SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Under Rule14a-12
DSI TOYS, INC.
(Name of Registrant as Specified In Its Charter)
.........................................................
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
....................................................................
2) Aggregate number of securities to which transaction applies:
....................................................................
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
....................................................................
4) Proposed maximum aggregate value of transaction:
....................................................................
5) Total fee paid:
....................................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
....................................................................
2) Form, Schedule or Registration Statement No.:
....................................................................
3) Filing Party:
....................................................................
4) Date Filed:
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DSI TOYS, INC.
1100 WEST SAM HOUSTON PARKWAY (NORTH)
HOUSTON, TEXAS 77043
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 23, 2000
To the Shareholders of
DSI Toys, Inc.
The Annual Meeting of Shareholders of DSI Toys, Inc. a Texas corporation
(the "Company"), will be held on Tuesday, May 23, 2000, at 1:30 p.m. Central
Daylight Time, at the Company's corporate offices, 1100 West Sam Houston Parkway
(North), Houston, Texas, 77043 for the following purposes:
1. To elect three directors to the class of directors whose three-year
term will expire in 2003.
2. To consider and vote upon the following proposals described more
fully in the accompanying proxy statement:
(i) Proposal One: Adoption and approval of a proposal to amend
the DSI Toys, Inc. 1997 Stock Option Plan (the "Stock Option Plan")
(a) to increase from 900,000 to 1,200,000 the aggregate number of
shares of Common Stock of the Company reserved for issuance under
the Stock Option Plan and (b) to make certain conforming changes.
(ii) Proposal Two: Adoption and approval of a proposal to
retain PricewaterhouseCoopers LLP as the independent public
accounting firm for the fiscal year ending December 31, 2000 to
perform audits, tax services, securities and exchange commission
reviews, and such other accounting services as the Board of
Directors may deem necessary to the proper operation of the
Company's business from time to time.
3. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on April 13, 2000
as the record date for the determination of shareholders entitled to notice of
and to vote at the 2000 Annual Meeting of Shareholders or any adjournment
thereof. Only holders of record of Common Stock at the close of business on the
record date are entitled to notice of and to vote at the meeting. A complete
list of such shareholders will be available for examination at the offices of
the Company in Houston, Texas during normal business hours for a period of ten
days prior to the meeting.
A record of the Company's activities during fiscal 1999 and financial
statements for the fiscal year ended December 31, 1999 are contained in the
accompanying 1999 Annual Report and Form 10-K. The Annual Report and Form 10-K
does not form any part of the material for solicitation of proxies.
All shareholders are cordially invited to attend the meeting. SHAREHOLDERS
ARE URGED, WHETHER OR NOT THEY PLAN TO ATTEND THE MEETING, TO SIGN, DATE AND
MAIL THE ENCLOSED PROXY OR VOTING INSTRUCTION CARD IN THE POSTAGE-PAID ENVELOPE
PROVIDED. If a shareholder who has returned a proxy attends the meeting in
person, such shareholder may revoke the proxy and vote in person on all matters
submitted at the meeting.
By Order of the Board of Directors
/s/ THOMAS V. YARNELL
Thomas V. Yarnell
SECRETARY
Houston, Texas
April 27, 2000
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DSI TOYS, INC.
1100 WEST SAM HOUSTON PARKWAY (NORTH)
HOUSTON, TEXAS 77043
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 23, 2000
This proxy statement is furnished to shareholders of DSI Toys, Inc. (the
"Company") in connection with the solicitation by the Board of Directors of the
Company of proxies for use at the 2000 Annual Meeting of Shareholders to be held
on Tuesday, May 23, 2000 at 1:30 p.m. Central Daylight Time, at the Company's
corporate offices, 1100 West Sam Houston Parkway (North), Houston, Texas 77043.
The approximate date of mailing of this proxy statement and the accompanying
proxy or voting instruction card is intended to be April 27, 2000.
At the meeting, shareholders will be asked to consider and vote upon the
following proposals (the "Proposals"), as well as upon the election of three
directors to the class of directors whose three-year term will expire in 2003
and upon such other business as may properly come before the meeting or any
adjournment thereof:
(i) adoption and approval of a proposal to amend the DSI Toys, Inc.
1997 Stock Option Plan (the "Stock Option Plan") (a) to increase
from 900,000 to 1,200,000 the aggregate number of shares of Common
Stock of the Company reserved for issuance under the Stock Option
Plan and (b) to make certain conforming changes.
(ii) adoption and approval of a proposal to retain
PricewaterhouseCoopers LLP as the independent public accounting firm
for the fiscal year ending December 31, 2000 to perform audits, tax
services, securities and exchange commission reviews, and such other
accounting services as the Board of Directors may deem necessary to
the proper operation of the Company's business from time to time.
GENERAL
PROXY CARDS
Record holders of the Common Stock of the Company may vote their shares in
person or by executing and returning by mail an enclosed proxy card. If a proxy
card is executed and returned, it serves to appoint proxies for record holders
of Common Stock of the Company. Shares represented by a proxy in such form, duly
executed and returned to the Company and not revoked, will be voted at the
meeting in accordance with the directions given. If no direction is made, the
proxy will be voted FOR election of all three nominees for director named in the
proxy, FOR approval of the amendment to the Stock Option Plan and FOR approval
of PricewaterhouseCoopers LLP as the Company's independent auditors for 2000.
Any shareholder giving a proxy may revoke it at any time before it is voted by
communicating such revocation in writing to the Secretary of the Company, by
executing and delivering a later-dated proxy, or by voting in person at the
meeting.
VOTING PROCEDURES AND TABULATION
The Company will appoint one or more inspectors of election to act at the
meeting and to make a written report thereof. Prior to the meeting, the
inspectors will sign an oath to perform their duties in an impartial manner and
according to the best of their abilities. The inspectors will ascertain the
number of shares outstanding and the voting power of each, determine the shares
represented at the meeting and the validity of proxies and ballots, count all
votes and ballots, and perform certain other duties as required by law.
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With regard to the election of directors, votes may be cast in favor of or
withheld from each nominee. Votes that are withheld will be excluded entirely
from the vote and will have no effect. Abstentions may be specified on the
Proposals to be acted upon and will be counted as present for purposes of
determining the existence of a quorum regarding such items of business.
Abstentions on such Proposals will have the effect of a negative vote.
Shares referred to as "broker non-votes" (shares held by brokers or
nominees as to which they have no discretionary authority to vote on a
particular matter and have received no instructions from the beneficial owners
or persons entitled to vote thereon), if any, are counted as shares that are
present and entitled to vote for purposes of determining the presence of a
quorum. However, for purposes of determining the outcome of any matter requiring
discretionary authority to vote, broker non-votes will be treated as not voting
with respect to that matter (even though those shares are considered present for
quorum purposes and may be entitled to vote on other matters). For matters
requiring the affirmative vote of a plurality of the shares of Common Stock
present or represented at the meeting, broker non-votes will have no effect on
the outcome of the vote. For matters requiring the affirmative vote of a
majority of the shares of Common Stock outstanding or of a majority of the
shares of Common Stock present or represented at the meeting and entitled to
vote, broker non-votes will have the effect of votes against such proposal.
RECORD DATE AND VOTING SECURITIES
The only voting security of the Company outstanding is its Common Stock.
Each share of Common Stock is entitled to one vote on each matter properly
brought before the meeting. Only holders of record of Common Stock at the close
of business on April 13, 2000, the record date for the meeting, are entitled to
notice of and to vote at the meeting. On the record date for the meeting, there
were 9,066,365 shares of Common Stock outstanding and entitled to be voted at
the meeting. A majority of such shares, present in person or represented by
proxy, is necessary to constitute a quorum.
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ELECTION OF DIRECTORS
The Articles of Incorporation and bylaws of the Company provide for three
classes of directors, with approximately one-third of the directors constituting
the Board being elected each year to serve a three-year term. Pursuant to the
Company's bylaws, the number of directors has been established by resolution of
the Board at seven.
Pursuant to the terms of a Shareholders' and Voting Agreement dated April
15, 1999, (the "Voting Agreement") among the Company, Messrs. M.D. Davis, Barry
Conrad, Joseph Matlock and Douglas Smith and Rust Capital, Ltd., a Texas limited
partnership, (the "DSI Group") and MVII, LLC, a California limited liability
company, ("MVII"), the DSI Group is entitled to nominate two of the directors of
the Company, and MVII is entitled to nominate the remaining directors of the
Company. Further, each member of the DSI Group has given MVII an irrevocable
proxy to vote its respective shares of Common Stock of the Company for MVII's
nominees for director, and MVII is obligated under the Voting Agreement to vote
its shares of Common Stock of the Company for the nominees of the DSI Group.
In addition, pursuant to the terms of a Shareholders' and Voting
Agreement dated January 7, 2000 (the "Reiling Voting Agreement") among the
Company, MVII and Susan and Walter Reiling (the "Reilings"), the number of
directors of the Company was increased by one, and the Reilings nominated Mr.
Reiling to fill the newly-created director position. The Board of Directors
appointed Mr. Reiling to the Board on February 1, 2000. Pursuant to the bylaws
of the Company, Mr. Reiling's term as director expires at the 2000 Annual
Meeting of Shareholders. The Reilings also have given MVII an irrevocable proxy
to vote their shares of Common Stock of the Company for MVII's nominees for
director, and MVII is obligated under the Reiling Voting Agreement to vote its
shares of Common Stock of the Company for the Reilings' nominee. In this year's
election, Mr. Reiling is the nominee of the Reilings, and Messrs. Davis and
Matlock are the nominees of the DSI Group. The remaining directors who are not
up for election this year, namely Messrs. Burke, McSorley, Martin and Whitaker,
were previously nominated by MVII.
In accordance with the above provisions, the Board of Directors has
nominated Messrs. M.D. Davis, Joseph N. Matlock and Walter S. Reiling from the
class of directors whose term expires at the 2000 Annual Meeting of Shareholders
for re-election as directors of the Company to serve three-year terms expiring
in 2003.
The directors nominated for election this year will be elected by a
plurality of the shares of Common Stock present in person or represented by
proxy at the meeting and entitled to vote. All duly submitted and unrevoked
proxies in the form enclosed will be voted for the nominees selected by the
Board of Directors, except where authorization so to vote is withheld.
Information with respect to the directors nominated for election this
year, and the directors whose terms do not expire at the 2000 Annual Meeting of
Shareholders is presented below.
NOMINEES FOR DIRECTOR
M. D. DAVIS MR. DAVIS has served as a director of the Company
age 65 since December 11, 1995. He served as the Chairman
of the Board and Chief Executive Officer of the
Company from December 1995 through June 1, 1999.
Simultaneously with his resignation on June 1,
1999, Mr. Davis entered into a consulting
agreement with the Company for a term of three
years. From June 1994 until December 1995, Mr.
Davis was engaged in personal investment
activities.
JOSEPH N. MATLOCK MR. MATLOCK has served as a director of the
age 51 Company since December 11, 1995. From September
1994 to January 1996, he was engaged in the
merchant banking and consulting business. From
January 1996 to March 1998, he served as Executive
Vice President and Director of Business and
Community Relations for Bank of America. In
September 1995, he founded Afford America, Inc.,
which provides housing for low-income families.
Mr. Matlock has served as President of Afford
America, Inc. since its inception. Currently, Mr.
Matlock is a partner and director of the Privet
Fund, a late stage technology investment
partnership.
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WALTER S. REILING MR. REILING was appointed a director by the Board
age 65 effective February 1, 2000. He is a 45-year
veteran of the toy industry and founded Meritus
Industries, Inc. in 1981. Meritus Industries, Inc.
merged into the Company on January 7, 2000.
CONTINUING DIRECTORS WHOSE TERMS EXPIRE IN 2001
ROBERT L. BURKE MR. BURKE has served as a director of the Company
Age 56 since June 1, 1999. He was an educator with the
Lake Oswego, Oregon, School District from 1993
until his retirement in 1999. Mr. Burke owns a
2.22% membership interest in MVII.
JOHN MCSORLEY MR. MCSORLEY has served as a director of the
Age 54 Company since June 1, 1999. He has served as
President of Double Bogey, LLC, a California
limited liability company engaged in the
investment of private capital and located in San
Rafael, California, since March 1997. From
November 1989 to October 1996, Mr. McSorley served
as Chief Operating Officer and General Partner of
BayCom Partners LP, a California limited
partnership engaged in the ownership of radio
stations in California and Oregon. Double Bogey,
LLC owns a 2.22% membership interest in MVII.
CONTINUING DIRECTORS WHOSE TERMS EXPIRE IN 2002
E. THOMAS MARTIN MR. MARTIN has served as the Chairman of the Board
Age 56 of the Company since June 1, 1999. He is the sole
Manager and President of MVII. Mr. Martin is a
director and significant shareholder
(approximately 6%) of Americorp (a one bank
holding company) which holds American Commercial
Bank, which is a six branch, $250 million,
community bank in Ventura County, California. Mr.
Martin was Chief Executive Officer and partner in
Martin & MacFarlane, Inc. and Martin Media, L.P.,
national outdoor advertising companies, until
their sale to Chancellor Media in September of
1998. Mr. Martin also manages various real estate
ventures.
JOSEPH S. WHITAKER MR. WHITAKER has served as a director and Senior
Age 59 Vice President, New Business Development, of the
Company since June 1, 1999. He also serves as Vice
President of, and owns less than a 1% membership
interest in, MVII. For the past five years, Mr.
Whitaker has operated a consulting business in La
Jolla, California, providing services related to
marketing, licensing and product development to
the toy industry.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE ELECTION OF ITS NOMINEES
FOR DIRECTOR.
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PROPOSAL ONE
APPROVAL OF AMENDMENTS TO THE DSI TOYS, INC. 1997 STOCK OPTION PLAN
GENERAL
The DSI Toys, Inc. 1997 Stock Option Plan (the "Stock Option Plan") was
adopted by the Board of Directors of the Company and its shareholders on May 1,
1997, prior to the initial public offering of the Company's Common Stock. At the
1999 Annual Meeting of Shareholders, the shareholders adopted a proposal to
increase the aggregate number of shares of Common Stock of the Company reserved
for issuance under the Stock Option Plan from 600,000 to 900,000 shares. At its
meeting on March 21, 2000, the Board of Directors adopted a proposal to amend
the Stock Option Plan to (i) increase from 900,000 to 1,200,000 the aggregate
number of shares of Common Stock of the Company reserved for issuance under the
Stock Option Plan and (ii) to make certain conforming changes. The proposal to
amend the Stock Option Plan is subject to shareholder approval. The affirmative
vote of the holders of at least a majority of the shares of Common Stock present
and entitled to vote on this proposal is required to adopt and approve the
proposal to amend the Stock Option Plan.
The purpose of the Stock Option Plan is to promote the financial success
of the Company by, among other things, enabling key employees to participate in
the long-term growth and financial success of the Company. The Stock Option Plan
is administered by the Company's compensation committee, which is composed of
three non-employee directors. Any employee or director of the Company is
eligible to receive grants of stock options under the Stock Option Plan.
All stock options granted under the Stock Option Plan will have an
exercise price per share to be determined by the compensation committee;
provided that, the exercise price per share under each stock option shall not be
less than the fair market value of the Common Stock at the time the stock option
is granted (110% of fair market value in the case of incentive stock options
granted to a shareholder who owns 10% or more of the Company's Common Stock).
The maximum term for all stock options granted under the Stock Option Plan is 10
years (5 years in the case of an incentive stock option granted to a shareholder
who owns 10% or more of the Company's Common Stock). Stock options granted to
non-employee directors are not intended to qualify as "incentive stock options"
within the meaning of Section 422A of the Internal Revenue Code of 1986, as
amended (the "Code").
The Board of Directors may at any time terminate, amend or modify the
Stock Option Plan; provided, however, that no such action of the Board of
Directors, without the approval of the shareholders of the Company, may increase
the total number of shares of Common Stock which may be issued under the Stock
Option Plan, decrease the minimum incentive stock option exercise price, extend
the period during which options may be granted pursuant to the Stock Option
Plan, or change the class of individuals eligible to be granted options. No
amendment to the Stock Option Plan shall, without the consent of an optionee,
affect such optionee's rights under an option previously granted.
REASONS AND PRINCIPAL EFFECTS OF THE PROPOSAL
INCREASE IN NUMBER OF SHARES. As of March 31, 2000, there were 101,700
shares of Common Stock available for future awards under the Stock Option Plan.
The primary purpose of the Proposal is to allow the Company to continue to
attract and retain qualified employees by increasing by 300,000 shares the
aggregate number of shares of Common Stock that may be issued under the Stock
Option Plan. If the Proposal is adopted, the employees of the Company who are
eligible to participate in the Stock Option Plan could receive more benefits
under the Stock Option Plan than they could if the Proposal is not adopted.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
INCENTIVE OPTIONS. No income will be recognized by an optionee for federal
income tax purposes upon the grant or exercise of an incentive option. The basis
of shares transferred to an optionee pursuant to the exercise of an incentive
option is the price paid for such shares. If the optionee holds such shares for
at least one year after transfer of the shares to the optionee and two years
after the grant of the option, the optionee will recognize capital gain or loss
upon sale of the shares received upon such exercise equal to the difference
between the amount realized on such sale and the exercise price. Generally, if
the shares are not held for that period, the optionee will recognize ordinary
income upon disposition in an amount equal to the excess of the fair market
value of the shares on the date of exercise over the
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option price of such shares, or if less (and if the disposition is a transaction
in which loss, if any, will be recognized), the gain on disposition. Any
additional gain realized by the optionee upon such disposition will be a capital
gain.
The excess of the fair market value of shares received upon the exercise
of an incentive option over the option price for such shares is an item of
adjustment for the optionee for purposes of the alternative minimum tax.
The Company is not entitled to a deduction upon the exercise of an
incentive option by an optionee. If the optionee disposes of the shares of stock
received pursuant to such exercise prior to the expiration of one year following
transfer of the shares to the optionee or two years after grant of the option,
however, the Company may deduct an amount equal to the ordinary income
recognized by the optionee upon disposition of the shares at the time such
income is recognized by the optionee.
If an optionee uses already owned shares of Common Stock to pay the
exercise price for shares under an incentive option, the resulting tax
consequences will depend upon whether such already owned shares of Common Stock
are "statutory option stock," and, if so, whether such statutory option stock
has been held by the optionee for the applicable holding period referred to in
Section 424(c)(3)(A) of the Code. In general, "statutory option stock" (as
defined in Section 424(c)(3)(B) of the Code) is any stock acquired through the
exercise of an incentive stock option, a qualified stock option, an option
granted pursuant to an employee stock purchase plan or a restricted stock
option, but not through the exercise of a nonqualified stock option. If such
stock is statutory option stock with respect to which the applicable holding
period has been satisfied, no income will be recognized by the optionee upon the
transfer of such stock in payment of the exercise price of an incentive option.
If such stock is not statutory option stock, no income will be recognized by the
optionee upon the transfer of such stock unless such stock is not substantially
vested within the meaning of the regulations under Section 83 of the Code (in
which event it appears that the optionee will recognize ordinary income upon the
transfer equal to the amount by which the fair market value of the transferred
shares exceeds their basis). If the stock used to pay the exercise price of an
incentive option is statutory option stock with respect to which the applicable
holding period has not been satisfied, the transfer of such stock will be a
disqualifying disposition described in Section 421(b) of the Code which will
result in the recognition of ordinary income by the optionee in an amount equal
to the excess of the fair market value of the statutory option stock at the time
the option covering such stock was exercised over the option price of such
stock. Under the present provisions of the Code, it is not clear whether all
shares received upon the exercise of an incentive option with already owned
shares will be statutory option stock or how the optionee's basis will be
allocated among such shares.
NONQUALIFIED OPTIONS. No income will be recognized by an optionee for
federal income tax purposes upon the grant of a nonqualified option. Except as
described below in the case of an "insider" subject to Section 16(b) of the
Exchange Act who exercises his or her option less than six months from the date
of grant, upon exercise of a nonqualified option, the optionee will recognize
ordinary income in an amount equal to the excess of the fair market value of the
shares on the date of exercise over the option price of such shares. In the
absence of an election pursuant to Section 83(b) of the Code, an "insider"
subject to Section 16(b) of the Exchange Act who exercises a nonqualified option
less than six months from the date the option was granted will recognize income
on the date six months after the date of grant in an amount equal to the excess
of the fair market value of the shares on such date over the option price of
such shares. An optionee subject to Section 16(b) of the Exchange Act can avoid
such deferral by making an election, pursuant to Section 83(b) of the Code, no
later than 30 days after the date of exercise. Executive officers, directors and
10 percent shareholders of the Company will generally be deemed to be "insiders"
for purposes of Section 16(b) of the Exchange Act.
Income recognized upon the exercise of nonqualified options will be
considered compensation subject to withholding at the time such income is
recognized, and therefore, the Company or affiliate must make the necessary
arrangements with the optionee to ensure that the Company will be entitled to a
deduction equal to the amount of ordinary income recognized by the optionee at
the time of such recognition by the optionee.
The basis of shares transferred to an optionee pursuant to exercise of a
nonqualified option is the price paid for such shares plus an amount equal to
any income recognized by the optionee as a result of the exercise of such
option. If an optionee thereafter sells shares acquired upon exercise of a
nonqualified option, any amount realized over the basis of such shares will
constitute capital gain to such optionee for federal income tax purposes.
If an optionee uses already owned shares of Common Stock to pay the
exercise price for shares under a nonqualified option, the number of shares
received pursuant to the option which is equal to the number of shares delivered
in payment of the exercise price will be considered received in a nontaxable
exchange, and the fair market value of the remaining shares received by the
optionee upon such exercise will be taxable to the optionee as ordinary
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income. If such already owned shares of Common Stock are not "statutory option
stock" (which is defined in Section 424(c)(3)(B) of the Code to include any
stock acquired through the exercise of an incentive stock option, a qualified
stock option, an option granted pursuant to an employee stock purchase plan or a
restricted stock option, but not through the exercise of a nonqualified stock
option) or are statutory option stock with respect to which the applicable
holding period referred to in Section 424(c)(3)(A) of the Code has been
satisfied, the shares received pursuant to the exercise of the option will not
be statutory option stock and the optionee's basis in the number of shares
delivered in payment of the exercise price will be equal to the basis of the
shares delivered in payment. The basis of the remaining shares received upon
such exercise will be equal to the fair market value of such shares. However, if
such already owned shares of Common Stock are statutory option stock with
respect to which the applicable holding period has not been satisfied, it is not
presently clear whether such exercise will be considered a disqualifying
disposition of the statutory option stock, whether the shares received upon such
exercise will be statutory option stock or how the optionee's basis will be
allocated among the shares received.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF PROPOSAL ONE.
PROPOSAL TWO
APPROVAL TO RETAIN AUDITORS
On March 21, 2000, upon the recommendation of the Audit Committee, the
Board of Directors unanimously voted to propose to the shareholders a
recommendation to retain PricewaterhouseCoopers LLP as the independent public
accounting firm for the Company for the fiscal year ending December 31, 2000 to
perform audits, tax services, securities and exchange commission reviews, and
such other accounting services as the Board of Directors may deem necessary to
the proper operation of the Company's business from time to time.
PricewaterhouseCoopers LLP has audited the Company's financial statements since
September 1, 1992. Representatives of PricewaterhouseCoopers LLP are expected to
attend the meeting to respond to appropriate questions from the shareholders and
will be given an opportunity to make a statement should they desire to do so.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF PROPOSAL TWO.
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ADDITIONAL INFORMATION REGARDING THE BOARD OF DIRECTORS
BOARD MEETINGS AND COMMITTEES
During fiscal 1999 the Board of Directors held nine (9) meetings. The
Company has standing audit, compensation and executive committees of the Board
of Directors. The Board of Directors does not have a nominating committee. The
selection of nominees for the Board of Directors is made by the entire Board of
Directors based upon nominations that have been made to the Board pursuant to
the Voting Agreement and the Reiling Voting Agreement. The current members of
the committees, number of meetings held by each committee in fiscal 1999, and a
brief description of the functions performed by each committee are set forth
below:
AUDIT COMMITTEE (3 MEETINGS). Robert L. Burke, Chairman; Joseph N.
Matlock and John McSorley. The primary responsibilities of the audit
committee are to review with the Company's auditors the scope of the audit
procedures to be applied in conducting the annual audit and the results of
the annual audit. At this time, the Board of Directors has not adopted a
written charter for the audit committee. The members of the audit
committee are independent directors as defined in Rule 4200 (a) (14) of
the National Association of Securities Dealers' listing standards.
COMPENSATION COMMITTEE (1 MEETING). John McSorley, Chairman; Robert
L. Burke and Joseph N. Matlock. The primary responsibilities of the
compensation committee are to review and set the compensation levels of
the officers of the Company, including those officers who are also
directors, evaluate the performance of management, consider management
succession and related matters, and administer the annual compensation
plans of the Company and the Stock Option Plan.
EXECUTIVE COMMITTEE (1 MEETING). E. Thomas Martin, Chairman; M.D.
Davis and Joseph S. Whitaker. The primary responsibilities of the
executive committee are to advise the Company's officers and act on
certain matters at times between meetings of the full Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. From February
1, 1999 through May 31, 1999 the compensation committee was comprised of Messrs.
Joseph N. Matlock, Barry B. Conrad, Jack R. Crosby, and Douglas A. Smith. The
current members of the compensation committee identified above served on such
committee since June 1, 1999. At no time was an officer or employee of the
Company a member of the Company's compensation committee. No member of the Board
of Directors of the Company or its compensation committee serves as a member of
the board of directors or compensation committee of an entity that has one or
more executive officers serving as a member of the Company's Board of Directors
or compensation committee.
REPORT OF AUDIT COMMITTEE
The following report of the audit committee shall not be deemed to be
"soliciting material" or to be "filed" with the Securities and Exchange
Commission (the "Commission") or subject to the Commission's proxy rules, except
for the required disclosure herein, or to the liabilities of Section 18 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and such
information shall not be deemed to be incorporated by reference into any filing
made by the Company under the Securities Act of 1933, as amended, or the
Exchange Act.
The Audit Committee of the Board of Directors is currently made up
of outside, non-employee, independent directors. The Audit Committee has
reviewed and discussed the audited financial statements with the
management of the Company. The Audit Committee has discussed with the
independent auditors the matters required to be discussed by SAS 61
(Codification of Statements on Auditing Standards, AUss. 380). Further,
the Audit Committee has received written disclosures and the letter from
the independent accountants required by Independence Standards Board
Standard No. 1 and has discussed with the independent accountants, their
independence.
Based on the referenced review and discussions, the Audit Committee
has recommended to the Board of Directors that the audited financial
statements be included in the Company's Annual Report on Form 10-K.
Robert L. Burke, Chairman
Joseph N. Matlock
John McSorley
8
<PAGE>
COMPENSATION OF DIRECTORS
ANNUAL RETAINER AND OTHER FEES AND EXPENSES. Directors are paid an annual
retainer of $15,000. The Company also reimburses directors for travel, lodging
and related expenses they incur in attending Board and committee meetings.
NON-EMPLOYEE DIRECTOR STOCK OPTIONS. Under the Stock Option Plan, which
was approved and ratified by shareholders on May 1, 1997, non-employee directors
may, from time to time at the discretion of the committee administering the
Stock Option Plan, receive a grant of an option to purchase Common Stock of the
Company. The options are granted at an exercise price as determined by the
committee and are exercisable, as determined by the committee, from time to time
over a period of ten years from grant date, unless sooner terminated as
described in the Stock Option Plan.
9
<PAGE>
PRINCIPAL SHAREHOLDERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth as of April 15, 2000, information about all
persons and entities who were known to the Company to be the beneficial owners
of more than five percent of the outstanding shares of Common Stock.
<TABLE>
<CAPTION>
COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED (1)
-------------------------------------------------------------- ------------------------------------------------------
NUMBER OF SHARES PERCENT OF CLASS
---------------------------- ------------------------
<S> <C> <C> <C>
E. Thomas Martin 654 Osos Street 4,625,659(2) 51.02%
San Luis Obispo, CA 93401
MVII, LLC 654 Osos Street 4,194,238(3) 46.26%
San Luis Obispo, CA 93401
Walter S. and Susan 15 Woodcrest Drive 533,208(4) 5.88%
Reiling; joint tenants Morristown, NJ 07960
Martin Group(5) 654 Osos Street 5,542,532(6) 61.11%
San Luis Obispo, CA 93401
</TABLE>
(1) Unless otherwise indicated, the beneficial owner has sole voting and
investment power with respect to all shares listed.
(2) Includes 431,421 shares owned of record by E. Thomas Martin and 4,194,238
shares owned of record by MVII, a company of which E. Thomas Martin serves
as sole Manager and President, but excludes shares owned of record by
other members of the Martin Group.
(3) Excludes shares owned of record by other members of the Martin Group that
are to be voted in accordance with the Voting Agreement or the Reiling
Voting Agreement.
(4) Excludes shares owned of record by MVII that are to be voted in accordance
with the Reiling Voting Agreement.
(5) The Martin Group is comprised of MVII, M.D. Davis, Joseph N. Matlock,
Douglas A. Smith, and Walter S. and Susan Reiling. Pursuant to the Voting
Agreement, each member of the DSI Group has given MVII an irrevocable
proxy to vote its respective shares of Common Stock of the Company for,
among other things, MVII's nominees for director, and MVII is obligated
under the Voting Agreement to vote its shares of Common Stock of the
Company for the nominees of the DSI Group. Pursuant to the Reiling Voting
Agreement, the Reilings have given MVII an irrevocable proxy to vote their
shares of Common Stock of the Company for, among other things, MVII's
nominees for director, and MVII is obligated under the Reiling Voting
Agreement to vote its shares of Common Stock of the Company for the
Reilings' nominee.
(6) Includes 4,194,238 shares owned of record by MVII, 323,951 shares owned of
record by M.D. Davis, 229,964 shares owned of record (including 2,000
shares not outstanding but subject to options currently exercisable) by
Joseph N. Matlock, 261,171 shares owned of record (including 2,000 shares
not outstanding but subject to options currently exercisable) by Douglas
A. Smith, and 533,208 shares owned of record by the Reilings.
10
<PAGE>
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth as of April 15, 2000 the beneficial
ownership of Common Stock by (i) each director of the Company and (ii) each
named executive officer listed in the Summary Compensation Table appearing on
page 16 of this proxy statement, and all directors and executive officers as a
group.
COMMON STOCK
NAME BENEFICIALLY OWNED
---------------------------------
NUMBER PERCENT OF
OF SHARES CLASS
--------------- ---------------
DIRECTORS
Robert L. Burke............................ - -
M.D. Davis................................. 323,951(1) 3.57%
E. Thomas Martin........................... 4,625,659(2) 51.02%
Joseph N. Matlock.......................... 229,964(1)(3) 2.50%
John McSorley.............................. - -
Walter S. Reiling.......................... 533,208(4) 5.88%
Joseph S. Whitaker......................... 22,000(3) *
NAMED EXECUTIVE OFFICERS (EXCLUDING ANY
DIRECTOR NAMED ABOVE) AND GROUP
Michael J. Lyden........................... 30,000(3) *
Yau Wing Kong.............................. 66,584(3) *
Thomas W. Neville.......................... 19,929(3) *
All current directors and executive officers
as a group (15 persons).................... 5,886,461(3) 64.33%
* Represents less than 1%.
(1) Excludes shares owned of record by other members of the Martin Group that
are to be voted in accordance with the Voting Agreement. For a discussion
of the Martin Group, see footnote number 5 under "Principal Shareholders -
Security Ownership of Certain Beneficial Owners."
(2) Includes 431,421 shares owned of record by E. Thomas Martin and 4,194,238
shares owned of record by MVII, a company of which E. Thomas Martin
serves as Sole Manager and President, but excludes shares owned of record
by the other members of the Martin Group.
(3) Includes shares of Common Stock not outstanding but subject to options
currently exercisable, or exercisable within 60 days, as follows: Mr.
Matlock - 2,000 shares; Mr. Whitaker - 20,000 shares; Mr. Lyden - 30,000
shares; Mr. Yau Wing Kong - 12,000 shares; and Mr. Neville - 6,000 shares;
group - 83,500 shares.
(4) Excludes shares owned of record by MVII that are to be voted in accordance
with the Reiling Voting Agreement.
CHANGE OF CONTROL DURING 1999
On June 1, 1999, the Company closed a Stock Purchase and Sale Agreement
(the "Stock Purchase Agreement") with MVII, a company controlled by E. Thomas
Martin ("Martin"). Pursuant to the Stock Purchase Agreement, MVII purchased from
the Company 2,458,491 shares of its Common Stock in April and June of 1999 for
approximately $ 5.0 million. Also, pursuant to the Stock Purchase Agreement,
MVII acquired an additional 1.6 million shares of the outstanding Common Stock
of the Company in a tender offer that closed on May 26, 1999 for approximately
$7 million. The source of the consideration used by MVII to purchase the
Company's Common Stock was working capital from capital contributions made by
its members. The Stock Purchase Agreement and the transactions contemplated
thereby were approved by the Company's shareholders at the Annual Meeting of
Shareholders held on May 24, 1999.
Following completion of those transactions, MVII was the record owner of
approximately 47% of the Company's outstanding shares of Common Stock. When
MVII's record ownership was combined with MVII's rights under the Voting
Agreement, MVII became the beneficial owner of approximately 61% of the
Company's outstanding shares of Common Stock.
11
<PAGE>
In July and September of 1999, MVII purchased an additional 13,646 and
50,000 shares of Common Stock, respectively, from two former executives of the
Company; and in September of 1999, MVII exercised its right of first refusal
contained in the Voting Agreement to purchase an additional 72,101 shares of
Common Stock. Following these transactions, MVII owned of record 4,194,238
shares of the Company's Common Stock which, as of March 15, 2000, represented
46% of the total Common Stock issued and outstanding. When MVII's record
ownership was combined with MVII's rights under the Voting Agreement, as of
December 31, 1999, MVII was the beneficial owner of approximately 55.23% of the
Company's outstanding shares of Common Stock. On December 17, 1999, Martin
purchased 291,421 shares of Common Stock pursuant to MVII's right of first
refusal contained in the Voting Agreement which was assigned by MVII to Martin
on December 15, 1999 for the limited purpose of purchasing the subject 291,421
shares of Common Stock.
The Voting Agreement also entitles MVII to nominate all but two of the
members of the Company's Board of Directors. On June 1, 1999, the Company
accepted the resignations of Messrs. Crosby, Smith, Conrad and Richard Neitz
from its Board. Such vacancies were 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 these appointments to the Board. On June 1, 1999, Martin
was appointed by the Company to serve as Chairman of the Board.
12
<PAGE>
MANAGEMENT
Information with respect to the executive management of the Company,
excluding Mr. Whitaker who is discussed under "Election of Directors", follows:
MICHAEL J. LYDEN MR. LYDEN has served as Chief Executive Officer
Age 57 and President of the Company since June 17, 1999.
From 1997 through June 1999, he was involved in
marketing and management consulting with Turnberry
Associates, a firm he founded. From 1988 through
1997, Mr. Lyden was employed by Tyco Toys, Inc.,
serving first as Senior Vice President, Business
Development, and later as President of Tyco's U.S.
Division and Executive Vice President of Tyco
Toys, Inc.
JOSEPH S. WHITAKER MR. WHITAKER has served as a director and Senior
Age 59 Vice President, New Business Development, of the
Company since June 1, 1999. He also serves as Vice
President of, and owns less than a 1% membership
interest in, MVII. For the past five years, Mr.
Whitaker has operated a consulting business in La
Jolla, California, providing services related to
marketing, licensing and product development to
the toy industry.
YAU WING KONG MR. YAU has served as the Managing Director of
Age 52 the Company's wholly-owned subsidiary, DSI (HK),
Limited, since October 1993.
ROBERT L. WEISGARBER MR. WEISGARBER has served as Chief Financial
Age 48 Officer of the Company since March 1999. Prior to
his employment by the Company, he served as
Executive Vice President and Chief Financial
Officer for Steelworks, Inc., an office products
manufacturer in Des Moines, Iowa. He was Vice
President - Administration for Texberry Container
Corporation in Houston, Texas from 1993 to 1995.
THOMAS W. NEVILLE MR. NEVILLE has served as Senior Vice President,
Age 36 Worldwide Sales, of the Company since October
1999. He has been employed by the Company since
November 1994, serving as Key Accounts Manager
from November 1994 through December 1995; National
Sales Manager from December 1995 through December
1997; and Vice President, Sales from December 1997
until his promotion to his current position.
WILLIAM J. KERNER MR. KERNER has served as Vice President of
Age 45 Research and Development of the Company since
December 1999. Prior to that, he was Senior
Director of Design for Tyco Toys/Mattel, Inc.,
MatchBox Division from 1995 through December 1999,
and Director of Product Design, Matchbox Division
at Tyco from 1992 until 1995.
BETH REILING MS. REILING has served as Vice President, Girls
Age 34 Division of the Company, since January 2000. Prior
to that, Ms. Reiling was the Executive Vice
President and General Manager of Meritus
Industries, Inc. from December 1997 to January
2000, and Vice President, Marketing from January,
1995 to December, 1997.
THOMAS V. YARNELL MR. YARNELL has been an employee of the Company
Age 47 since 1989 serving as Administrative Vice
President since October 1989, Corporate Secretary
since April 1991, and General Counsel since
December 1995.
LOYD W. HARLAN MR. HARLAN has served as Vice President,
Age 63 Operations of the Company since September 1999.
Previously, he served as Director of Operations of
the Company from May 1991.
13
<PAGE>
EXECUTIVE COMPENSATION
The following report of the compensation committee on executive compensation
and the information herein under "Executive Compensation--Performance Graph"
shall not be deemed to be "soliciting material" or to be "filed" with the
Commission or subject to the Commission's proxy rules, except for the required
disclosure herein, or to the liabilities of Section 18 of the Exchange Act and
such information shall not be deemed to be incorporated by reference into any
filing made by the Company under the Securities Act of 1933, as amended, or the
Exchange Act.
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The Compensation Committee (the "Committee") of the Board of Directors is
currently composed entirely of outside, non-employee directors. The Committee
reviews and sets the compensation levels of the Company's Chief Executive
Officer ("CEO") and other executives, evaluates the performance of management,
considers management succession and related matters, and administers the Stock
Option Plan. All decisions by the Committee relating to the compensation of
executive officers are reviewed by the full Board.
The Committee considers information with respect to the reasonableness of
compensation paid to senior officers of the Company, as well as all employees of
the Company and its subsidiaries in managerial positions. The Committee also
takes into account how compensation compares to compensation paid by competitors
in the Company's industry as well as the performance of the Company.
COMPENSATION POLICIES AND PROGRAMS
The compensation policies of the Company, set by management and supported by
the Committee, focus on enhancing shareholder value. Specific policies are
designed to attract, motivate and retain persons of high quality who will have
the skill, training and dedication to assist the Company to achieve its
corporate goals. The executive compensation program for fiscal 1999 consisted of
two elements: base salary, and long-term incentive through the granting of stock
options pursuant to the Stock Option Plan.
BASE SALARY: Base salary for executive officers is determined principally by
competitive factors and the marketplace. The policy of the Committee is
generally to set base salary levels for positions at approximately the median
levels determined from survey information for positions deemed comparable by the
Committee.
LONG-TERM INCENTIVE COMPENSATION: The Company uses stock options as a means
of furnishing longer-term incentives to officers and other employees of the
Company and its subsidiary. Under the Stock Option Plan, which was approved by
shareholders in 1997, the Company has flexibility in granting directors,
officers and employees options to acquire shares of the Company's Common Stock.
During fiscal 1999 the following named executive officers listed in the
Summary Compensation Table were granted stock options on the dates indicated.
All stock options bear an exercise price of fair market value at the date of
grant. The stock options vest over five successive anniversary dates, commencing
one year after the date of grant. Twenty percent of the stock options granted to
each named executive officer vests on each such anniversary date.
NAME TITLE DATE OF GRANT
- ---- ----- -------------
Michael J. Lyden Chief Executive Officer and President June 17, 1999
M.D. Davis Director and Former Chief Executive Officer December 17, 1999
Yau Wing Kong Managing Director, DSI(HK) Limited June 14, 1999
Thomas W. Neville Senior Vice President June 14, 1999
FISCAL 1999 COMPENSATION OF CEO
The 1999 base salary of the CEO and President, Michael J. Lyden, was
$180,000 per annum. The base salary is established by an employment agreement
that was negotiated in good faith by the Company. The employment agreement
became effective on June 17, 1999, and expires on December 31, 2002. The
compensation provided in the
14
<PAGE>
agreement was based upon the job description and time commitment of the position
as set forth in the agreement.
TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162(m) of the Internal Revenue Code contains provisions which could
limit the deductibility of certain compensation payments to the Company's
executive officers. The Company believes that any compensation realized in
connection with the exercise of stock options granted by the Company will
continue to be deductible as performance-based compensation. The policy of the
Company is to design its compensation programs generally to preserve the tax
deductibility of compensation paid to its executive officers. The Committee
could determine, however, taking into consideration the burdens of compliance
with Section 162(m) and other relevant facts and circumstances, to pay
compensation that is not fully deductible if the Committee believes such
payments are in the Company's best interests.
SUMMARY
The members of the Committee believe that linking executive compensation to
corporate performance results in a better alignment of compensation with
corporate goals and shareholder interests. As performance goals are met or
exceeded, resulting in increased value to shareholders, executive officers are
to be rewarded commensurately. The members of the Committee believe that
compensation levels during fiscal 1999 adequately reflect the compensation goals
and policies of the Company. Certain executive compensation increases were
announced on January 1, 2000, and no other executive compensation increases are
planned for fiscal 2000.
John McSorley, Chairman
Robert L. Burke
Joseph N. Matlock
15
<PAGE>
COMPENSATION OF CERTAIN NAMED EXECUTIVE OFFICERS
The following table sets forth certain summary information concerning the
compensation awarded to, earned by or paid to the Chief Executive Officer of the
Company and certain other executive officers of the Company for the years
indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------- -----------
STOCK
OTHER OPTION
NAME AND FISCAL ANNUAL (NUMBER OF ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION SHARES) (1) COMPENSATION
- ---------------------------------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Lyden ................. 1999 96,923 -- $ 5,850(2) 150,000 $ 1,388(3)
Chief Executive Officer and ...... 1998 -- -- -- -- --
President ........................ 1997 -- -- -- -- --
M.D. Davis ....................... 1999 62,500 -- 96,250(4) 25,000(5) 234(6)
Director and former 1998 150,000 -- -- -- 3,202(6)
Chief Executive Officer 1997 150,000 -- -- -- 3,274(6)
Yau Wing Kong .................... 1999 165,000(7) -- -- 60,000 --
Managing Director 1998 180,000(7) -- -- -- --
DSI (HK) Limited 1997 180,000(7) -- -- -- --
Thomas W. Neville ................ 1999 108,333 -- -- 50,000 2,271(8)
Senior Vice President 1998 110,000 -- -- -- 2,375(8)
1997 101,248 -- -- -- 2,375(8)
</TABLE>
(1) Options represent the right to purchase shares of Common Stock at a fixed
price per share.
(2) Auto allowance.
(3) Includes Company contributions or other allocations to a defined
contribution plan of $1,125 and group term life insurance premiums of
$263.
(4) Includes consulting fees of $87,500 and director fees of $8,750.
(5) Options granted as a director, not as an employee.
(6) Includes Company contributions or other allocations to (i) a defined
contribution plan of $2,500 in fiscal 1998 and $2,375 in fiscal 1997 and
(ii) group term life insurance premiums of $234 in fiscal 1999, $702 in
fiscal 1998 and $899 in fiscal 1997.
(7) Based on average exchange rates with Hong Kong.
(8) Company contributions or other allocations to a defined contribution plan.
16
<PAGE>
The following table sets forth certain information with respect to options
to purchase Common Stock granted during the year ended December 31, 1999 to each
of the named executive officers.
OPTION GRANTS IN FISCAL 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED
NUMBER OF % OF ANNUAL RATES OF STOCK PRICE
SECURITIES TOTAL PER APPRECIATION FOR OPTION
UNDERLYING OPTIONS SHARE TERM(3)
OPTIONS GRANTED TO EXERCISE EXPIRATION ------------------------
NAME GRANTED(1) EMPLOYEES PRICE(2) DATE 5% 10%
- ---- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Lyden .......................... 150,000 26.76 $ 3.125 06/16/09 $ 294,794 $ 747,067
M.D. Davis ................................ 25,000(4) 4.46 3.125 12/16/09 49,132 124,511
Yau Wing Kong ............................. 60,000 10.70 3.125 06/13/09 117,918 298,827
Thomas W. Neville ......................... 30,000 5.35 3.125 06/13/09 58,959 149,413
Thomas W. Neville ......................... 20,000 3.57 3.125 12/16/09 39,306 99,609
</TABLE>
(1) All granted options vest at the rate of 20% per year commencing on the
first anniversary date after the grant.
(2) All grants were made at the average fair market value as of the date of
grant.
(3) The "potential realizable value" shown will be achieved only if the
options have been held for the full ten years and the stock price has
appreciated at the assumed rate. For the named executive officers, the
value is calculated from the option price per share of options granted
in fiscal year 1999. Potential realizable value is listed for
illustration purposes only. The values disclosed are not intended to be
and should not be interpreted as representations or projections of
future value of Company stock or of the stock price.
(4) Options granted as a director, not an employee.
17
<PAGE>
The following table sets forth certain information with respect to the
exercise of options to purchase Common Stock and during the year ended December
31, 1999, and the unexercised options held at December 31, 1999 and the value
thereof, by each of the named executive officers.
AGGREGATED OPTION EXERCISES IN FISCAL 1999
AND 12/31/99 OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF EXERCISABLE AND
SHARES NUMBER OF SECURITIES UNEXERCISABLE IN-THE-MONEY
ACQUIRED UNDERLYING OPTIONS AT 12/31/99 OPTIONS
ON EXERCISE (SHARES) AT FISCAL YEAR END
(NUMBER VALUE ------------------------- -------------------------
NAME OF SHARES) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Lyden .................. 0 $ 0 0 150,000 $ 0 $ 0
M.D. Davis ........................ 0 0 0 25,000 0 0
Yau Wing Kong ..................... 0 0 0 60,000 0 0
Thomas W. Neville ................. 0 0 0 50,000 0 0
</TABLE>
EMPLOYMENT AND RELATED AGREEMENTS
Mr. Davis entered into a consulting agreement effective as of June 1, 1999,
pursuant to which Mr. Davis ceased to be an employee and officer of the Company
and began to provide consulting services to the Company for the period ending
June 1, 2002. For his services under the consulting agreement, Mr. Davis shall
receive total compensation for the three year term of the consulting agreement
in the amount of $450,000, payable in equal monthly installments of $12,500
($150,000 per annum). Mr. Davis shall be entitled to such compensation
irrespective of a termination of the consulting agreement, unless such
termination is by Mr. Davis for reasons other than a breach by the Company of
its obligations under the consulting agreement. The consulting agreement
contains non-disclosure covenants.
The Company entered into an employment agreement with Mr. Lyden on June 17,
1999. Pursuant to this agreement, Mr. Lyden will be employed as President and
Chief Executive Officer of the Company for a term ending June 16, 2002 and will
be paid an annual salary of $180,000, which salary may be raised at the
discretion of the Board of Directors. The agreement contains non-disclosure,
non-competition and non-solicitation provisions applicable during the term of
employment and for one year thereafter.
DSI (HK), Limited, the Company's wholly-owned subsidiary, has entered into
an employment agreement effective January 1, 2000 with Mr. Yau, pursuant to
which he will be employed as Managing Director of DSI (HK), Limited until
December 31, 2002 and will be paid a monthly salary of HK $116,000
(approximately US $15,000 based on currency exchange rates). Mr. Yau is entitled
to a fiscal year-end performance bonus equal to 1% of the Company's annual
consolidated after-tax profits in excess of US $2.0 million, up to a maximum of
US $8.0 million. The agreement contains non-disclosure, non-competition and
non-solicitation provisions applicable during the term of employment and for one
year thereafter. Upon termination of Mr. Yau's employment without cause, the
Company must continue to pay Mr. Yau's salary for a period of three months and
must pay a pro-rated performance bonus. In the event the non-competition
provisions are enforced, the Company will be obligated to pay an additional
one-year salary during the non-compete period.
18
<PAGE>
The Company entered into an employment agreement with Ms. Beth Reiling
effective January 7, 2000. Pursuant to this agreement, Ms. Reiling will be
employed as Vice President, Girl's Division, and will be paid an annual salary
of $120,000. The agreement contains non-disclosure, non-competition and
non-solicitation provisions applicable during the term of employment and for one
year thereafter. Ms. Reiling's father is Walter S. Reiling, a director of the
Company.
The Company has entered into an employment agreement with Mr. Joseph Reiling
effective January 7, 2000. Pursuant to this agreement, Mr. Reiling will be
employed as Vice President of Product Development and will be paid an annual
salary of $105,000. The agreement contains non-disclosure, non-competition and
non-solicitation provisions applicable during the term of employment and for one
year thereafter. Mr. Reiling's father is Walter S. Reiling, a director of the
Company.
19
<PAGE>
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on
the Common Stock of the Company to the cumulative total return of each of the
following indices: the Standard & Poor's 500 Index, the Standard and Poor's
SmallCap 600 Index and a Peer Group Index since May 29, 1997, the date on which
the Company's Common Stock was first traded on the Nasdaq Market.
[GRAPH]
COMPARISON OF CUMULATIVE TOTAL RETURNS (1)
AMONG DSI TOYS, INC., STANDARD & POOR'S 500 INDEX, STANDARD & POOR'S SMALLCAP
600 INDEX, AND PEER GROUP INDEX (2)
5/29/97 1/31/98 1/31/99 12/31/99
------- ------- ------- --------
DSI Toys, Inc......................$ 100 $ 30 $ 21 $ 38
Peer Group.........................$ 100 $ 156 $ 170 $ 82
Standard & Poor's 500 Index........$ 100 $ 124 $ 164 $ 181
Standard & Poor's SmallCap Index...$ 100 $ 129 $ 128 $ 141
(1) Total return assuming reinvestment of dividends. Assumes $100 invested on
May 29, 1997 in Common Stock of the Company, the Standard & Poor's 500
Index, the Standard & Poor's Smallcap 600 Index and a Company constructed
peer group index.
(2) In accordance with the rules of the Securities and Exchange Commission, the
Company has elected to select a group of peer companies on an industry basis
for comparison purposes. The peer group is composed of 10 industry
participants: Action Performance Empire of Carolina, Inc., Equity Marketing,
Inc., Grand Toys International Inc., Jakks Pacific Inc., Just Toys Inc.,
Marvel Enterprises Inc. (formerly named ToyBiz, Inc.), Play by Play Toys &
Novelties, Inc., Racing Champions Corp., Radica Games, Ltd. and Toymax
International, Inc. Cumulative total return calculations were weighted
according to the respective company's market capitalization. Janex
International, Inc. was included in the 1998 peer group index, but is not
included in the 1999 peer group index.
20
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain transactions involving the Company and
certain directors and executive officers of the Company is provided above in
"Election of Directors", "Principal Shareholders - Change of Control During
1999", and "Management - Employment and Related Agreements".
On October 7, 1999 the Company entered into an Agreement and Plan of Merger
by and among Meritus Industries, Inc., Meritus Industries, Ltd., the Reilings
and the Company. As of January 7, 2000, the Company acquired Meritus Industries,
Inc. ("Meritus"), a privately held toy manufacturer. Pursuant to the terms of
the merger, the Company acquired all of the issued and outstanding stock of
Meritus in exchange for (i) 600,000 unregistered shares of the Company's common
stock, less 66,792 shares of the Company's common stock, which shares are
currently held by the Company and are payable to the Reilings upon satisfaction
of certain post closing conditions as set forth in a Closing and Holdback
Agreement between the parties; (ii) $984,033.82 in cash; and (iii) the Company's
Subordinated Secured Promissory Note for $1,690,000, paid to the Reilings who
were the sole shareholders of Meritus. Contemporaneously with the merger, the
Company satisfied $4.4 million of Meritus' debt. Also in connection with the
merger, MVII entered into the Reiling Voting Agreement. When MVII's record
ownership is combined with MVII's rights under the Voting Agreement and the
Reiling Voting Agreement, MVII became the beneficial owner of approximately 61%
of the Company's outstanding shares of Common Stock. The Reiling Voting
Agreement also entitles the Reilings to nominate one of the members of the Board
of Directors.
In connection with the Meritus merger, the Company borrowed $5,000,000 from
MVII. That debt is evidenced by a promissory note dated January 7, 2000. The
note bears interest at a rate of prime plus 2%, matures on July 1, 2004, and is
subordinated to senior debt of the Company. The proceeds from the note were used
primarily to facilitate the Company's merger with Meritus, including the
satisfaction of the Meritus debt discussed above.
The irrevocable proxies executed by the DSI Group in connection with the
Voting Agreement not only authorize MVII to vote the shares of Common Stock of
the Company held by the DSI Group for directors of the Company as provided in
the Voting Agreement, it also designates MVII as its proxy with respect to all
other matters subject to a vote of the Company's shareholders except matters
concerning (i) a dissolution of the Company, or (ii) the sale of all or
substantially all of the assets of the Company which requires a vote of
shareholders under applicable law, the issuance by the Company of Common Stock
in such amount that the rules of the exchange on which the Company's stock is
listed requires shareholder approval, or a merger of the Company with another
entity which requires a vote of shareholders under applicable law. The Voting
Agreement continues until the earlier of the June 1, 2004, the agreement of the
parties to the Voting Agreement, or the dissolution of the Company.
The irrevocable proxy executed by the Reilings in connection with the
Reiling Voting Agreement not only authorizes MVII to vote the shares of Common
Stock of the Company held by the Reilings for directors of the Company as
provided in the Reiling Voting Agreement, it also designates MVII as proxy to
vote the shares of Common Stock of the Company held by the Reilings (i) with
respect to any matter relating to the creation or composition of any committee
of the Board, (ii) with respect to any matter affecting the size or composition
of the Board, and (iii) with respect to any proposal to amend the Company's
bylaws or articles of incorporation for the sole purpose of affecting the
matters described in clauses (i) and (ii) above. The Reiling Voting Agreement
continues until the earlier of January 7, 2005, the agreement of the parties to
the Reiling Voting Agreement, or the dissolution of the Company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires directors and officers of the
Company, and persons who own more than 10 percent of the Common Stock, to file
with the Commission initial reports of ownership and reports of changes in
ownership of such stock. Directors, officers and beneficial owners of more than
10 percent of the Common Stock are required by Commission regulations to furnish
the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the year ended December 31, 1999, all Section
16(a) filing requirements applicable to its directors, officers, and beneficial
owners of more than 10 percent of its Common Stock were complied with, except
the following reports which were subsequently filed with the Commission: Form 5,
Mr. Davis; Form 3, Mr. Weisgarber; and Form 4, Messrs. Lyden, Whitaker, Yau,
Neville, and Yarnell.
21
<PAGE>
SHAREHOLDER PROPOSALS AND OTHER MATTERS
Shareholder proposals for inclusion in the Company's proxy materials in
connection with the 2001 Annual Meeting of Shareholders must be received by the
Company at its office in Houston, Texas, addressed to the Secretary of the
Company, no later than January 15, 2001, in accordance with Rule 14a-8 under the
Exchange Act.
With respect to shareholder proposals which are not intended to be included
in the Company's proxy statement, the bylaws of the Company provide that notice
of any such shareholder proposal must be received at the Company's principal
executive office not less than 80 days prior to the annual meeting or, in the
event that the date of the meeting has not been publicly announced by the
Company in the manner specified in the bylaws more than 90 days prior to the
meeting, not later than the close of business on the tenth day following the day
on which the date of the meeting is publicly announced.
The cost of solicitation of proxies will be borne by the Company. Certain
officers and employees of the Company, who will receive no additional
compensation for their services, may solicit proxies in person or by mail,
telephone, facsimile telecommunication or telegraph.
The Board of Directors does not intend to present any other matter at the
meeting and knows of no other matters that will be presented. However, if any
other matter comes before the meeting, the persons named on the enclosed proxy
card intend to vote thereon in accordance with their best judgment.
DSI TOYS, INC.
/s/ E. THOMAS MARTIN
E. Thomas Martin
CHAIRMAN
Houston, Texas
April 27, 2000
22
<PAGE>
DSI TOYS, INC.
1100 WEST SAM HOUSTON PARKWAY (NORTH)
HOUSTON, TX 77043
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints E. Thomas Martin and Thomas V. Yarnell and
each of them, as the undersigned's attorneys and proxies, each with the power to
appoint his substitute, and hereby authorizes them to represent and to vote, as
directed on the reverse side hereof, all the shares of common stock of DSI TOYS,
INC. (the "Company") held of record by the undersigned on April 13, 2000, at the
annual meeting of shareholders to be held on May 23, 2000, or any adjournment
thereof.
IT IS UNDERSTOOD THAT WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED IN THE
MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. WHERE NO CHOICE IS
SPECIFIED BY THE SHAREHOLDER, THE PROXY WILL BE VOTED FOR THE ELECTION OF
DIRECTORS PROPOSED IN ITEM 1 AND IN FAVOR OF EACH OF THE TWO PROPOSALS IN
ITEM 2.
The undersigned hereby revokes all previous proxies relating to the shares
covered hereby and confirms all that said proxy or his substitutes may do by
virtue hereof.
(TO BE SIGNED ON REVERSE SIDE)
<PAGE>
PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD BACK AS SOON AS POSSIBLE!
ANNUAL MEETING OF SHAREHOLDERS
DSI TOYS, INC.
MAY 23, 2000
Please Detach and Mail in the Envelope Provided
- --------------------------------------------------------------------------------
Please mark your
A [X] votes as in this
example.
<TABLE>
<CAPTION>
<S> <C>
FOR all nominees WITHHOLD
listed at right AUTHORITY
(except as marked to vote for all nominees
to the contrary below) listed at right
1. ELECTION NOMINEES:
OF [ ] [ ] M. D. Davis
DIRECTORS: Joseph N. Matlock
Walter S. Reiling
INSTRUCTION: (TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE(S),
STRIKE A LINE THROUGH THE NOMINEE'S NAME OR WRITE A ZERO ("0") IN THE SPACE
FOLLOWING HIS OR HER NAME AT RIGHT.)
2. PROPOSALS FOR AGAINST ABSTAIN
PROPOSAL ONE: Adoption and approval of a proposal to amend the DSI Toys, Inc.
1997 Stock Option Plan (the "Stock Option Plan") (a) to increase from 900,000
to 1,200,000 the aggregate number of shares of Common Stock of the Company [ ] [ ] [ ]
reserved for issuance under the Stock Option Plan and (b) to make certain
conforming changes.
PROPOSAL TWO: Adoption and approval of a proposal to retain
PricewaterhouseCoopers LLP as the independent public accounting firm for the
fiscal year ending December 31, 2000 to perform audits, tax services, [ ] [ ] [ ]
securities and exchange commission reviews, and such other accounting
services as the Board of Directors may deem necessary to the proper operation
of the Company's business from time to time.
3. In his or her discretion, the Proxy is authorized to vote upon any matters
which may properly come before the Meeting or any adjournment or postponement
thereof.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY,
USING THE ENCLOSED ENVELOPE.
Signature: _________________________________________ Printed Name: ______________________ Dated: ___________ , 2000
Signature if held jointly: __________________________ Printed Name: ______________________ Dated: ___________ , 2000
(Note that you should sign exactly as your name appears above.)
</TABLE>
