any other damages sustained by Employer, Employee shall pay to Employer all
profits, payments, earnings compensation or other emoluments paid or accruing to
Employee, directly or indirectly, by reason of Employee's disclosure of
information as provided herein. Nothing herein shall be construed as prohibiting
Employer and/or its affiliates from pursuing any other remedies available to it
or them for such breach or threatened breach, including the recovery of damages
from Employee.
4.2 NON-COMPETITION. During the Employment Term, and if this
Agreement is terminated in accordance with Sections 3.3 or 3.4, for a period of
one (1) year from the date of Employee's termination of employment hereunder,
Employee shall not directly or indirectly, either for himself, or as an
employer, employee, owner, manager, independent contractor, consultant, agent,
principal, partner, co-venturer, shareholder, director, officer or in any other
capacity, engage or have any indirect interest in any person that is engaged, or
to the knowledge of Employee is planning to engage, in competition in any manner
whatsoever with the business of Employer including, without limitation, any
person that manufactures, markets, imports, sells or distributes toys. If the
Employment Term is terminated by Employer pursuant to Section 3.4 and Employer
elects to enforce the provisions of this Section 4.2, Employer shall be
obligated to pay Employee as additional consideration on or before the fifteenth
(15th) day of each month during the one (1) year period following termination of
the Employment Term an amount equal to one-twelfth (1/12) of Employee's then
existing Base Salary.
4.3 AGREEMENT NOT TO SOLICIT. During the Employment Term, and if
this Agreement is terminated in accordance with Section 3.3 or 3.4, for a period
of one (1) year from the date of Employee's termination of employment hereunder,
Employee will not, either directly or
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indirectly, on his own or in the service of another:
(a) Knowingly call upon, solicit, divert or attempt to solicit
or divert any of the business contacts of Employer;
(b) Knowingly employ any employee of Employer or solicit,
divert, recruit or induce any employee of Employer to leave the employ of
Employer, whether or not such employment is at will; and/or
(c) Knowingly induce or advise any service provider, customer,
factory or representative of Employer to terminate or materially alters its then
existing relationship with Employer.
ARTICLE 5
MISCELLANEOUS PROVISIONS
5.1 MISCELLANEOUS PROVISIONS. The following miscellaneous provisions
shall apply to the terms and conditions of this Agreement:
(a) Pursuit of any one remedy shall not preclude pursuit of
any other remedies provided for herein or by law. No waiver of one violation of
this Agreement shall be deemed or construed to constitute a waiver of any
similar violations subsequently occurring, or any other violation whatsoever.
(b) This Agreement shall be construed under the laws of Texas,
and the rights and obligations of each of the parties to this Agreement during
the term hereof and upon its termination shall be governed exclusively by Texas
law.
(c) This instrument contains all of the understandings and
agreements of whatsoever kind and nature existing between the parties hereto
with respect to this Agreement, and the rights, interests, understandings,
agreements and obligations of the respective parties and their prior oral
agreements.
(d) This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which shall
constitute one and the same Agreement.
(e) If any one or more of the provisions contained in this
Agreement are held to be invalid or unenforceable in any respect, such
invalidity or unenforceability shall not affect any other provision hereof, and
the intent manifested thereby shall be recognized.
(f) Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, other than the parties hereto
and their respective heirs and successors, any legal or equitable rights, remedy
or claim under or in respect to this Agreement,
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or any provisions herein contained.
(g) This Agreement may not be amended, altered or modified
except by a written instrument signed by each of the parties.
(h) 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.
5.2 SUCCESSORS BOUND; SURVIVAL OF COVENANTS. The rights and
obligations of the parties hereunder shall inure to the benefit of and shall be
binding upon the successors of each respective party. The representations,
warranties, covenants, and agreements of the parties, as well as any rights and
benefits of the parties, shall survive the execution hereof and following the
Employment Term to the extent so provided herein.
5.3. ARBITRATION. All disputes, controversies or differences which
may arise between the parties out of or in relation to or in connection with
this Agreement, or for the breach thereof, shall be finally settled by
arbitration in accordance with the Rules of the American Arbitration
Association. Any such arbitration shall be convened and take place in Houston,
Texas. Any such arbitration shall be absolute and binding upon the parties.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on and
as of the date first above written.
"EMPLOYEE" "EMPLOYER"
DSI TOYS, INC., A TEXAS CORPORATION
/S/ MICHAEL J. LYDEN
MICHAEL J. LYDEN By: /s/ E. Thomas Martin
Title: Chairman, DSI Toys, Inc.
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EXHIBIT 10.42
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is hereby made and effective as of
the 1st day of June, 1999, by and between DSI Toys, Inc., a Texas corporation,
whose principal business address is 1100 West Sam Houston Parkway, Houston,
Texas 77043 ("Employer" or "Company"), and Joseph S. Whitaker, an individual
residing at 5615 Ladybird Lane, La Jolla, California 92037 ("Employee").
WITNESSETH:
A. Employer is in the business of inventing, developing, manufacturing and
marketing toys. Employer is a public company.
B. Employee has extensive experience and expertise in the toy industry.
C. Employer wishes to employ Employee and Employee wishes to become an
employee of Employer pursuant to the terms and conditions of this Agreement.
ARTICLE 1
GENERAL
1.1 EMPLOYMENT. Employer hereby employs Employee and Employee hereby
accepts such employment with Employer upon the terms and conditions hereinafter
set forth. Employee shall perform such duties and responsibilities and exercise
such powers for the Employer as may from time to time be assigned or delegated
to him by Employer, including such duties as may be customary for a Senior Vice
President in the toy industry. Employee acknowledges that Employer shall be
dependent upon Employee for its continued ongoing business operations and that
the provisions hereof are necessary for the successful conduct of the business
and affairs of the Company.
1.2 POSITION. Employee shall be employed in the capacity and hold
the position of Senior Vice President of Business Development of Employer. In
such capacity, Employee agrees to, at all times, exercise his best efforts for
the benefit of the Company and to thereby undertake to use and implement the
management, organizational, intellectual, technical and other skills of Employee
to the best of his ability on the Company's behalf. Employee shall be
responsible to and report to the President and Chief Executive Officer of the
Company.
1.3 TERM. Subject to the provisions provided for and relating to
termination set forth herein, the term of Employee's employment pursuant to this
Agreement shall be for a period beginning on June 15, 1999, and ending on June
14, 2002 (said period being hereinafter referred to as the "Employment Term").
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ARTICLE 2
REMUNERATION AND BENEFITS
2.1 BASE SALARY. For all services rendered by Employee during the
Employment Term, Employer shall pay to Employee a salary of Ninety-Six Thousand
Dollars ($96,000.00) per year (the "Base Salary"). The Base Salary shall begin
to accrue and be paid on the Effective Date of this Agreement and shall be
distributed in semi-monthly installments in arrears through the Employment Term.
(a) At a minimum, the Base Salary shall be adjusted annually
on the anniversary date to reflect any increase in the Consumer Price Index -
All Urban Wage Earners (the "Index"). The Base Salary shall not be adjusted
downward to reflect any decrease in the Index.
(b) The Base Salary may also be raised at any time during the
Employment Term at the discretion of the Company's Board of Directors.
2.2 BENEFITS. Employee shall be eligible to participate in any and
all benefit plans which Employer may from time to time make generally available
to all employees of the Company, including but not limited to participation in
the Company's 401(k) plan, group life insurance and health insurance programs.
2.3 STOCK OPTIONS. Employee shall be eligible to participate in
Employer's 1997 Stock Option Plan (the "Plan") at the senior executive level.
Employee shall be granted nonqualified stock options for the purchase of 100,000
shares of the common stock of Employer (the "Options") pursuant to the terms and
conditions of the Plan.
2.4 EXTENT OF SERVICE. During the Employment Term, Employee agrees
to devote such amount of time, attention, energy and effort as is necessary to
further the business and profitability of Employer. Further, during the
Employment Term, Employee shall not be engaged in any other business activity
pursued for gain, profit or other pecuniary advantage. However, the foregoing
limitations shall not be construed as prohibiting Employee from making personal
investments in any business enterprise not competitive with that of Employer in
such form or manner as will neither require his services in the operations or
affairs of enterprises in which such investments are made, nor otherwise violate
the terms of this Agreement.
2.5 OFFICES. Employer shall provide office space for Employee, with
provisions for secretarial and other support services necessary to the
maintenance and operations of such office, and the performance of Employee's
duties hereunder.
2.6 EXPENSE ALLOWANCE. Employer shall reimburse Employee for all
approved, deductible business expenses reasonably incurred in the performance of
his duties hereunder, including reasonable expenditures for entertainment,
consistent with Employer's then existing expense reimbursement policy.
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2.7 VACATIONS AND HOLIDAYS. Employee shall be entitled to fifteen
(15) vacation days annually in accordance with the policies established by
Employer's Board of Directors, as well as those public holidays duly observed by
Employer; provided, however, no more than ten (10) consecutive vacation days
shall be taken at any one time.
2.8 INSURANCE. Employee shall be provided group life, disability and
health insurance coverages by Employer throughout the term of this Agreement. If
qualified, Employee shall be provided a group life insurance policy with a death
benefit of no less than $200,000.00.
2.9 BUSINESS TRAVEL. Employee shall be entitled to travel portal to
portal via business class on all international air travel performed for the
Company. All domestic air travel performed for the Company shall be via coach
class.
2.10 AUTOMOBILE ALLOWANCE. Employee shall be entitled to an
automobile allowance of Five Hundred Dollars ($500.00) per month.
ARTICLE 3
TERMINATION
3.1 DEATH. In the event of the Employee's death during the
Employment Term, the Employer shall pay to Employee's executor(s),
administrator(s) or personal representative(s) an amount equal to the
installment of his Base Salary payable for the month in which he dies and for no
period thereafter. Employer shall have no other liabilities or other obligations
of any kind or character under this Agreement to Employee's executor(s),
administrator(s) or personal representative(s) except such accrued salary and
unused vacation that Employee is entitled at the time of death.
(a) It is expressly understood and agreed that the Company may
maintain key man term life insurance for the benefit of the Company on the life
of Employee. Additionally, the Company may maintain such other life insurance
for the benefit of Employer, the Company's shareholders, as from time to time
the Board of Directors of the Company deems reasonable and appropriate.
(b) Upon the death of Employee, any and all vested employee
benefits accrued for the benefit of Employee shall be distributed in accordance
with the provisions set forth in the subject plan agreement or arrangement
providing the applicable benefits, and otherwise distributed in accordance with
applicable laws.
3.2 DISABILITY; FAILURE TO PERFORM DUTIES. In the event of
Employee's failure to perform his duties hereunder by reason of illness or
disability for a period equal to or in excess of ninety (90) consecutive days
during the Employment Term or for ninety (90) days during any twelve (12) month
period throughout the Employment Term, Employer shall have the option to
terminate this Agreement by giving thirty (30) days written notice of
termination to Employee. Upon such notice of termination, Employer shall pay to
Employee an amount equal to the installments of his Base Salary payable up to
the time this Agreement is terminated, and Employer shall distribute any
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and all accrued employee benefits as of the date of termination to Employee in
accordance with the provision of the applicable benefit plan, agreement or
arrangement giving rise to the applicable benefits. Upon the termination of this
Agreement as a result of such disability, Employer shall have no other
liabilities or obligations of any kind or character to Employee under this
Agreement.
3.3 TERMINATION FOR CAUSE. Employee may be terminated for cause by
Employer upon written notice to Employee. For purposes of this Agreement, "for
cause" shall be if Employee:
(a) Neglects the performance of his duties required to be
performed under the terms of this Agreement to the economic detriment of the
Company;
(b) Fails or refuses in the opinion of the Board of Directors
to comply with the reasonable policies, standards and regulations of the Company
which from time to time may be established;
(c) Is convicted of a crime or is charged with committing a
felony;
(d) Materially breaches any of the terms or conditions of this
Agreement; or
(e) Performs any action constituting fraud or an intentional
misrepresentation.
Upon such determination, Employer may, at its option, terminate this
Agreement immediately without prejudice to any other remedy to which Employer
may be entitled either at law or in equity, or under this Agreement. In such
event, any of the obligations of Employer under this Agreement shall be
terminated as of the date given in the notice of termination referred to
hereinabove, following payment by Employer to Employee of that portion of the
Base Salary and vacation then accrued, due and owing in accordance with Section
2.1 hereof.
3.4 TERMINATION WITHOUT CAUSE. Employer may terminate this Agreement
without cause upon prior written notice to Employee. In such event, Employee
shall be paid his regular Base Salary from the date of termination for a period
of three (3) months, but no other severance shall be paid to the Employee.
Further, upon payment by Employer to Employee of the three (3) months' Base
Salary, Employee shall have no further rights and Employer no other liabilities
or other obligations of any kind or nature under this Agreement except for
accrued employee benefits to which Employee may otherwise be entitled.
ARTICLE 4
COVENANTS
4.1 DISCLOSURE OF INFORMATION. Employee recognizes and acknowledges
that he has and will have access to certain confidential information,
proprietary data and trade secrets of Employer, and of entities and individuals
controlling, controlled by or under common control with Employer ("affiliates"),
including but not limited to, contracts, patterns, devices, calculations,
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drawings, productions, plans, specifications, records, compilations or
information, and other confidential information and data either compiled by
Employer or received from its customers or Employer, and that such information
is not generally available to the public and constitutes valuable, special and
unique property of the Employer. Employee shall not, during or after the term of
this Agreement, undertake in any fashion, to take commercial or proprietary
advantage of or profit from any such confidential information to any person or
firm, corporation, association or other entity for any reason or purpose
whatsoever, except to authorized representatives of Employer and as otherwise
may be proper in the course of performing his employment hereunder. Further,
Employee shall maintain the confidentiality of all such information of Employer,
its affiliates or its customers for the sole use and benefit of Employer. All
files, records, documents, drawings, plans, specifications, contracts, products,
equipment or similar items relating to the business of Employer and/or the
affiliates shall not be removed from the premises of Employer and/or its
affiliates without the prior consent of Employer and/or its affiliates, as
applicable.
(a) Employee further covenants and agrees to promptly return
and deliver to Employer all documents, information, or other material or
property of any kind or character which in any way relate to the business of
Employer or any of its affiliates or customers, whether or not asserted to be
the exclusive property of Employer; and, further, Employee shall not attempt to
retain copies or duplicates of any such property. In the event of a breach or a
threatened breach of these covenants by Employee, Employer and/or its
affiliates, in addition to all other remedies made available hereby or as a
matter of law or in equity, may seek an injunction restraining Employee from
disclosing, in whole or in part, such confidential information. In addition to
any other damages sustained by Employer, Employee shall pay to Employer all
profits, payments, earnings compensation or other emoluments paid or accruing to
Employee, directly or indirectly, by reason of Employee's disclosure of
information as provided herein. Nothing herein shall be construed as prohibiting
Employer and/or its affiliates from pursuing any other remedies available to it
or them for such breach or threatened breach, including the recovery of damages
from Employee.
4.2 NON-COMPETITION. During the Employment Term, and if this
Agreement is terminated in accordance with Sections 3.3 or 3.4, for a period of
one (1) year from the date of Employee's termination of employment hereunder,
Employee shall not directly or indirectly, either for himself, or as an
employer, employee, owner, manager, independent contractor, consultant, agent,
principal, partner, co-venturer, shareholder, director, officer or in any other
capacity, engage or have any indirect interest in any person that is engaged, or
to the knowledge of Employee is planning to engage, in competition in any manner
whatsoever with the business of Employer including, without limitation, any
person that manufactures, markets, imports, sells or distributes toys. If the
Employment Term is terminated by Employer pursuant to Section 3.4 and Employer
elects to enforce the provisions of this Section 4.2, Employer shall be
obligated to pay Employee as additional consideration on or before the fifteenth
(15th) day of each month during the one (1) year period following termination of
the Employment Term an amount equal to one-twelfth (1/12) of Employee's then
existing Base Salary.
4.3 AGREEMENT NOT TO SOLICIT. During the Employment Term, and if
this Agreement is terminated in accordance with Section 3.3 or 3.4, for a period
of one (1) year from the date of Employee's termination of employment hereunder,
Employee will not, either directly or
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indirectly, on his own or in the service of another:
(a) Knowingly call upon, solicit, divert or attempt to solicit
or divert any of the business contacts of Employer;
(b) Knowingly employ any employee of Employer or solicit,
divert, recruit or induce any employee of Employer to leave the employ of
Employer, whether or not such employment is at will; and/or
(c) Knowingly induce or advise any service provider, customer,
factory or representative of Employer to terminate or materially alters its then
existing relationship with Employer.
ARTICLE 5
MISCELLANEOUS PROVISIONS
5.1 MISCELLANEOUS PROVISIONS. The following miscellaneous provisions
shall apply to the terms and conditions of this Agreement:
(a) Pursuit of any one remedy shall not preclude pursuit of
any other remedies provided for herein or by law. No waiver of one violation of
this Agreement shall be deemed or construed to constitute a waiver of any
similar violations subsequently occurring, or any other violation whatsoever.
(b) This Agreement shall be construed under the laws of Texas,
and the rights and obligations of each of the parties to this Agreement during
the term hereof and upon its termination shall be governed exclusively by Texas
law.
(c) This instrument contains all of the understandings and
agreements of whatsoever kind and nature existing between the parties hereto
with respect to this Agreement, and the rights, interests, understandings,
agreements and obligations of the respective parties and their prior oral
agreements.
(d) This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, and all of which shall
constitute one and the same Agreement.
(e) If any one or more of the provisions contained in this
Agreement are held to be invalid or unenforceable in any respect, such
invalidity or unenforceability shall not affect any other provision hereof, and
the intent manifested thereby shall be recognized.
(f) Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, other than the parties hereto
and their respective heirs and successors, any legal or equitable rights, remedy
or claim under or in respect to this Agreement,
-6-
<PAGE>
or any provisions herein contained.
(g) This Agreement may not be amended, altered or modified
except by a written instrument signed by each of the parties.
(h) 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.
5.2 SUCCESSORS BOUND; SURVIVAL OF COVENANTS. The rights and
obligations of the parties hereunder shall inure to the benefit of and shall be
binding upon the successors of each respective party. The representations,
warranties, covenants, and agreements of the parties, as well as any rights and
benefits of the parties, shall survive the execution hereof and following the
Employment Term to the extent so provided herein.
5.3. ARBITRATION. All disputes, controversies or differences which
may arise between the parties out of or in relation to or in connection with
this Agreement, or for the breach thereof, shall be finally settled by
arbitration in accordance with the Rules of the American Arbitration
Association. Any such arbitration shall be convened and take place in Houston,
Texas. Any such arbitration shall be absolute and binding upon the parties.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on and
as of the date first above written.
"EMPLOYEE" "EMPLOYER"
DSI TOYS, INC., A TEXAS CORPORATION
/S/ JOSEPH S. WHITAKER
JOSEPH S. WHITAKER By: /s/ Michael J. Lyden
Title: President and CEO
-7-
EXHIBIT 10.43
AMENDMENT
TO THE
DSI TOYS, INC.
1997 STOCK OPTION PLAN
Effective as of May 24, 1999 the DSI Toys, Inc. 1997 Stock Option Plan is
amended in the following respects:
Section 3.1 of Article III of the DSI Toys, Inc. Stock Option Plan is hereby
amended and restated to read in its entirety as follows:
3.1 SHARES RESERVED UNDER PLAN. The aggregate number of shares of
Common Stock that may be issued upon the exercise of Options granted under
the Plan shall not exceed Nine Hundred Thousand (900,000) shares, all or
any part of which may be issued pursuant to Incentive Stock Options,
Nonstatutory Stock Options or any combination thereof. Shares of Common
Stock issued upon the exercise of Options granted under the Plan may
consist of either authorized but unissued shares or shares that have been
issued and which shall have been or shall be reacquired by the Company.
The total number of shares authorized under the Plan shall be subject to
increase or decrease in order to give effect to the provisions of Sections
10.3 and 10.4, and to give effect to any amendment adopted pursuant to
Article IX. If any Option granted under the Plan shall expire, terminate
or be canceled for any reason without having been exercised in full, the
number of shares as to which such Option was not exercised shall again be
available for purposes of the Plan. The Company shall at all times while
the Plan is in effect reserve such number shares of Common Stock as will
be sufficient to satisfy the requirements of the Plan.
The undersigned Secretary of the Corporation hereby certifies that the foregoing
amendment to the DSI Toys, Inc. Stock Option Plan was duly adopted and approved
by proper action of the Board of Directors on April 9, 1999 and by the
affirmative vote of the holders of a majority of the shares of Common Stock of
the corporation on May 24, 1999.
/s/ THOMAS V. YARNELL
Thomas V. Yarnell
Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DSI TOYS,
INC. FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED JULY 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> JUL-31-1999
<CASH> 701,066
<SECURITIES> 0
<RECEIVABLES> 8,558,769
<ALLOWANCES> (1,739,508)
<INVENTORY> 7,757,936
<CURRENT-ASSETS> 17,662,277
<PP&E> 6,250,685
<DEPRECIATION> (4,329,847)
<TOTAL-ASSETS> 22,957,331
<CURRENT-LIABILITIES> 14,533,100
<BONDS> 0
0
0
<COMMON> 87,190
<OTHER-SE> 7,075,534
<TOTAL-LIABILITY-AND-EQUITY> 22,957,331
<SALES> 18,574,638
<TOTAL-REVENUES> 18,574,638
<CGS> 13,987,652
<TOTAL-COSTS> 4,613,064
<OTHER-EXPENSES> 44,084
<LOSS-PROVISION> 11,044
<INTEREST-EXPENSE> 252,990
<INCOME-PRETAX> (234,984)
<INCOME-TAX> (84,594)
<INCOME-CONTINUING> (150,390)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (150,390)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
