ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto, and the information included
elsewhere herein.
The Company designs, develops, markets and distributes high quality,
innovative dolls, toys and consumer electronics products. Core products include
TECH-LINK -Registered Trademark- communications products, KAWASAKI
-Registered Trademark- electronic musical instruments, GEARHEAD -TM- remote
control vehicles, the LAZERDOODLE -TM- electronic drawing toy and a full range
of special feature doll brands including SASSY SECRETS -TM-, SOMERSAULT SARA
-TM-, TOO CUTE TWINS -TM-, CHILDHOOD VERSES -TM-, PRIDE & JOY -Registered
Trademark-, LITTLE DARLINGS -Registered Trademark-, along with interactive plush
products including KITTY KITTY KITTENS -Registered Trademark-, FRISKY KITTENS
-TM-, PUPPY PUPPY PUPPIES -Registered Trademark-, and girls' activity products,
AIR NAILS SALON -TM-, and TWIST AND TWIRL BRAIDER -TM-.
The Company has three major product categories: Juvenile Audio Products,
Girls' Toys and Boys' Toys.
JUVENILE AUDIO PRODUCTS
The Juvenile Audio Product category consists of Youth Communications
products and Musical Instruments. Products in the Youth Communications line
include walkie-talkies, wrist watch walkie-talkies, audio products and novelty
electronic products. The category brands include TECH-LINK -Registered
Trademark- and MICRO LINK -TM- communications products, Harley-Davidson
-Registered Trademark- walkie-talkies and bike alarms, and the Company's new
BIOSCAN -TM- ROOM GUARDIAN -TM-, and the LAZERDOODLE -TM- electronic drawing
toy. The Musical Instrument line includes the branded line of KAWASAKI
-Registered Trademark- guitars, drum pads, saxophones and keyboards.
GIRLS' TOYS
The Girls' Toys product category includes dolls, interactive plush toys,
play sets, accessories, and girls' activity toys. The Girls' Toys portfolio of
brands includes SASSY SECRETS -TM-, SOMERSAULT SARA -TM-, TOO CUTE TWINS -TM-,
CHILDHOOD VERSES -TM-, PRIDE & JOY -Registered Trademark-, LITTLE DARLINGS
-Registered Trademark-, along with interactive plush products including KITTY
KITTY KITTENS -Registered Trademark-, FRISKY KITTENS -TM-, PUPPY PUPPY PUPPIES
-Registered Trademark-, and girls' activity products, AIR NAILS SALON -TM-, and
TWIST AND TWIRL BRAIDER -TM-.
BOYS' TOYS
The Boys' Toys product category includes radio control and infra-red
control vehicles. The brands in this product category are GEARHEAD -TM- radio
control vehicles, including the INSECTOR -Registered Trademark-, and the unique
ultra-articulated STREET SAVAGE -TM-. The GEARHEAD -TM- brand also includes
GEARHEAD -TM- JR. infra-red control vehicles.
PRODUCT INTRODUCTIONS
New product introductions during 2001 included KAWASAKI Mega Chords
Guitar, KAWASAKI Mega Deluxe Drum, TOO CUTE TWINS -TM-, and SUSIE SO SMART
-TM-interactive electronic dolls; KITTY KITTY KITTENS -Registered Trademark-
plush toys and the unique STREET SAVAGE -TM- radio control vehicle.
SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies are more fully described in Note
2 to our consolidated financial statements. Certain of our accounting
policies require the application of significant judgment by management in
selecting the appropriate assumptions for calculating financial estimates. By
their nature, these judgments are subject to an inherent degree of
uncertainty. These judgments are based on our historical experience, terms
with current customers, our observance of trends in the industry, information
provided by our customers and information available from other outsides
sources, as appropriate. Our significant accounting policies include:
18
REVENUE RECOGNITION - The Company recognizes revenue when products
are shipped and title passes to unaffiliated customers. In most cases, title
transfers to our customers when the product has been presented to shipment
forwarders on FOB Asia sales and when the product is picked up from our
distribution facilities on domestic sales. The Securities and Exchange
Commission's Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition",
provides guidance on the application of generally accepted accounting
principles to selected revenue recognition issues. The Company has concluded
that its revenue recognition policy is appropriate and in accordance with
generally accepted accounting principles and SAB No. 101.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - Accounts receivable are reduced by
an allowance for amounts that may become uncollectible in the future. The
Company's estimate for its allowance is based on two methods which are
combined to determine the total amount reserved. First, the company evaluates
specific accounts where we have information that the customer may have an
inability to meet its financial obligations (bankruptcy, etc.). In these
cases, the company uses its judgement, based on the best available facts and
circumstances, and records a specific reserve for that customer against
amounts due to reduce the receivable to the amount that is expected to be
collected. These specific reserves are reevaluated and adjusted as additional
information is received that impacts the amounts reserved. Second, a general
reserve is established for all other customers based on historical collection
and write-off experience. If circumstances change, the Company's estimates of
the recoverability of amounts due the Company could be reduced by a material
amount.
ALLOWANCE FOR RETURNS AND DEFECTIVES - The Company records a
provision for estimated sales returns and defectives on sales in the same
period as the related revenue is recorded. Our sales to customers generally
do not give them the right to return product or to cancel firm orders.
However, as is common in the industry, we sometimes accept returns for stock
balancing and negotiate accommodations to customers, which includes price
discounts, credits and returns, when demand for specific product falls below
expectations. Additionally, customers are given credit for any defective
products they may have received. The allowance estimates are based on
historical sales returns and defective rates, analysis of credit memo data
and other known factors. If the data the Company uses to calculate these
estimates does not properly reflect future returns and defectives, revenue
could be overstated and future operating results adversely affected.
INVENTORIES - Inventory is valued at the lower of cost or market. The
Company reviews the book value of slow-moving items, discounted product lines
and individual products to determine if these items are properly valued. The
Company identifies these items and assesses the ability to dispose of them at
a price greater than cost. If it is determined that cost is less than market
value, then cost is used for inventory valuation. If market value is less
than cost, then the Company establishes a reserve for the amount required to
value the inventory at market. If the Company is not able to achieve its
expectations of the net realizable value of the inventory at its current
value, the Company would adjust its reserve accordingly.
DEFERRED TAXES - The Company recognizes deferred tax assets and
liabilities based on the differences between the financial statement carrying
amounts and the tax bases of assets and liabilities. Generally accepted
accounting principles require that we review deferred tax assets for
recoverability and if needed, establish a valuation allowance for those
amounts deemed unrecoverable. The review considers historical taxable income,
projected future taxable income, and the expected timing of the reversals of
temporary differences. Deferred tax assets of the Company are primarily the
result of unused net operating loss carry-forwards and foreign tax credits
which expire over a range of years. In 2001, the Company recorded a valuation
allowance of $566,000 related to foreign tax credits expiring in 2002, as it
was determined that it was more likely than not that these credits would not
be realized.
GOODWILL - The Company made an acquisition in 2000 that included a
significant amount of goodwill and other intangible assets. Under generally
accepted accounting principles through December 31, 2001, these assets were
amortized over their estimated useful lives, and were to be tested
periodically to determine if they were
19
recoverable from future operating earnings over their useful lives. We recorded
goodwill amortization expense of $513,396 and $513,360, respectively in 2001 and
2000.
Effective in 2002, goodwill will no longer be amortized but will be
subject to at least an annual impairment test based on its estimated fair
value. Other intangible assets meeting certain criteria will continue to be
amortized over their useful lives and also subject to an impairment test.
There are many assumptions and estimates underlying the determination,
including future cash flow and operating results. Management engaged an
independent company to assist in valuing the Company's goodwill at December
31, 2001. Based on this review, at this time an impairment charge is not
anticipated.
RESULTS OF OPERATIONS
The following table sets forth the Company's results of operations as a
percentage of net sales for the fiscal years indicated:
2001 2000 1999
------------ ------------ ------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 70.7 71.1 71.6
----- ----- -----
Gross profit 29.3 28.9 28.4
Selling, general and administrative expenses 29.6 28.9 22.8
----- ----- -----
Operating income (loss) (0.3) 0.0 5.6
Interest expense (1.7) (2.1) (1.3)
Other income 0.4 0.2 0.2
----- ----- -----
Income (loss) before income taxes and extraordinary item (1.6) (1.9) 4.5
Benefit from (provision for) income taxes (0.5) 0.7 (1.8)
----- ----- -----
Net income (loss) (2.1)% (1.2)% 2.7%
===== ===== =====
FISCAL YEAR 2001 COMPARED TO FISCAL YEAR 2000
NET SALES. Net sales during fiscal 2001 decreased $2.5 million, or 3.6%,
to $67.9 million, from $70.4 million in fiscal 2000. The decrease was due
primarily to reduced sales of Boys' Toys and Juvenile Audio products, partially
offset by sales of Girls' Toys.
Net sales of Juvenile Audio Products decreased $1.5 million, or 5.2%, to
$26.3 million during fiscal 2001, from $27.8 million during fiscal 2000. The
major product groups in this category are Youth Communications and Musical
Instruments, providing $14.6 million and $11.7 million respectively in 2001
sales, compared to $14.2 million and $13.6 million respectively in 2000. The
Youth Communications product group increase reflects sales of EBRAIN -TM-
personal communicator, introduced in fall 2001, partially offset by decreases in
walkie-talkie sales, due to increased competition in non-branded products.
Musical Instruments sales decreased primarily in keyboards, which is a result of
decreased warehouse club business with one, non-primary customer.
Net sales of Girls' Toys increased $3.5 million, or 12.4%, to
$31.5 million in fiscal 2001 from $28.0 million in fiscal 2000. The sales
increase in Girls' Toys was driven by the television promoted
TOO CUTE TWINS -TM- doll line, the girls activity toy AIR NAILS SALON -TM- and
the plush toy KITTY KITTY KITTENS -Registered Trademark-, partially offset by
declines in sales of dolls in the PRIDE & JOY -Registered Trademark-,
ELITE -Registered Trademark- and other general doll lines.
Net sales of Boys' Toys decreased $4.1 million, or 32.4% to $8.6 million
during fiscal 2001 from $12.7 million in fiscal 2000. The decrease is due
primarily to the discontinuation of the BLOCKMEN -Registered Trademark- line
of products sold
20
in 2000 and decreased sales of the primary 2000 R/C vehicle, INSECTOR
-Registered Trademark-, and other boys' items, partially offset by sales of the
new 2001 R/C vehicle, STREET SAVAGE -TM-.
Net sales of products in other categories decreased approximately
$460,000 or 0.5% to $1.5 million during fiscal 2001 from $1.9 million in fiscal
2000. The decrease is attributable to lower sales of games, video phones,
doorbells and other discontinued lines, partially offset by increased sales of
preschool products.
International net sales decreased $1.6 million, or 12.0%, to $11.7
million during fiscal 2001 from $13.3 million in fiscal 2000. The decrease
reflects the strength of the U.S. dollar against foreign currencies; thereby
negatively affecting sales distributors potential retail price points and
margins. International net sales were 17.2% of total net sales for fiscal 2001
as compared to 18.9% of total net sales in fiscal 2000.
GROSS PROFIT. Gross profit decreased approximately $400,000 or 2.0%
to $19.9 million during fiscal 2001 from $20.3 million in fiscal 2000. Gross
profit as a percentage of net sales increased to 29.3% during fiscal 2001
from 28.9% in fiscal 2000. The percentage increase reflects the continued
focus on sales of proprietary products, such as the TOO CUTE TWINS -TM- doll,
AIR NAILS SALON -TM- girls' activity toy, and the STREET SAVAGE -TM- R/C
vehicle, versus lower margin, more volume-driven non-proprietary products.
Proprietary products, which were 80% of our total net sales in 2001, generate
a higher margin percentage.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $200,000 to $20.1 million, or 1.3%, during
fiscal 2001 from $20.3 million in fiscal 2000. The decrease reflects reductions
of approximately $945,000 and $846,000 in advertising and commission expenses,
due to lower sales volume. Additionally, professional fees decreased $356,000,
as expenses associated with the 2000 Meritus merger were non-reoccuring, along
with a $120,000 decrease in various operating expenses. Partially offsetting
these decreases, was an approximate $525,000 increase in employee compensation,
due to employee additions and a significant increase in receivables' bad debt
expense. The $1.7 million provision for uncollectible accounts receivable is
primarily related to the January, 2002 bankruptcy filing of K-mart Corp. (SEE
NOTE 15 TO CONSOLIDATED FINANCIAL STATEMENTS.)
INTEREST EXPENSE. Interest expense decreased approximately $319,000 or
21.6% to $1.2 million in fiscal 2001 from $1.5 million during fiscal 2000. The
decrease was due primarily to lower interest borrowing rates in 2001 as compared
to 2000.
INCOME TAXES. In fiscal 2001, the Company generated a loss before income
taxes of $1.0 million compared to a $1.3 million loss before income taxes during
fiscal 2000. A significant contributor to the 2001 loss was a $1.7 million
provision for uncollectible accounts receivable. The provision is not included
in taxable income for 2001, but will be in a future year when the underlying
receivables are written-off against the provision. As a result, the Company
believes its ability to use Foreign Tax Credits expiring in 2002 has been
potentially negated, and therefore has recorded a $566,000 valuation allowance
for the credits in 2001.
NET LOSS. The Company's net loss for fiscal 2001 was approximately
$1.4 million compared to a net loss of approximately $849,000 for fiscal 2000.
The 2001 net loss was due in significant part to the required increase in the
uncollectible receivables provision related to the Kmart bankruptcy. The
$1.7 million provision offset all other gains made in reduction of selling,
general and administrative expense by management in response to the reduced 2001
sales volumes from 2000. (SEE NOTE 12 TO THE CONSOLIDATED FINANCIAL STATEMENTS.)
FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999
All component changes are affected by the change in the Company's fiscal
year in 1999 (fiscal 2000 reflects 12 months activity versus 11 months activity
in fiscal 1999).
NET SALES. Net sales during fiscal 2000 increased $22.9 million, or
48.1%, to $70.4 million, from $47.6 million in fiscal 1999. A substantial
portion of this increase, $10.6 million, was due to the acquisition of Meritus
and its product lines. Excluding these Meritus items, net sales increased
$12.3 million or 25.8% compared to fiscal 1999, primarily due to increased sales
of Girls' Toys.
21
Net sales of Juvenile Audio Products decreased $1.3 million, or 4.1%, to
$27.8 million during fiscal 2000, from $29.1 million during fiscal 1999. The
major product groups in this category are Youth Communications and Musical
Instruments, providing $14.2 million and $13.6 million respectively in 2000
sales. Decreases occurred in both product groups in 2000, as more emphasis was
placed on branded products like TECH LINK -Registered Trademark- and KAWASAKI
-Registered Trademark-, requiring customers to reposition their inventory from
the non-branded product lines sold in prior years.
Net sales of Girls' Toys increased $21.1 million, or 304.8%, to $28.0
million in fiscal 2000 from $7.0 million in fiscal 1999. Meritus items
contributed $10.6 million of this increase. Excluding these Meritus items,
Girls' Toys net sales increased $10.4 million or 251.4% compared to fiscal
1999. With respect to non-Meritus items, the sales increase in Girls' Toys
was driven by the television promoted HUSH LI'L BABY -Registered Trademark-
doll and the continued expansion and growth of the PRIDE AND JOY -Registered
Trademark- doll line.
Net sales of Boys' Toys increased $3.8 million, or 40.3% to
$12.7 million during fiscal 2000 from $8.9 million in fiscal 1999. The increase
reflects the successful introduction of the television promoted INSECTOR
-Registered Trademark- R/C vehicle in 2000, partially offset by decreases in
sales of BLOCKMEN -Registered Trademark- and other military type products.
Net sales of products in other categories decreased approximately
$700,000, or 24.7%, to $1.9 million during fiscal 2000 from $2.6 million in
fiscal 1999. The decrease reflects continued reduction in sales of HOPPIN'
POPPIN' SPACEBALLS -Registered Trademark- and other hand-held and outdoor games,
as well as a decrease in sales of the TALKING DOORBELL -Registered Trademark-
products introduced in fiscal 1998.
International net sales increased $2.4 million, or 21.7%, to
$13.3 million during fiscal 2000 from $10.9 million in fiscal 1999.
International net sales were 18.9% of total net sales for fiscal 2000 as
compared to 22.9% of total net sales in fiscal 1999.
GROSS PROFIT. Gross profit increased $6.8 million, or 50.3%, to $20.3
million during fiscal 2000 from $13.5 million in fiscal 1999. Gross profit as
a percentage of net sales increased to 28.9% during fiscal 2000 from 28.4% in
fiscal 1999. The percentage increase reflects the strategic emphasis placed
on proprietary products such as PRIDE & JOY -Registered Trademark- and HUSH
LI'L BABY -Registered Trademark- dolls, the INSECTOR -Registered Trademark-
R/C vehicle, and the successful branding of our TECH-LINK -Registered
Trademark- walkie-talkie lines in addition to the inclusion of the Meritus
doll lines. Proprietary products have a higher margin, and as a result of the
sales emphasis now comprise an increased percentage of our total net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $9.5 million to $20.3 million, or 87.7%,
during fiscal 2000 from $10.8 million in fiscal 1999. The increase included
major increases in television and other marketing costs of $3.4 million and
approximately $385,000, respectively to support sales of our proprietary
products. In addition, the merger with Meritus added employee costs of
$2.4 million. Other operating costs associated with the New Jersey office and
associated with the increased development activity in Girls' Toys were also a
substantial part of the increase. Professional fees, including attorney and
accounting costs, increased approximately $550,000, a portion of which is
directly related to the Meritus merger. A downturn in the general retail climate
required the Company to make an additional provision for noncollectible accounts
of approximately $150,000. Travel and entertainment expense also increased
approximately $400,000 due primarily to increased 2001 sales activity and focus
on increasing the internal sales responsibility for major accounts.
INTEREST EXPENSE. Interest expense increased approximately $855,000, or
138.1%, to $1.5 million in fiscal 2000 from $619,000 during fiscal 1999. The
increase was due to borrowings associated with the Meritus merger and increased
working capital needs to support the increased 2000 sales.
INCOME TAXES. In fiscal 2000, the Company generated a loss before income
taxes of $1.3 million compared to a $2.1 million profit before income taxes
during fiscal 1999. As a result, the Company generated a tax benefit of
approximately $477,000 during fiscal 2000 compared to a tax expense of
approximately $869,000 in fiscal 1999. The Company expects to realize its 2000
tax benefits from net operating loss carry forwards and foreign income tax
credits by the reduction of tax liabilities on taxable earning in future years.
22
NET INCOME (LOSS). The Company's net loss for fiscal 2000 was
approximately $849,000 compared to a net income of $1.3 million for fiscal 1999.
The 2000 net loss was due, in part, to less than expected sales of our
television promoted products in relation to television advertising costs and
fourth quarter inventory close-outs of BLOCKMEN -Registered Trademark- and other
products introduced in prior years. As discussed above, the gains made by the
Company in net sales and gross profit were exceeded by substantial increases in
selling, general and administrative expenses. In addition, the financial
condition of several customers required a higher than normal provision for
uncollectible accounts receivable.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has funded its operations and capital
requirements by cash generated from operations and borrowings. The Company's
primary capital needs have consisted of acquisitions of inventory, financing
accounts receivable and capital expenditures for product development.
The Company's operating activities used net cash of $3.4 million during
fiscal 2001, consisting primarily of increases in accounts receivable and
decreases in accounts payable. Net cash used in investing activities during
fiscal 2001 was approximately $525,000 and was mostly due to capital
expenditures. Net cash provided by financing activities was $4.1 million in 2001
and was a result of proceeds from the issuance of common stock warrants and
borrowing under revolving lines of credit, net of payments on long-term debt.
The Company's working capital at December 31, 2001 was $9.2 million and
unrestricted cash was approximately $285,000.
The seasonal nature of the toy business results in complex working
capital needs. The Company's working capital needs, which the Company generally
satisfies through short-term borrowings, are greatest in the last two fiscal
quarters. To manage these working capital requirements, the Company maintains
the Dao Heng Facility and the Revolver. Additionally, the Company discounts
customers' letters of credit at several other Hong Kong banks.
As of December 31, 2001, the Company and Sunrock amended the Revolver to
revise the future covenants and restrictions required by the Revolver.
Management believes the Company will be able to maintain compliance with such
covenants in the future.
On March 19, 2001, the Company issued to MVII an Investment Warrant to
acquire 1.8 million shares of the Company's Common Stock at a purchase price of
$2.7 million. The Investment Warrant is exercisable, in whole or in part, for a
ten-year period beginning June 3, 2002. Proceeds from the sale of the Investment
Warrant were used by the Company for current working capital. The Investment
Warrant was amended and restated in its entirety on January 31, 2002, to remove
all anti-dilution provisions at the request of Nasdaq.
The Company has budgeted approximately $1.3 million for capital
expenditures for fiscal 2002 consisting primarily of purchases of tools and
molds and information technology systems. As of March 19, 2002 the Company had
additional aggregate borrowing capacity of approximately $300,000 under the
Revolver and the Dao Heng Credit Facility. Based on projected fiscal 2002
operating results, the Company believes cash flows from operations and available
borrowings under the Revolver and the Dao Heng Credit Facility will be
sufficient to meet the Company's operating cash requirements and fund its
anticipated capital expenditures. However, there can be no assurance the Company
will meet its projected operating results. In connection with any future cash
needs or acquisition opportunities, the Company may incur additional debt or
issue additional equity or debt securities depending on market conditions and
other factors.
In a series of related transactions with MVII that occurred between
April and June of 1999, the Company received $5 million in exchange for the sale
of approximately 2.5 million shares of the Company's Common Stock. The Company
used those funds to finance the normal business operations of the Company.
In connection with the acquisition of Meritus, the Company borrowed
$5 million from MVII. The debt is evidenced by a promissory note dated
January 7, 2000 (the "MVII Note"). The MVII Note bears interest at a rate of
prime plus 2%, matures on July 1, 2004 and is subordinate to the Revolver. The
proceeds from the MVII Note
23
were used primarily to facilitate the merger with Meritus, including the
satisfaction of Meritus' debt, described below.
On March 6, 2002, pursuant to the terms of the Revolver and the MVII
Note, the Company reborrowed $500,000 of the original principal that the Company
had paid on the MVII Note. The proceeds were used to finance the normal business
operations of the Company.
The Company is obligated to make future minimum royalty payments under
certain of its license agreements. As of December 31, 2001, the Company was
required to make an aggregate of approximately $150,000 in payments of
guaranteed royalties under certain licenses in fiscal 2002 and $225,000
thereafter through fiscal 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 141 entitled "BUSINESS COMBINATIONS" was issued in June 2001
and became effective July 1, 2001. SFAS No. 141 requires that all business
combinations be accounted for using the purchase method of accounting, which
requires that acquisitions be recorded at fair value as of the date of
acquisition. The pooling-of-interests method of accounting allowed under prior
standards, which reflected business combinations using historical financial
information, is now prohibited.
In June 2001, the FASB issued SFAS No. 142 entitled "GOODWILL AND OTHER
INTANGIBLE ASSETS", which became effective on January 1, 2002. Under SFAS
No. 142, existing goodwill will no longer be amortized, but will be tested for
impairment using a fair value approach. SFAS No. 142 requires goodwill to be
tested for impairment at a level referred to as a reporting unit, generally one
level lower than reportable segments. SFAS No. 142 requires us to perform the
first goodwill impairment test on all reporting units within six months of
adoption. The first step is to compare the fair value with the book value of a
reporting unit. If the fair value of the reporting unit is less than its book
value, the second step will be to calculate the impairment loss, if any. Any
impairment loss from the initial adoption of SFAS No. 142 will be recognized as
a change in accounting principle. After the initial adoption, we will test
goodwill for impairment on an annual basis and between annual tests if an event
occurs or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying amount. Management engaged an
independent company to assist in valuing the Company's goodwill at December 31,
2001. Based on this review, at this time an impairment change is not
anticipated.
In June 2001, the FASB issued SFAS No. 143, "ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS". This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Due to the nature of our
business, this new accounting pronouncement is not expected to have a
significant impact on our reported results of operations and financial
condition.
In August 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" and the
accounting and reporting provisions of APB Opinion No. 30, "REPORTING THE
RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF A DISPOSAL OF A BUSINESS AND
EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS," for
the disposal of a segment of a business. This Statement also amends ARB No. 51,
"CONSOLIDATED FINANCIAL STATEMENTS," to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. SFAS No. 144
became effective on January 1, 2002, and interim periods within fiscal 2003,
with early application encouraged. The provisions of this Statement generally
are to be applied prospectively.
24
MERITUS ACQUISITION
Effective January 7, 2000, the Company acquired Meritus by way of
merger. Pursuant to the terms of the merger, the Company acquired all of the
issued and outstanding stock of Meritus for 533,208 shares of the Company's
Common Stock and $2.8 million in other consideration paid to the shareholders of
Meritus. Contemporaneously with the merger, the Company satisfied $4.4 million
of Meritus' debt. The merger was accounted for using the purchase method;
therefore the Company recorded the acquired assets at their fair market value,
generating a significant amount of goodwill. (SEE NOTE 2 TO THE CONSOLIDATED
FINANCIAL STATEMENTS.)
As a result of the merger, the Company added the BABY BEANS -Registered
Trademark- brand soft bean bag dolls, FOREVER GIRL FRIENDS -Registered
Trademark- brand accessories for 11-1/2" fashion dolls, and LITTLE DARLINGS
-Registered Trademark- brand value-priced action feature dolls to its product
offerings, as welL as the ELITE DOLLS -TM- brand, which was created by Meritus
specifically to manufacture and market "LIFETIME PLAY DOLLS -TM-," a line of
exquisite 18" dolls and accessories suitable for playing or collecting.
INFLATION
The Company does not believe that inflation in the United States, Europe
or Asia in recent years has had a significant effect on its results of
operations.
YEAR 2000
During 1999, the Company concluded its efforts to address the Year 2000
issue. In addition to a review of the Company's management information software
("MIS"), EDI software, and local area network and personal computer operating
systems, readiness reviews were completed on customers and vendors. The Company
did not experience any Year 2000 issues with its internal operating systems or
with its customers or vendors. In addition, the Company did not experience any
loss in revenues due to the Year 2000 issue.
CAUTIONARY STATEMENT
Certain written and oral statements made or incorporated by reference
from time to time by the Company or its representatives in this Form 10-K, other
filings or reports with the Securities and Exchange Commission, press releases,
conferences, or otherwise, are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. The Company is
including this Cautionary Statement to make applicable and take advantage of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
for any such forward-looking statements. Forward-looking statements can be
identified by the use of terminology such as "believe," "anticipate," "expect,"
"estimate," "may," "will," "should," "project," "continue," "plans," "aims,"
"intends," "likely," or other words or phrases of similar terminology.
Management cautions you that forward-looking statements involve risks and
uncertainties which may cause actual results to differ materially from the
forward-looking statements. For a discussion of some of the factors that may
cause actual results to differ materially from those suggested by
forward-looking statements, please read carefully the information under Item 1,
"Risk Factors", of this Form 10-K. In addition to the Risk Factors and other
important factors detailed herein and from time to time in other reports filed
by the Company with the Securities and Exchange Commission, including Forms 8-K,
10-Q, and 10-K, the following important factors could cause actual results to
differ materially from those suggested by any forward-looking statements.
MARKETPLACE RISKS
- Increased competitive pressure, both domestically and
internationally, which may negatively affect the sales of the
Company's products;
- Changes in public and consumer taste, which may negatively affect
the sales of the Company's products;
25
- Significant changes in the play patterns of children, whereby
they are increasingly attracted to more developmentally advanced
products at younger ages, which may affect brand loyalty and the
perceived value of and demand for the Company's products; and
- Possible weaknesses in economic conditions, both domestically and
internationally, which may negatively affect the sales of the
Company's products and the costs associated with manufacturing
and distributing these products.
FINANCING CONSIDERATIONS
- Currency fluctuations, which may affect the Company's reportable
income; significant changes in interest rates, both domestically
and internationally, which may negatively affect the Company's
cost of financing both its operations and investments.
OTHER RISKS
- Changes in laws or regulations, both domestically and
internationally, including those affecting consumer products or
trade restrictions, which may lead to increased costs or
interruption in normal business operations of the Company;
- Future litigation or governmental proceedings, which may lead to
increased costs or interruption in normal business operations of
the Company; and
- Labor disputes, which may lead to increased costs or disruption
of any of the Company's operations.
The risks included herein and in Item 1 "Risk Factors" are not
exhaustive. Other sections of this Form 10-K may include additional factors
which could materially and adversely impact the Company's business, financial
condition, and results of operations. Moreover, the Company operates in a very
competitive and rapidly changing environment. New risk factors emerge from time
to time and it is not possible for management to predict all such risk factors
on the Company's business, financial condition or results of operations or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements.
Given these risks and uncertainties, investors should not place undue reliance
on forward-looking statements as a prediction of actual results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements and Schedules" included
on page F-1 for information required under this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
26
PART III
GENERAL
Information required by Item 10 relating to the executive officers of
the Company appears under the heading "Executive Officers of the Registrant" in
Part I herein. Information required by Item 10 relating to members of the
Company's Board of Directors, as well as information required by Items 11
through 13, is hereby incorporated by reference to the information under the
headings "Election of Directors," "Section 16(a) Beneficial Ownership Reporting
Compliance," "Executive Compensation," "Compensation of Certain Named Executive
Officers," "Management-Employment and Related Agreements," and "Certain
Relationships and Related Transactions" in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A and anticipated to be filed
within 120 days after the end of the Company's fiscal year ended December 31,
2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements. Reference is made to the Index on page F-1
for a list of all financial statements filed as part of this
Report.
(a) 2. and (d) Financial Statement Schedules. Reference is made to the Index on
page F-1 for a list of all financial statement schedules filed as
part of this Report.
(a) 3. and (c) Exhibits. Reference is made to the Exhibit Index on page E-1 for
a list of all exhibits filed as part of this Report.
(b) Reports on Form 8-K. The Company filed a Form 8-K dated
October 12, 2001, (filed on October 24, 2001) for the purpose of
reporting the resignation of Michael J. Lyden from his positions
as President and Chief Executive Officer, and member of the Board
of Directors of the Company.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DSI Toys, Inc.
Dated: April 1, 2002 By: /s/ JOSEPH S. WHITAKER
------------------------------------------------
Joseph S. Whitaker
President, Chief Executive Officer and Director
Dated: April 1, 2002 By: /s/ ROBERT L. WEISGARBER
------------------------------------------------
Robert L. Weisgarber
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ E. THOMAS MARTIN Chairman April 01, 2002
--------------------------------- ---------------------------
E. Thomas Martin
/s/ M.D. DAVIS Director April 01, 2002
--------------------------------- ---------------------------
M.D. Davis
/s/ JOSEPH N. MATLOCK Director April 01, 2002
--------------------------------- ---------------------------
Joseph N. Matlock
/s/ ROBERT L. BURKE Director April 01, 2002
--------------------------------- ---------------------------
Robert L. Burke
/s/ JOHN MCSORLEY Director April 01, 2002
--------------------------------- ---------------------------
John McSorley
/s/ WALTER S. REILING Director April 01, 2002
--------------------------------- ---------------------------
Walter S. Reiling
28
DSI TOYS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
----
FINANCIAL STATEMENTS
Report of Independent Accountants F-2
Consolidated Balance Sheet at December 31, 2001 and 2000 F-3
Consolidated Statement of Operations for fiscal years 2001, 2000 and 1999 F-4
Consolidated Statement of Cash Flows for fiscal years 2001, 2000 and 1999 F-5
Consolidated Statement of Shareholders' Equity for fiscal years 2001, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7
SCHEDULE
II. Valuation and Qualifying Accounts and Reserves S-1
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
DSI Toys, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of DSI
Toys, Inc. and its subsidiaries (the "Company") at December 31, 2001 and 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Houston, Texas
March 29, 2002
F-2
DSI TOYS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, DECEMBER 31,
2001 2000
-------------------- -------------------
ASSETS
Current Assets:
Cash $ 284,637 $ 177,682
Restricted cash 150,000
Accounts receivable, net 8,767,550 6,522,883
Inventories 6,739,920 6,687,195
Prepaid expenses and other current assets 1,981,592 1,740,945
Deferred income taxes 893,000 385,000
---------------- ---------------
Total current assets 18,666,699 15,663,705
Property and equipment, net 1,769,284 2,415,084
Deferred income taxes 1,312,000 1,780,000
Goodwill, net 9,241,128 9,754,524
Other assets 323,624 385,827
---------------- ---------------
$ 31,312,735 $ 29,999,140
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 6,580,780 $ 7,901,290
Current portion of long-term debt 1,120,650 1,689,911
Current portion of long-term debt due to a related party 1,751,485 1,424,478
Income taxes payable 69,638 112,325
---------------- ---------------
Total current liabilities 9,522,553 11,128,004
Long-term debt 9,210,390 6,464,268
Long-term debt due to a related party 3,289,552 4,291,037
Deferred income taxes 156,642 188,849
---------------- ---------------
Total liabilities 22,179,137 22,072,158
---------------- ---------------
Commitments and Contingencies (Note 11)
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized, none issued or outstanding
Common stock, $.01 par value, 35,000,000 authorized,
9,066,365 shares issued and outstanding 90,664 90,664
Additional paid-in capital 5,173,465 5,173,465
Common stock warrants 2,802,500 102,500
Accumulated other comprehensive loss (70,928) (27,062)
Retained earnings 1,137,897 2,587,415
---------------- ---------------
Total shareholders' equity 9,133,598 7,926,982
---------------- ---------------
$ 31,312,735 $ 29,999,140
================ ===============
See accompanying notes to consolidated financial statements.
F-3
DSI TOYS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR
------------------------------------------------------------
2001 2000 1999
------------------ ------------------ ------------------
Net sales $ 67,906,409 $ 70,438,531 $ 47,560,024
Cost of goods sold 47,985,126 50,120,552 34,046,112
---------------- ---------------- ----------------
Gross profit 19,921,283 20,317,979 13,513,912
Selling, general and administrative expenses 20,103,335 20,367,165 10,848,624
---------------- ---------------- ----------------
Operating income (loss) (182,052) (49,186) 2,665,288
Interest expense (1,155,092) (1,473,909) (618,994)
Other income 278,529 196,661 103,302
---------------- ---------------- ----------------
Income (loss) before income taxes (1,058,615) (1,326,434) 2,149,596
Benefit from (provision for) income taxes (390,903) 477,448 (868,605)
---------------- ---------------- ----------------
Net income (loss) $ (1,449,518) $ (848,986) $ 1,280,991
================ ================ ================
BASIC EARNINGS PER SHARE
Earnings (loss) per share $ (0.16) $ (0.09) $ 0.17
================ ================ ================
Weighted average shares outstanding 9,066,365 9,053,382 7,688,964
================ ================ ================
DILUTED EARNINGS PER SHARE
Earnings (loss) per share $ (0.16) $ (0.09) $ 0.16
================ ================ ================
Weighted average shares outstanding 9,066,365 9,053,382 7,803,403
================ ================ ================
See accompanying notes to consolidated financial statements.
F-4
DSI TOYS, INC
CONSOLIDATED STATEMENT OF CASH FLOWS
FISCAL YEAR
---------------------------------------------------------
2001 2000 1999
----------------- ----------------- -----------------
Cash flows from operating activities:
Net income (loss) $ (1,449,518) $ (848,986) $ 1,280,991
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation 1,334,392 1,551,632 728,951
Amortization and write-off of debt discount and
issuance costs 42,583 24,927 36,799
Amortization of goodwill 513,396 513,360
Provision for doubtful accounts 1,717,931 222,021 65,528
Loss (gain) on sale or abandonment of equipment (25,957) 32,173 727
Deferred income taxes (72,207) (893,491) 722,340
Changes in assets and liabilities, excluding
acquisitions:
Restricted cash 150,000
Accounts receivable (3,962,598) (2,413,654) (2,403,862)
Inventories (52,725) (954,186) (1,487,536)
Income taxes payable (42,687) (316,402) 156,807
Prepaid expenses (240,647) (507,859) (287,174)
Accounts payable and accrued liabilities (1,320,510) 1,039,373 (3,030,004)
------------- ------------- -------------
Net cash used in operating activities (3,408,547) (2,551,092) (4,216,433)
Cash flows from investing activities:
Cash used for acquisition of Meritus (884,033)
Capital expenditures (766,921) (1,249,944) (1,087,446)
Proceeds from sale of equipment 104,286 225
Decrease in other assets 137,120 273,087 125,408
------------- ------------- -------------
Net cash used in investing activities (525,515) (1,860,890) (961,813)
Cash flows from financing activity:
Net borrowing (repayments) under
revolving lines of credit (613,604) 4,046,472 329,085
Net borrowings on long-term debt 2,790,465 400,684 12,741
Net borrowings (repayments) on long-term debt due
to related parties (674,478) 4,025,515
Payments of assumed Meritus debt (4,382,541)
Net proceeds from issuance of common stock 4,873,548
Net proceeds from issuance of warrants 2,700,000
Debt and stock issue costs (117,500) 35,000 (85,433)
------------- ------------- -------------
Net cash provided by financing activities 4,084,883 4,125,130 5,129,941
Effect of exchange rate changes on cash (43,866) (14,436) (26,922)
------------- ------------- -------------
Net increase (decrease) in cash 106,955 (301,288) (75,227)
Cash and cash equivalents, beginning of year 177,682 478,970 554,197
------------- ------------- -------------
Cash and cash equivalents, end of year $ 284,637 $ 177,682 $ 478,970
============= ============= =============
See accompanying notes to consolidated financial statements.
F-5
DSI TOYS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
---------------------- PAID-IN COMPREHENSIVE RETAINED TREASURY
SHARES AMOUNT CAPITAL WARRANTS INCOME(LOSS) EARNINGS STOCK TOTALS
----------- ---------- ------------- ---------- --------------- ------------ -------------- ---------
Balance,
January 31, 1999 8,719,000 $ 87,190 $ 21,162,568 $ 102,500 $ 14,296 $ 2,155,410 $(22,660,592) $ 861,372
Comprehensive
income:
Net income 1,280,991 1,280,991
Foreign
currency
translation
adjustments
Net of tax (26,922) (26,922)
-----------
Comprehensive
income 1,254,069
Issuance of
2,458,491
common shares
from the treasury (15,479,229) 20,479,229 5,000,000
Options exercised (518,189) 621,968 103,779
Stock issuance
cost (230,231) (230,231)
--------- -------- ------------ ----------- ---------- ----------- ------------ -----------
Balance,
December 31, 1999 8,719,000 87,190 4,934,919 102,500 (12,626) 3,436,401 (1,559,395) 6,988,989
Comprehensive
loss:
Net Loss (848,986) (848,986)
Foreign
Currency
translation
adjustments
net of tax (14,436) (14,436)
-----------
Comprehensive
Loss (863,422)
Issuance of
347,365
common
shares and
185,843 common
shares from the
treasury 347,365 3,474 238,546 1,559,395 1,801,415
--------- -------- ------------ ----------- ---------- ----------- ------------ -----------
Balance,
December 31,
2000 9,066,365 90,664 5,173,465 102,500 (27,062) 2,587,415 7,926,982
Comprehensive
loss:
Net Loss (1,449,518) (1,449,518)
Foreign
Currency
translation
adjustments
net of tax (43,866) (43,866)
-----------
Comprehensive (1,493,384)
Loss
Warrants Issued 2,700,000 2,700,000
--------- -------- ------------ ----------- ---------- ----------- ------------ -----------
Balance,
December 31,
2001 9,066,365 $ 90,664 $ 5,173,465 $ 2,802,500 $ (70,928) $ 1,137,897 $ $ 9,133,598
========= ======== ============ =========== ========== =========== ============ ===========
See accompanying notes to consolidated financial statements.
F-6
DSI TOYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION:
DSI Toys, Inc. (the "Company") was incorporated under the laws of the State
of Texas in November 1970. The Company markets and distributes a variety of toys
and children's consumer electronics both within the United States and
internationally, primarily to retailers. The Company's products are manufactured
primarily in the People's Republic of China.
Effective May 1, 1997, the Company's Articles of Incorporation were amended
to (i) authorize the issuance of 5,000,000 shares of $.01 par value preferred
stock, (ii) change the par value of common stock to $.01 and (iii) reduce the
authorized shares of common stock to 20,000,000 shares.
On June 3, 1997, the Company completed its initial public offering (the
"Offering") of 2,500,000 shares of common stock, which provided the Company net
proceeds of $17.7 million. All of the net proceeds were used to repay debt of
the Company. In connection with the Offering, the Company issued warrants to
purchase 250,000 shares of common stock to the lead underwriters. Such warrants
are exercisable at $10.80 per share and expire May 28, 2002.
Effective May 28, 1999, the Company's Articles of Incorporation were
amended to increase the authorized shares of common stock to 35,000,000 shares.
Effective June 1, 1999, the Company consummated transactions with MVII, LLC
("MVII") pursuant to a Stock Purchase and Sale Agreement dated April 15, 1999.
As a result of those transactions, MVII made a total investment of $12 million
in the Company's common stock, $5 million of which was paid directly to the
Company for the purchase of 2,458,491 shares of common stock.
On March 19, 2001, the Company issued to MVII an Investment Warrant to
acquire 1.8 million shares of the Company's Common Stock, in exchange for a cash
purchase price of $2.7 million. The Investment Warrant is exercisable for no
additional consideration, in whole or in part, for a ten-year period beginning
June 4, 2002. Proceeds from the sale of the Investment Warrant were used by the
Company for current working capital.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
wholly-owned subsidiaries DSI(HK) Limited, Meritus Limited, and RSP Limited. All
significant intercompany transactions have been eliminated in consolidation.
FISCAL YEAR
The Company's fiscal year is the year ending December 31 of the calendar
year mentioned. Prior to December 31, 1999, the terms "fiscal year" and "fiscal"
refer to January 31 of the following calendar year mentioned (e.g., a reference
to fiscal 1998 was a reference to the fiscal year ended January 31, 1999).
CASH EQUIVALENTS
The Company considers investments with original maturity dates of three
months or less from the date of purchase to be cash equivalents. Restricted
cash, held as a compensating balance under a revolving loan supported by letters
of credit is not considered a cash equivalent.
F-7
REVENUE RECOGNITION
Revenues are recognized upon shipment of product by the Company, or in the
case of FOB Asia sales, by the manufacturer, and, at that point, legal
responsibility and title pass to the buyer. The Company provides an allowance
for doubtful accounts and accrues for returns and discounts using a percentage
of gross sales based on historical experience. Provision is made currently for
estimated returns of defective and slow-moving merchandise, price protection and
customer allowances and is included as a reduction of accounts receivable and
revenues.
INVENTORIES
Inventories consist of finished goods and supplies and are stated at the
lower of cost or market, with cost determined on a first-in, first-out basis.
The Company provides an allowance for obsolete inventory when appropriate to
reflect current market value.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Maintenance and repairs are
charged to operations, and replacements or betterments are capitalized. Property
or equipment sold, retired, or otherwise disposed of is removed from the
accounts, and any gains or losses thereon are included in operations.
Depreciation is recorded over the estimated useful lives of the related assets
using the straight-line method for molds and leasehold improvements and an
accelerated method, which approximates the straight line method, for all other
assets.
DEBT ISSUANCE COSTS AND DEBT DISCOUNT
Debt issuance costs and debt discount are amortized over the term of the
related debt on a straight-line basis.
ADVERTISING
The cost of producing media advertising is capitalized as incurred and
expensed in the period in which the advertisement is first shown. During interim
periods, media communications costs are accrued in relation to sales when the
advertising is clearly implicit in the related sales arrangement. In any event,
all media communication costs are expensed in the fiscal year incurred. All
other advertising costs are expensed in the period incurred. Television
advertising expense totaled $2,500,000, $3,621,000 and $275,000 during fiscal
2001, 2000 and 1999, respectively. Prepaid television advertising production
costs of $130,000 and $101,000 respectively are included in prepaid expenses at
December 31, 2001 and 2000. The Company entered into advertising barter
transactions in which the Company recorded $730,000, $529,000 and $311,000 in
advertising expenses in fiscal 2001, 2000 and 1999, respectively. In addition,
prepaid expenses at December 31, 2000 included $200,000 in bartered, prepaid
2001 print advertising. There is no bartered prepaid advertising expense at
December 31, 2001. Management believes these amounts approximate fair value.
INCOME TAXES
The Company accounts for deferred income taxes using the liability method
which provides for the recognition of deferred tax assets and liabilities based
upon temporary differences between the tax basis of assets and liabilities and
their carrying value for financial reporting purposes. Deferred tax expense or
benefit is the result of changes in deferred tax assets and liabilities during
the period. In estimating future tax consequences, all expected future events
are considered other than enactments of changes in the tax law or rates.
U.S. deferred income taxes are provided on the undistributed earnings of
the wholly-owned subsidiaries.
F-8
FOREIGN CURRENCY TRANSLATIONS
The Company's foreign subsidiary uses the local currency as the functional
currency. Accordingly, assets and liabilities of the Company's foreign
subsidiary are translated using the exchange rate in effect at the balance sheet
date, while income and expenses are translated using average rates. Translation
adjustments are reported as a separate component of shareholders' equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments recorded on the balance sheet include
cash and cash equivalents, accounts receivable, accounts payable and debt. Due
to their short maturity, the fair value of cash and cash equivalents, accounts
receivable and accounts payable approximates carrying value. The fair value of
the Company's debt approximates the carrying amount of the debt as it is at
variable market rates.
CONCENTRATION OF CREDIT RISK AND EXPORT SALES
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables. The
Company sells its products principally to retail discount stores and toy stores.
Five customers comprise a significant portion of the Company's sales (50% in
2001), and therefore, receivables from one or all of these customers may, at any
point in time, comprise a large portion of the Company's total receivables,
providing an increased concentration of credit risk. Additionally, the customer
base is primarily located in the United States, though overall the Company's
customer base is large and geographically dispersed across the globe. The
Company performs ongoing credit evaluations of its customers to minimize credit
risk, and for the majority of its FOB Asia sales, the Company obtains letters of
credit from its customers supporting the accounts receivable. (See Note 12).
USE OF ESTIMATES
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the period. Because of the inherent uncertainties in their
process, actual results could differ from such estimates. Management believes
that the estimates are reasonable.
IMPAIRMENT OF ASSETS
The Company reviews for the impairment of long-lived assets, including
goodwill, whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
Goodwill has been amortized over 20 years using the straight-line method in
2001 and 2000. In 2002, the Company will adopt, Statement of Financial
Accounting Standards, No. 142, "Goodwill and Other Intangible Assets", which
eliminates amortization of goodwill beginning in January 2002 and requires an
annual impairment test based on its estimated fair value, using future
discounted cash flow and other factors. The initial valuation will be done as of
December 31, 2001, with any impairment recorded in 2002. The Company engaged an
independent company to assist in this fair value assessment. Based on this
review, at this time an impairment adjustment is not anticipated.
EARNINGS PER SHARE
The Company reports both basic earnings per share, which is based on the
weighted average number of common shares outstanding, and diluted earnings per
share, which is based on the weighted average number of common shares as well as
all dilutive potential common shares outstanding.
Stock options and warrants are the only potentially dilutive shares the
Company has outstanding at December 31, 2001. The 729,500 shares and 866,500
shares, respectively of common stock options and
F-9
warrants outstanding were not included in the diluted earnings per share
calculation during fiscal 2001 and 2000, because the options and warrants would
be anti-dilutive. During fiscal 1999, the Company's warrants, for which the
exercise price was less than the average market price of the common shares, were
included in the computation of diluted earnings per share, increasing the
weighted average number of shares outstanding by 114,439 shares. The Company's
remaining 996,500 shares of common stock options and warrants were not included
in the calculation because the exercise price of the options and warrants were
greater than the average market price of the common shares.
STOCK-BASED COMPENSATION PLANS
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related interpretations in
accounting for its plans and the disclosure-only provision of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123) in disclosures regarding the plan.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 141 entitled "BUSINESS COMBINATIONS" was issued in June 2001 and
became effective July 1, 2001. SFAS No. 141 requires that all business
combinations be accounted for using the purchase method of accounting, which
requires that acquisitions be recorded at fair value as of the date of
acquisition. The pooling-of-interests method of accounting allowed under prior
standards, which reflected business combinations using historical financial
information, is now prohibited.
In June 2001, the FASB issued SFAS No. 142 entitled "GOODWILL AND OTHER
INTANGIBLE ASSETS" which became effective on January 1, 2002. Existing goodwill
will no longer be amortized, but will be tested for impairment using a fair
value approach. SFAS No. 142 requires goodwill to be tested for impairment at a
level referred to as a reporting unit, generally one level lower than reportable
segments. SFAS No. 142 requires the Company to perform the first goodwill
impairment test on all reporting units within six months of adoption. The first
step is to compare the fair value with the book value of a reporting unit. If
the fair value of the reporting unit is less than its book value, the second
step will be to calculate the impairment loss, if any. Any impairment loss from
the initial adoption of SFAS No. 142 will be recognized as a change in
accounting principle. After the initial adoption, the Company will test goodwill
for impairment on an annual basis and between annual tests if an event occurs or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. Management engaged an independent
company to assist in valuing the Company's goodwill at December 31, 2001. Based
on this review, at this time an impairment adjustment is not anticipated.
In June 2001, the FASB issued SFAS No. 143, "ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS". This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Due to the nature of our
business, this new accounting pronouncement is not expected to have a
significant impact on our reported results of operations and financial
condition.
In August 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" and the
accounting and reporting provisions of APB Opinion No. 30, "REPORTING THE
RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF A DISPOSAL OF A BUSINESS AND
EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS," for
the disposal of a segment of a business. This Statement also amends ARB No. 51,
"CONSOLIDATED FINANCIAL STATEMENTS," to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. SFAS No. 144
became effective on January 1, 2002, and interim periods within fiscal 2003,
with early application encouraged. The provisions of this Statement generally
are to be applied prospectively. The Company has not determined the effect, if
any, adoption of SFAS No. 144 will have on the financial position and results of
operations.
F-10
NOTE 3 - ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following:
December 31, 2001 December 31, 2000
---------------------- -----------------------
Trade receivables $ 12,717,550 $ 9,642,883
Provisions for:
Discounts and markdowns (1,472,706) (1,670,229)
Return of defective goods (777,294) (1,029,771)
Doubtful accounts (1,700,000) (420,000)
---------------- -----------------
Accounts receivable, net $ 8,767,550 $ 6,522,883
================ =================
The 2001 provision for doubtful accounts includes $1,650,000 related to
trade receivables due from K-mart Corp., which filed for Chapter 11 bankruptcy
on January 22, 2002 (see Note 15).
NOTE 4 - PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
Estimated useful December 31, 2001 December 31, 2000
----------------------- --------------------- ---------------------
Molds 3 years $ 5,509,743 $ 5,175,410
Equipment, furniture and fixtures 5-7 years 1,826,150 2,030,612
Leasehold improvements 10 years or lease term 1,221,473 1,188,693
Automobiles 3-5 years 31,678 83,981
------------- ---------------
8,589,044 8,478,696
Less: accumulated depreciation (6,819,760) (6,063,612)
------------- ---------------
$ 1,769,284 $ 2,415,084
============= ===============
NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
Accounts payable and accrued liabilities consist of the following:
December 31, 2001 December 31, 2000
----------------------- -----------------------
Trade payables $ 3,447,888 $ 5,053,214
Accrued royalties 1,512,586 1,023,633
Accrued compensation and commissions 679,540 714,411
Other 940,766 1,110,032
---------------- ------------------
$ 6,580,780 $ 7,901,290
================ ==================
F-11
NOTE 6 - NOTES PAYABLE:
Indebtedness consists of the following:
December 31, 2001 December 31, 2000
----------------------- -----------------------
PRIMARY DEBT
Bank revolving line of credit for $17.5 million with a
commercial bank, collateralized by all of the
Company's U.S. accounts receivable, intangibles,
equipment, fixtures, and inventory, and 65% of
the common stock of DSI(HK) Limited, principal
due on March 31, 2004; interest at prime plus
.75% (5.5% at December 31, 2001) $ 9,210,390 $ 6,419,925
Revolving bank loan drawn against an $8 million line
of credit, collateralized by customers' letters of
credit and $150,000 cash; interest at prime (9.5%
at December 31, 2000) 1,631,415
Short-term loans from 3 banks discounted and
collateralized by specific customer's letters of
credit; interest ranging from 4.75% to 5.15%. 1,080,235
Other 40,415 102,839
--------------- ----------------
10,331,040 8,154,179
Less: current portion 1,120,650 1,689,911
--------------- ----------------
$ 9,210,390 $ 6,464,268
=============== ================
The bank revolving credit facility (the "Revolver") includes a $17.5
million revolving line of credit commitment, subject to availability under a
borrowing base calculated by reference to the level of eligible accounts
receivable and inventory, as defined in the agreement. The Revolver matures on
March 31, 2004. Interest on borrowings outstanding under the Revolver is payable
monthly in arrears at an annual rate equal to prime plus .75%. In addition, an
unused line fee at an annual rate equal to .50% applied to the amount by which
$17.5 million exceeds the average daily principal balance during the month and a
collateral management fee of $2,500 is payable monthly.
The Revolver contains certain restrictive covenants and conditions among
which are prohibition on payment of dividends, limitations on further
indebtedness, restrictions on dispositions and acquisition of assets,
limitations on advances to third parties and compliance with minimum net worth
and net income amounts and designation as the "Senior Indebtedness" as relates
to the related party debt described below.
F-12
RELATED PARTY DEBT December 31, 2001 December 31, 2000
------------------ ----------------------- -----------------------
Promissory Note of $1,690,000 to Walter S. and
Susan Reiling, collateralized by a $868,000 Letter
of Credit, subordinated to other debt, payable in
quarterly installments of $108,500 through January 7,
2005; including interest at 10.0375%. $ 1,191,037 $ 1,415,515
Promissory Note of $5,000,000 to MVII, Inc.,
subordinated to the Revolver, payable in monthly
installments of $75,000 through July 2004 plus
interest at prime plus 2% (6.75% at December 31, 2001).
Additionally, under certain conditions as
stipulated by the Revolver a $300,000 payment may be
made on March 31 each year. 3,850,000 4,300,000
--------------- ----------------
5,041,037 5,715,515
Less: current portion 1,751,485 1,424,478
--------------- ----------------
$ 3,289,552 $ 4,291,037
--------------- ----------------
The $868,000 Letter of Credit collateralizing the $1,690,000 promissory
note, is provided for the benefit of the Company by MVII. Expense associated
with the letter of credit are reimbursed to MVII by the Company. Payment to MVII
on the $5,000,000 promissory note is subject to the terms of a subordination
agreement between MVII and the Revolver bank, which places restrictions on
payment to MVII, based on the borrowing capacity available to the Company under
the Revolver.
The Company's ability to meet its maturing debt and other cash requirements
is dependent on the continuation of sufficient lending arrangements, additional
cash infusions, and/or cash from operations. In connection with any future cash
needs or acquisition opportunities, the Company may incur additional debt or
issue additional equity or debt securities depending on market conditions, as
well as other factors. However, there can be no assurance the Company will meet
its projected operating results.
F-13
NOTE 7 - INCOME TAXES:
The components of income (loss) before provision for (benefit from) income
taxes by fiscal year were as follows:
The difference between income taxes (benefit) at the statutory federal and
the effective income tax rates by fiscal year is as follows:
2001 2000 1999
----------------- ---------------- ----------------
Taxes (benefit) computed at statutory rate $ (359,929) $ (450,987) $ 734,000
Expired foreign tax credits 44,000
U.S. Permanent items 191,002 190,256
Split Dollar Life Insurance (592,577)
Reserve against foreign tax credits 566,474 371,654 87,000
Other, net (6,644) 4,206 3,605
------------ ----------- -----------
$ 390,903 $ (477,448) $ 868,605
------------ ----------- -----------
F-14
Deferred tax assets (liabilities) are comprised of the following:
December 31, 2001 December 31, 2000
--------------------- ---------------------
Net operating loss carry forward $ 610,000 $ 1,179,000
Allowance for doubtful accounts 578,000 136,000
Inventory valuation adjustments 29,000 38,000
Depreciation 259,000 135,000
Accruals for inventory returns and markdowns 133,000 169,000
Foreign and alternative minimum tax credits 1,753,000 1,636,000
Other 57,000 64,000
------------- -------------
Gross deferred tax assets 3,419,000 3,357,000
Less valuation allowance (566,000) (372,000)
------------- -------------
Net deferred tax assets 2,853,000 2,985,000
------------- -------------
Unremitted earnings of foreign subsidiary (648,000) (820,000)
Depreciation (156,642) (188,849)
Other (99,118)
------------- -------------
Gross deferred tax liabilities (903,760) (1,008,849)
------------- -------------
Net deferred tax assets (liabilities) $ 1,949,240 $ 1,976,151
------------- -------------
The Internal Revenue Service regulations restrict the utilization of U.S.
net operating loss carryforwards and other tax attributes such as foreign tax
credits for any company in which an "ownership change" as defined in Section 382
of the Internal Revenue Code has occurred. In June of 1999, the Company had a
Section 382 change in ownership. As a result, the Company's U.S. net operating
losses and tax credits are subject to limitation of approximately $1,230,000 per
year. For the current fiscal year, this limitation did not impact the Company's
utilization of U.S. net operating losses and foreign tax credits.
At December 31, 2001, the Company has approximately $1,671,000 in foreign
tax credit carryforwards which expire between December 31, 2001 through December
31, 2006. The Company also has approximately $82,000 in alternative minimum tax
credit carryforwards which do not expire. With the exception of approximately
$566,000 of foreign tax credits expiring during the tax year December 31, 2002,
the Company believes that the foreign and alternative minimum tax credit
carryforwards will be available to reduce future federal income tax liabilities,
and has recorded the related tax benefit as a non-current deferred tax asset.
The Company has federal net operating loss carryforwards (NOL) of approximately
$610,000 which expire in 2020. The Company's state net operating loss
carryforward is not significant. The benefit from utilization of net operating
loss carryforwards could be subject to limitations if significant ownership
changes occur in the Company. The Company's ability to realize the entire
benefit of its deferred tax asset requires that the Company achieve certain
future earnings levels prior to the expiration of its foreign tax credit and NOL
carryforwards. The Company could be required to record a valuation allowance for
a portion or all of its deferred tax asset if market conditions deteriorate and
future earnings are below, or projected to be below, its current estimates.
NOTE 8 - EMPLOYEE BENEFIT PLAN:
The Company maintains a 401(k) Plan (the Plan) for the benefit of its U.S.
employees. The Company may, at its discretion, provide funds to match employee
contributions to the Plan. The Company contributed approximately $63,000,
$54,000 and $27,000 in fiscal 2001, 2000 and 1999, respectively, as employer
matching contributions to employee contributions.
F-15
NOTE 9 - THE STOCK OPTION PLAN AND WARRANTS:
The Company has reserved 388,888 common shares for issuance upon exercise
of warrants issued to a bank. Such warrants are currently exercisable at a
purchase price of $2 per share and expire December 11, 2005.
In connection with the Offering, the Company issued warrants to purchase
250,000 shares of common stock. Such warrants are exercisable at $10.80 per
share and expire May 28, 2002.
On March 19, 2001, the Company issued to MVII an Investment Warrant to
acquire 1.8 million shares of the Company's Common Stock at a purchase price of
$2.7 million. The Investment Warrant is exercisable, in whole or in part, for a
ten-year period beginning June 4, 2002. Proceeds from the sale of the Investment
Warrant were used by the Company for current working capital.
In May 1997, the Board adopted the DSI Toys, Inc. 1997 Stock Option Plan
(the 1997 Plan) whereby certain employees may be granted stock options,
appreciation rights or awards related to the Company's common stock.
Additionally, the Company may grant nonstatutory stock options (as defined in
the 1997 Plan) to nonemployee board members. The Board authorized 600,000 shares
to be available for grant pursuant to the 1997 Plan. Options expire no later
than ten years from the date of grant.
Additional awards may be granted under the 1997 Plan in the form of cash,
stock or stock appreciation rights. The stock appreciation right awards may
consist of the right to receive payment in cash or common stock. Any award may
be subject to certain conditions, including continuous service with the Company
or achievement of business objectives.
In May 1999, the 1997 Plan was amended to authorize 900,000 shares to be
available for grant.
In May 2000, the 1997 Plan was amended to authorize 1,200,000 shares to be
available for grant.
A summary of the option activity under the 1997 Plan, as amended, follows:
Number of Weighted Average
Outstanding Options Option Price
---------------------- ---------------------
Options outstanding at January 31, 1999 603,000 $ 7.10
Granted 685,500 3.13
Exercised (74,666) 1.39
Surrendered (467,334) 7.73
--------
Options outstanding at December 31, 1999 746,500 3.63
Granted 142,500 3.19
Surrendered (22,500) 5.40
--------
Options outstanding at December 31, 2000 866,500 3.51
Granted 103,000 3.13
Surrendered (240,000) 3.29
--------
Options outstanding at December 31, 2001 729,500 $ 3.55
--------
F-16
The weighted average fair value at date of grant for options granted during
fiscal 2001, 2000 and 1999 was $3.13, $3.19 and $3.13 respectively. Vesting
periods for options granted range from immediate to seven years from the date of
grant in increments between 5% and 90% per year.
Options outstanding at December 31, 2001 are as follows:
Weighted Weighted Weighted
Number of Average Average Number of Average
Outstanding Exercise Remaining Exercisable Exercise
Option Price Options Price Contractual Life Options Price
----------------- --------------- --------------- -------------------- --------------- ---------------
$3.125 - 3.49 667,500 $ 3.14 8 225,300 $ 3.13
8.00 62,000 $ 8.00 6 18,800 $ 8.00
------- -------
729,500 244,100
------- -------
The Company applies APB 25 and related interpretations in accounting for
its stock option plan. Accordingly, no compensation cost has been recognized by
the Company for this plan. The following unaudited pro forma data is calculated
as if compensation cost for the 1997 Plan was determined based upon the fair
value at the grant date for awards under the plan consistent with the
methodology prescribed under SFAS 123 for fiscal years 2001, 2000 and 1999:
2001 2000 1999
---------------- ---------------- ----------------
Pro forma net earnings (loss) $ (1,769,418) $ (1,089,412) $ 1,000,150
Pro forma basic earnings (loss) per common share $ (0.20) $ (0.12) $ 0.13
Pro forma diluted earnings (loss) per common share $ (0.20) $ (0.12) $ 0.13
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes options-repricing model with the following weighted
average assumptions used for grants in fiscal 2001, 2000 and 1999: expected
volatility of 80% in fiscal 2001, 80% in fiscal 2000 and 104% in fiscal 1999,
risk-free interest rate of 4.64% to 6.37%, no dividend yield and an expected
life of seven years.
NOTE 10 - RELATED PARTY TRANSACTIONS:
The Company leases its office and warehouse in Houston from an entity owned
by the previous sole shareholder of the Company. Rent expense on these leases
was approximately $367,000, $325,000 and $199,000 respectively for fiscal 2001,
2000, and 1999. Management believes that the rental rates approximate fair
market value.
On June 11, 1999, the Company entered into a consulting agreement with a
director (and former CEO), for a term of three years. Compensation for the three
year term is $450,000 payable in equal monthly installments of $12,500.
On January 7, 2000, the Company borrowed $5,000,000 from MVII, LLC (a
California limited liability company controlled by the Chairman, and including
certain other directors) evidenced by a Promissory Note. The Note, which bears
interest at a rate of prime plus 2% per annum, requires monthly interest
payments from the date of the Note and principal payments beginning June 1,
2000, subject to subordination terms of the Revolver (see Note 6).
On March 6, 2002, pursuant to the terms of the Revolver and the MVII Note,
the Company reborrowed $500,000 of the original principal that the Company had
paid on the MVII Note. The proceeds were used to finance normal business
operations of the Company.
F-17
Also on January 7, 2000, as discussed in Note 15, the Company merged with
Meritus Industries, Inc. Pursuant to the merger terms, one of Meritus' primary
shareholders was subsequently elected to the Board. In addition to the stock
received in the transaction, the shareholder received $1.1 million in cash and a
note receivable for $1.7 million. The note, bearing interest at 10.0375% per
annum, requires quarterly principal and interest payments beginning April 1,
2000.
Additional related party transactions are described in Notes 1, 11 and 16.
NOTE 11 - COMMITMENTS AND CONTINGENCIES:
In the normal course of business, the Company is involved in product and
intellectual property issues which sometimes result in litigation. It is the
opinion of management that the ultimate resolution of such matters will not have
a material adverse effect on the Company's financial position, results of
operations or cash flows, taken as a whole.
The Company leases its facilities under various operating leases which
expire from 2001 to 2010. Rent expense, including amounts paid to a related
party, for fiscal 2001, 2000, and 1999 amounted to $966,971, $1,008,183 and
$573,000, respectively. Aggregate minimum rental commitments under
non-cancelable leases are as follows for the specified fiscal years:
The lease for the Company's primary executive offices, showroom and
warehouse expires August 31, 2002. The Company is in negotiations to lease for
about five years approximately 16,000 square feet of office space in Houston,
Texas for executive offices, showroom and consumer services. The Company
anticipates occupying its new offices on August 1, 2002.
The Company is in negotiations to lease approximately 75,000 square feet of
warehouse space in Fife, Washington. The Company anticipates signing the lease
in June, 2002.
Royalty expense under licensing agreements aggregated approximately
$3,310,000, $2,989,000 and $1,829,000, in fiscal 2001, 2000 and 1999,
respectively. At December 31, 2001, minimum guaranteed royalties payable under
these agreements of $150,000 in fiscal 2002 and $225,000 through 2003, are
included in accrued royalties payable and prepaid expenses and other assets.
The Company has employment agreements with executives at December 31, 2001
that aggregate $750,000, are adjusted annually by the CPI change, and expire in
the next 15-35 months.
In fiscal 2000, the Company terminated its obligations for current and
future insurance premium payments on certain life insurance policies. In prior
years, the Company paid premiums for the policies owned by the Tommy and JoBeth
Moss Joint Life Insurance Trust, (the "Trust"), and was entitled to repayment of
the advanced premiums, plus related cumulative interest, upon the death of
JoBeth Moss. The Company agreed to forgo the cumulative amounts due the Company
in exchange for the Trust extinguishing the future obligations for insurance
premium payments. The premiums recorded for general and administrative expense
in 1999 were approximately $243,000.
F-18
NOTE 12 - SEGMENT INFORMATION:
The Company designs, develops, markets and distributes a variety of toys
and children's consumer electronics. These product lines are grouped into three
major categories which represent the Company's operating segments, as follows:
Juvenile Audio Products, including walkie-talkies, pre-school audio
products, pre-teen audio products and musical toys; Girls' Toys, including
dolls, play sets and accessories; and Boys' Toys, including radio control
vehicles, action figures and western and military action toys.
These operating segments all have similar economic characteristics: the
marketing of children's products. Based on these similarities, the Company's
products can be aggregated into one reportable segment for purposes of this
disclosure.
The Company sells its products through (i) the Hong Kong operation, where
products are shipped directly from contract manufacturers to the Company's
customers, and (ii) the United States operation, where products are shipped from
the Company's warehouse in Houston to its customers.
Financial information for fiscal 2001, 2000, and 1999 for the U.S. and Hong
Kong operations is as follows:
United States Hong Kong Consolidated
------------------- ------------------- -------------------
FISCAL 2001:
Net sales $ 31,859,743 $ 36,046,666 $ 67,906,409
Operating income (loss) (632,616) 450,564 (182,052)
Depreciation expense 469,033 865,359 1,334,392
Capital expenditures 121,657 645,264 766,921
Total assets at fiscal year end $ 27,622,660 $ 3,690,075 $ 31,312,735
FISCAL 2000:
Net sales $ 27,147,848 $ 43,290,683 $ 70,438,531
Operating income (loss) (682,572) 633,386 (49,186)
Depreciation expense 733,186 818,446 1,551,632
Capital expenditures 237,752 1,012,192 1,249,944
Total assets at fiscal year end $ 26,528,128 $ 3,471,012 $ 29,999,140
FISCAL 1999:
Net sales $ 16,419,628 $ 31,140,396 $ 47,560,024
Operating income (loss) (1,527,874) 4,139,162 2,665,288
Depreciation expense 265,790 463,161 728,951
Capital expenditures 256,354 831,092 1,087,446
Total assets at fiscal year end $ 11,134,140 $ 3,893,226 $ 15,027,366
F-19
Sales to major customers that exceeded 10% of the Company's total net sales
consist of the following for the specified fiscal years (See Note 15):
Approximately 17% of the Company's sales were exports to foreign countries
during fiscal 2001, and 19% and 23% during fiscal 2000 and 1999, respectively.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION:
Additional cash flow information by fiscal year is as follows:
2001 2000 1999
--------------- ------------------ ---------------
Cash paid (received) for:
Interest $ 1,107,486 $ 1,104,296 $ 334,932
Income taxes $ 385,926 $ 753,199 $ (8,636)
Noncash activities included in the following:
Accounts receivable write-offs (recoveries) $ 438,089 $ (11,769) $ 2,777
Acquisition of Meritus:
Property, plant and equipment acquired $ (748,730)
Accounts receivable and other assets acquired (838,563)
Liabilities assumed 7,475,172
Note payable issued to the Sellers 1,690,000
Common stock issued (including treasury shares) 1,801,415
Goodwill resulting from Meritus acquisition (10,263,327)
--------------
Net cash paid for Meritus acquisition $ (884,033)
==============
F-20
NOTE 14 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
FISCAL QUARTER ENDED
-----------------------------------------------------------------
3/31/01 6/30/01 9/30/01 12/31/01
---------------- --------------- ---------------- ----------------
Net sales $ 6,721,223 $ 9,416,184 $ 29,927,783 $ 21,841,219
Operating income (loss) (2,188,188) (2,070,282) 3,531,705 544,713
Income (loss) before income taxes (2,421,792) (2,314,578) 3,312,353 365,402
Net income (loss) (1,549,947) (1,481,330) 1,981,289 (399,530)
Basic earnings (loss) per share $ (0.17) $ (0.16) $ 0.22 $ (0.04)
Diluted earnings (loss) per share $ (0.17) $ (0.16) $ 0.22 $ (0.04)
FISCAL QUARTER ENDED
------------------------------------------------------------------
3/31/00 6/30/00 9/30/00 12/31/00
--------------- ---------------- --------------- ----------------
Net sales $ 6,914,462 $ 13,582,505 $29,915,591 $ 20,025,973
Operating income (loss) (1,735,467) 362,744 2,598,974 (1,275,437)
Income (loss) before income taxes (1,995,260) 3,287 2,312,891 (1,647,352)
Net income (loss) (1,276,913) 2,049 1,480,251 (1,054,373)
Basic earnings (loss) per share $ (0.14) $ 0.00 $ 0.16 $ (0.12)
Diluted earnings (loss) per share $ (0.14) $ 0.00 $ 0.16 $ (0.12)
------------------------------------------------------------------
FISCAL QUARTER ENDED
------------------------------------------------------------------
4/30/99 7/31/99 10/31/99 12/31/99
--------------- ---------------- ---------------- ---------------
Net sales $ 3,927,695 $ 14,646,943 $ 22,466,132 $ 6,519,254
Operating income (loss) (631,394) 472,609 2,867,621 (43,548)
Income (loss) before income taxes (741,246) 373,555 2,672,381 (155,094)
Net income (loss) (498,285) 215,188 1,686,437 (122,349)
Basic earnings (loss) per share $ (0.08) $ 0.03 $ 0.20 $ (0.01)
Diluted earnings (loss) per share $ (0.08) $ 0.03 $ 0.19 $ (0.01)
NOTE 15 - SUBSEQUENT EVENTS
On January 22, 2002, the Kmart Corporation (Kmart) filed for Chapter 11
bankruptcy. At December 31, 2001, the Company's receivables included
$1,653,548 due from Kmart, all of which were still outstanding at the date of
filing. Based on the listing of Kmart's unsecured debt and financial position
contained in the filing, the Company does not anticipate that any of the
outstanding balance will be recovered. Accordingly, the Company has recorded
an allowance for doubtful accounts in 2001 equal to the entire December 31,
2001 Kmart outstanding balance, or $1,653,548.
Kmart was the Company's second largest customer in 2001, comprising 10% of
sales. Kmart is requiring normal trade terms from companies desiring to do
business with them in 2002, offering a
F-21
second-priority lien or "Trade Creditor Lien" in Kmart's owned merchandise
inventory. Due to Kmart's market share, the Company has accepted this lien
position and will sell to Kmart in 2002.
On March 6, 2002, pursuant to the terms of the Revolver and the MVII Note,
the Company reborrowed $500,000 of the original principal that the Company paid
on the MVII Note. The proceeds were used to finance normal business operations
of the Company.
As of December 31, 2001, the Company and Sunrock amended the Revolver to
revise the future covenants and restrictions required by the Revolver.
Management believes the Company will be able to maintain compliance with such
covenants in the future.
F-22
NOTE 16 - BUSINESS COMBINATION
On January 7, 2000, the Company acquired by way of a merger all of the
issued and outstanding stock of Meritus Industries, Inc. ("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 were initially held by the
Company and payable to Walter and Susan Reiling (the "Reilings") upon
satisfaction of certain post-closing conditions as set forth in the Closing and
Holdback Agreement between the parties; (ii) $884,034 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. At the end of the holdback
period (June 7, 2000), the post-closing conditions were not satisfied and none
of the held back (66,792) shares was paid to the Reilings. The market value of
the shares issued was $1,081,415 and was satisfied by the issuance of 347,365
shares of new stock and 185,843 shares in treasury stock. Contemporaneously with
the merger, the Company satisfied approximately $4.4 million of Meritus' debt.
The acquisition was accounted for utilizing the purchase method; therefore
the Company recorded the acquired assets at their estimated fair market value.
Goodwill generated by the transaction has been amortized over 20 years using the
straight-line method in 2001 and 2000. In 2002, and thereafter the market value
of the goodwill will be evaluated annually and an impairment charge recorded if
appropriate in accordance with Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets".
Commensurate with the merger, the Company borrowed $5,000,000 from MVII,
LLC, a California limited liability company controlled by E. Thomas Martin
("MVII"), evidenced by a promissory note dated January 7, 2000. The proceeds
from the note were used for the payment of the Meritus debt discussed above.
PRO FORMA RESULTS OF OPERATIONS
Presented below is a pro forma statement of operations for fiscal year
ended December 1999. The proforma reflects the combined operations of the
Company and Meritus as if the merger of the Company and Meritus occurred on
January 1, 1998.
FISCAL 1999
-----------------------------------------------------------------
DSI MERITUS COMBINED
(UNAUDITED) (UNAUDITED)
------------------- ------------------ --------------------
Net sales $ 47,560,024 $ 15,813,170 $ 63,373,194
Net income (loss) $ 1,280,991 $ (2,000,870) $ (719,879)
Basic earnings per share
Earnings per shares $ 0.17 $ (0.09)
Weighted average shares outstanding $ 7,688,964 8,222,172
Diluted earnings per share
Earnings per share $ 0.16 $ (0.09)
Weighted average shares outstanding $ 7,803,403 8,336,611
F-23
DSI TOYS, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (SCHEDULE II)
(IN THOUSANDS)
Balance Charged Balance Charged Balance Charged Balance
at to costs at to costs at to costs at
January and December and December and December
Description 31, 1999 expenses Deductions 31, 1999 expenses Deductions 31, 2000 expenses Deductions 31, 2001
----------- -------- -------- ---------- -------- -------- ---------- -------- -------- ---------- --------
Reserves deducted
from assets:
Trade receivables 123 66 (3) 186 222 12 420 1,718 (438) 1,700
Discounts and
markdowns 1,384 1,041 (1,696) 729 1,339 (398) 1,670 1,558 (1,755) 1,473
Return of
defective goods 408 2,400 (1,726) 1,082 1,837 (1,889) 1,030 1,012 (1,265) 777
Inventory 100 100 379 (129) 350 412 (392) 370
----- ----- ------ ----- ----- ---------- ----- ----- ------ -----
1,915 3,607 (3,425) 2,097 3,777 (2,404) 3,470 4,700 (3,850) 4,320
===== ===== ====== ===== ===== ========== ===== ===== ====== =====
S-1
EXHIBIT INDEX
2.1 Articles/Certificate of Merger of Meritus Industries, Inc. into
the Company, dated January 7, 2000 (filed as Exhibit 2.2 to the
Company's Form 8-K dated January 7, 2000), incorporated herein by
reference.
3.1 Amended and Restated Articles of Incorporation of the Company.
(1)
3.1.1 Amendment to Amended and Restated Articles of Incorporation of
the Company (filed as Exhibit 3.1.1 to the Company's Form 10-Q
for the quarterly period ended April 30, 1999), incorporated
herein by reference. (3)
3.2 Amended and Restated Bylaws of the Company. (1)
3.3 Amendment to Amended and Restated Bylaws of the Company. (1)
4.1 Form of Common Stock Certificate. (1)
4.2 Form of Warrant Agreement among the Company and Representatives
to purchase 250,000 shares of common stock. (1)
4.3 Common Stock Purchase Warrant No. A-1 dated December 11, 1995,
issued to Hibernia Corporation to purchase 388,888 shares of
common stock. (1)
4.4 Registration Rights Agreement by and between the Company and
Hibernia Corporation. (1)
4.5 Registration Rights Agreement by and between the Registrant and
Tommy Moss. (1)
4.6 Form of Investment Warrant by and between the Company and MVII,
LLC, dated March 19, 2001(filed as Exhibit 4.6 to the Company's
Form 10-K for the fiscal year ended December 31, 2000),
incorporated herein by reference.
4.7 Registration Rights Agreement by and between the Company and
MVII, LLC, dated March 19, 2001 (files as Exhibit 4.7 to the
Company's Form 10-K for the fiscal year ended December 31, 2000),
incorporated herein by reference.
4.8* Amended and Restated Investment Warrant by and between the
Company and MVII, LLC, dated January 31, 2002.
4.9* Amended and Restated Registration Rights Agreement by and between
the Company and MVII, LLC dated January 31, 2002.
10.1 1997 Stock Option Plan. (1)
10.2 Agreement for Sale of Stock between Rosie Acquisition, L.L.C. and
DSI Acquisition, Inc. and Diversified Specialists, Inc. and Tommy
Moss, dated December 11, 1995. (1)
10.3 Employment Agreement dated December 11, 1995 by and between the
Company and M.D. Davis. (1)
10.4 Employment Agreement dated December 11, 1995 by and between the
Company and Richard R. Neitz. (1)
10.5 Employment Agreement dated December 11, 1995 by and between the
Company and Yau Wing Kong. (1)
E-1
10.6 Employment Agreement dated December 11, 1995 by and between the
Company and Dale Y. Chen. (1)
10.7 Employment Agreement dated December 11, 1995 by and between the
Company and Thomas V. Yarnell. (1)
10.8 Employment Agreement dated March 16, 1997 by and between the
Company and J. Russell Denson. (1)
10.9 Letter Loan Agreement between the Company and Bank One, Texas,
N.A. dated December 11, 1995, evidencing a revolving line of
credit and a term note (the "Bank One Letter Loan Agreement").
(1)
10.10 First Amendment to Bank One Letter Loan Agreement, dated January
31, 1996. (1)
10.11 Second Amendment to Bank One Letter Loan Agreement, dated August
1, 1996. (1)
10.12 Third Amendment to Bank One Letter Loan Agreement, dated November
14, 1996. (1)
10.13 Fourth Amendment to Bank One Letter Loan Agreement, dated January
31, 1997. (1)
10.14 Fifth Amendment to Bank One Letter Loan Agreement, dated January
31, 1997. (1)
10.15 Line of Credit Facility with State Street Bank and Trust Company,
Hong Kong Branch, dated April 1, 1997, evidencing a $5,000,000
line of credit. (1)
10.16 Underwriting Agreement dated May 28, 1997 among the Company, the
Tommy Moss Living Trust, Hibernia Corporation and Tucker Anthony
Incorporated and Sutro & Co. Incorporated (filed as Exhibit 10.1
to the Company's Form 10-Q for the quarterly period ended April
30, 1997), incorporated herein by reference.
10.17 Warrant Agreement dated May 28, 1997 by and among the Company,
Tucker Anthony Incorporated and Sutro & Co. Incorporated (filed
as Exhibit 10.2 to the Company's Form 10-Q for the quarterly
period ended April 30, 1997), incorporated herein by reference.
10.18 Renewal and Modification of Line of Credit Facility with State
Street Bank and Trust Company, Hong Kong Branch, dated June 6,
1997, evidencing an $8,000,000 line of credit (filed as Exhibit
10.1 to the Company's Form 10-Q for the quarterly period ended
July 31, 1997), incorporated herein by reference.
10.19 Debenture by DSI(HK) Limited to State Street Bank and Trust
Company, Hong Kong Branch, dated July 29, 1997 (filed as Exhibit
10.2 to the Company's Form 10-Q for the quarterly period ended
July 31, 1997), incorporated herein by reference.
10.20 Amended and Restated Bank One Letter Loan Agreement, dated
October 22, 1997 (filed as Exhibit 10.1 to the Company's Form
10-Q for the quarterly period ended October 31, 1997),
incorporated herein by reference.
10.21 First Amendment to Amended and Restated Bank One Letter Loan
Agreement, dated January 31, 1998 (filed as Exhibit 10.21 to the
Company's Form 10-K for the annual period ended January 31,
1998), incorporated herein by reference.
10.22 Second Amendment to Amended and Restated Bank One Letter Loan
Agreement, dated September 30, 1998 (filed as Exhibit 10.22 to
the Company's Form 10-Q for the quarterly period ended October
31, 1998), incorporated herein by reference.
10.23 Employment Agreement dated August 20, 1998 by and between the
Company and Howard G. Peretz. (2)
E-2
10.24 Loan and Security Agreement by and between the Company and
Sunrock Capital Corp. dated February 2, 1999. (2)
10.25 Stock Pledge Agreement by and between the Company and Sunrock
Capital Corp. dated February 2, 1999. (2)
10.26 Assignment of Deposit Account by and between the Company and
Sunrock Capital Corp. dated February 2, 1999. (2)
10.27 Trademark Security Agreement by and between the Company and
Sunrock Capital Corp. dated February 2, 1999. (2)
10.28 Patent Collateral Assignment by and between the Company and
Sunrock Capital Corp. dated February 2, 1999. (2)
10.29 Stock Purchase and Sale Agreement dated April 15, 1999 by and
between the Company and MVII, LLC (filed as Exhibit 2 to the
Company's Schedule 14D-9 filed by the Company on April 22, 1999),
incorporated herein by reference.
10.30 Stock Purchase and Sale Agreement, dated April 15, 1999, between
the Company and MVII, LLC (filed as Exhibit 99.2 to the Schedule
14D-9 filed by the Company on April 22, 1999), incorporated
herein by reference.
10.31 Shareholders' and Voting Agreement dated April 15, 1999, by and
among the Company, MVII, LLC, certain management shareholders of
the Company and a limited partnership controlled by a management
shareholder (filed as Exhibit 99.4 to the Schedule 14D-9 filed by
the Company on April 22, 1999), incorporated herein by reference.
10.32 Registration Rights Agreement dated April 15, 1999, by and among
the Company, MVII, LLC, certain management shareholders of the
company and a limited partnership controlled by a management
shareholder (filed as Exhibit 99.5 to the Schedule 14D-9 filed by
the Company on April 22, 1999), incorporated herein by reference.
10.33 Irrevocable Proxy dated April 15, 1999, between MVII, LLC and
Conrad. (3)
10.34 Irrevocable Proxy dated April 15, 1999, between MVII, LLC and
Davis. (3)
10.35 Irrevocable Proxy dated April 15, 1999, between MVII, LLC and
Matlock. (3)
10.36 Irrevocable Proxy dated April 15, 1999, between MVII, LLC and
Rust Capital. (3)
10.37 Irrevocable Proxy dated April 15, 1999, between MVII, LLC and
Smith. (3)
10.38 Consulting Agreement dated June 1, 1999, between the Company and
Davis. (3)
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. (3)
10.40 Amendment No. 1 dated June 30, 1999, to Loan and Security
Agreement, by and between Sunrock Capital Corp. and the Company.
(4)
10.41 Employment Agreement dated June 17, 1999 by and between the
Company and Michael J. Lyden. (4)
10.42 Employment Agreement dated June 1, 1999, by and between the
Company and Joseph S. Whitaker. (4)
10.43 Amendment to 1997 Stock Option Plan dated May 24, 1999. (4)
E-3
10.44 Restated Employment Agreement dated December 31, 1999, by and
between DSI(HK) Limited and Yau Wing Kong (filed as Exhibit 10/44
to the Company's Form 10-K for the 11 month period ended December
31, 1999), and incorporated herein by reference.
10.45 Agreement and Plan of Merger between Meritus Industries, Inc.
et al. and the Company, dated October 7, 1999 (filed as Exhibit
10.45 to the Company's Form 10-Q for the quarterly period ended
October 31, 1999), incorporated herein by reference.
10.46 Closing and Holdback Agreement dated January 7, 2000, by and
between the Company and Meritus Industries, Inc., et al. (filed
as Exhibit 2.3 to the Company's Form 8-K dated January 7, 2000),
incorporated herein by reference.
10.47 Shareholders' and Voting Agreement dated January 7, 2000, by and
among the Company, MVII, LLC and Walter S. and Susan Reiling
(filed as Exhibit 10.1 to the Company's Form 8-K dated January 7,
2000), incorporated herein by reference.
10.48 Limited Irrevocable Proxy dated January 7, 2000, between MVII,
LLC and Walter S. and Susan Reiling (filed as Exhibit 10.2 to the
Company's Form 8-K dated January 7, 2000), incorporated herein by
reference.
10.49 Registration Rights Agreement dated January 7, 2000, by and
between the Company and Walter S. and Susan Reiling (filed as
Exhibit 10.3 to the Company's Form 8-K dated January 7, 2000),
incorporated herein by reference.
10.50 Subordinated Secured Promissory Note dated January 7, 2000, from
the Company to Walter S. and Susan Reiling (filed as Exhibit 10.4
to the Company's Form 8-K dated January 7, 2000), incorporated
herein by reference.
10.51 Promissory Note dated January 7, 2000, from the Company to MVII,
LLC (filed as Exhibit 10.5 to the Company's Form 8-K dated
January 7, 2000), incorporated herein by reference.
10.52 Amendment No. 2 dated January 7, 2000, to Loan and Security
Agreement, by and between Sunrock Capital Corp. and the Company
(filed as Exhibit 10.6 to the Company's Form 8-K dated January 7,
2000), incorporated herein by reference.
10.53 Employment Agreement dated January 7, 2000, by and between the
Company and Beth Reiling (filed as Exhibit 10.7 to the Company's
Form 8-K dated January 7, 2000), incorporated herein by
reference.
10.54 Employment Agreement dated January 7, 2000, by and between the
Company and Joseph Reiling (filed as Exhibit 10.8 to the
Company's Form 8-K dated January 7, 2000), incorporated herein by
reference.
10.55 Amendment No. 2 to DSI Toys, Inc. 1997 Stock Option Plan (filed
as Exhibit 10.11 to the Company's Form 10-Q for the quarterly
period ended June 30, 2000), incorporated herein by reference.
10.56 Amendment No. 3 dated July 14, 2000, to Loan and Security
Agreement, by and between Sunrock Capital Corp. and the Company
(filed as Exhibit 10.12 to the Company's Form 10-Q for the period
ended June 30, 2000), incorporated herein by reference.
10.57 Amendment No. 4 dated March 30, 2001, to Loan and Security
Agreement, by and between Sunrock Capital Corp. and the Company
(filed as Exhibit 10.57 to the Company's Form 10-K for the annual
period ended December 31, 2000), incorporated herein by
reference.
E-4
10.58 Employment Agreement dated April 1, 2001, but executed April 23,
2001, by and between the Company and Gregory A. Barth (filed as
Exhibit 10.2 to the Company's Form 10-Q for the quarterly period
ended March 31, 2001), incorporated herein by reference.
10.59 Amendment No. 5 to Loan and Security Agreement, dated August 13,
2001, by and between Sunrock Capital Corp. and the Company (filed
as Exhibit 10.3 to the Company's Form 10-Q for the quarterly
period ended June 30, 2001), incorporated herein by reference.
10.60 Amendment No. 6 to Loan and Security Agreement, dated August 13,
2001, by and between Sunrock Capital Corp. and the Company (filed
as Exhibit 10.4 to the Company's Form 10-Q for the quarterly
period ended June 30, 2001), incorporated herein by reference.
10.61* First Amendment to Employment Agreement by and between the
Company and Joseph S. Whitaker, dated December 1, 2001.
10.62* Line of Credit Facility with Dao Heng Bank Limited evidencing a
$6,000,000 line of credit, dated December 4, 2001.
10.63* Memorandum of Re-borrowing of Principal by and between the
Company and MVII, LLC, dated March 6, 2002.
10.64* Amendment No. 7 dated March 20, 2002, to Loan and Security
Agreement by and between Sunrock Capital Corp. and the Company.
10.65* Unconditional Guaranty Agreement dated March 20, 2002, by the
Company and Dao Heng Bank Limited.
10.66* Amendment No. 8 dated March 29, 2002, to Loan and Security
Agreement by and between Sunrock Capital Corp. and the Company.
21* Subsidiaries.
99.1 DSI Toys, Inc. Audit Committee of the Board of Directors,
Charter, adopted by the Board of Directors on May 23, 2000 (filed
as Exhibit 99.1 to the Company's Form 10-Q for the period ended
June 30, 2000), incorporated herein by reference.
99.2 Amendment No. 1 to the Audit Committee of the Board of Directors
Charter, adopted by the Board of Directors on March 31, 2001
(filed as Exhibit 99.2 to the Company's Form 10-K for the fiscal
year ended December 31, 2000), incorporated herein by reference.
(1) Filed as a part of the Registrant's Registration Statement on Form S-1 (No.
333-23961) and incorporated herein by reference.
(2) Filed as the indicated numbered exhibit to the Company's Form 10-K for the
annual period ended January 31, 1999, and incorporated herein by reference.
(3) Filed as the indicated numbered exhibit to the Company's Form 10-Q for the
quarterly period ended April 30, 1999, and incorporated herein by
reference.
(4) Filed as the indicated numbered exhibit to the Company's Form 10-Q for the
quarterly period ended July 31, 1999, and incorporated herein by reference.
* Filed herewith
E-5
EXHIBIT 4.8
THIS INVESTMENT WARRANT AND THE SECURITIES ISSUABLE UPON THE CONVERSION HEREOF
HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED,
HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH
ACT OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SUCH ACT.
Dated January 31, 2002 Void after
June 3, 2012
AMENDED AND RESTATED
INVESTMENT WARRANT
DSI TOYS, INC.
THIS AMENDED AND RESTATED INVESTMENT WARRANT OF DSI TOYS, INC. (HEREINAFTER
THE "INVESTMENT WARRANT") AMENDS AND RESTATES IN ITS ENTIRETY THAT CERTAIN
INVESTMENT WARRANT OF DSI TOYS, INC. (THE "COMPANY") MADE IN FAVOR OF MVII, LLC,
A CALIFORNIA LIMITED LIABILITY COMPANY (THE "HOLDER"), DATED MARCH 19, 2001,
WHICH IS HEREBY TERMINATED, CANCELED AND REPLACED BY THIS INVESTMENT WARRANT.
THIS CERTIFIES THAT, for cash paid in the amount of TWO MILLION SEVEN HUNDRED
THOUSAND AND NO/100 DOLLARS ($2,700,000.00) (the "PURCHASE PRICE") on or about
March 19, 2001, the Holder is entitled to receive from the Company, at any time
or from time to time during the period specified in Paragraph 2, ONE MILLION
EIGHT HUNDRED THOUSAND (1,800,000) fully paid and nonassessable shares of the
Company's common stock, $0.01 par value per share (the "COMMON STOCK"). The term
"OPTION SHARES," as used herein, refers to the shares of Common Stock receivable
hereunder. The term "DEEMED CONVERSION PRICE," as used herein is $1.50 per
Option Share and refers to the price per share paid by the Holder for the right
to receive the Option Shares in accordance with the terms of this Investment
Warrant.
This Investment Warrant is subject to the following terms, provisions, and
conditions:
1. MANNER OF CONVERSION; ISSUANCE OF CERTIFICATES. Subject to the
provisions set forth herein, this Investment Warrant may be converted by any
Holder and/or its registered assigns, in whole or in part, by the surrender of
this Investment Warrant together with a completed conversion agreement in the
form attached to this Investment Warrant (the "CONVERSION AGREEMENT"), to the
Company during normal business hours on any business day at the Company's
principal executive offices (or such other office or agency of the Company as it
may designate by notice to the Holder).
Page 1
The Option Shares received upon conversion shall be deemed to be issued to the
Holder, as the record owner of such shares, as of the close of business on the
date on which this Investment Warrant shall have been surrendered and the
completed Conversion Agreement shall have been delivered. Certificates for the
Option Shares shall be delivered to the Holder within a reasonable time, not to
exceed three business days after this Investment Warrant shall have been so
converted. The certificates so delivered shall be in such denominations as may
be requested by the Holder and shall be registered in the name of the Holder or
such other name as shall be designated by such Holder.
2. PERIOD OF CONVERSION. This Investment Warrant may be converted, at the
option of the Holder, in whole or in part, at any time from and after June 3,
2002, until 5:00 p.m., Central time, June 3, 2012 (the "EXERCISE PERIOD"),
unless it expires and terminates earlier as provided herein.
3. CERTAIN AGREEMENTS OF THE COMPANY. The Company hereby covenants and
agrees as follows:
a. SHARES TO BE FULLY PAID. All Option Shares will, upon issuance in
accordance with the terms of this Investment Warrant, be validly issued, fully
paid and nonassessable and free from all taxes, liens and charges with respect
to the issue thereof.
b. RESERVATION OF SHARES. During the Exercise Period, the Company shall
at all times have authorized, and reserved for the purpose of issuance upon
exercise of this Investment Warrant, a sufficient number of shares of Common
Stock to provide for the conversion of this Investment Warrant.
c. SUCCESSORS AND ASSIGNS. This Investment Warrant will be binding upon
any entity succeeding to the Company by merger, consolidation or acquisition of
all or substantially all of the Company's assets.
4. CONSOLIDATION, MERGER OR SALE. From and after the date of this
Investment Warrant, in case of any consolidation of the Company with, or merger
of the Company into, any other corporation, or in case of any sale or conveyance
of all or substantially all of the assets of the Company other than in
connection with a plan of complete liquidation of the Company, then as a
condition of such consolidation, merger or sale or conveyance, adequate
provision will be made whereby the Holder of this Investment Warrant will have
the right to acquire and receive such shares of stock, securities or assets as
may be issued or payable with respect to or in exchange for the number of shares
of Common Stock immediately acquirable and receivable had this Investment
Warrant been converted at that time had such consolidation, merger or sale or
conveyance not taken place. "Common Stock" for the purposes of this Paragraph 4,
includes the Common Stock or shares resulting from any subdivision or
combination of such Common Stock, or in the case of any reorganization,
reclassification, consolidation, merger or sale of the character referred to in
this Paragraph, the stock or other securities or property provided for in such
Paragraph.
Page 2
5. ISSUE TAX. The issuance of certificates for Option Shares upon the
conversion of this Investment Warrant shall be made without charge to the Holder
or such shares for any issuance tax or other costs in respect thereof, provided
that the Company shall not be required to pay any tax that may be payable in
respect of any transfer involved in the issuance and delivery of any certificate
in a name other than the Holder of this Investment Warrant.
6. NO RIGHTS OR LIABILITIES AS A SHAREHOLDER. This Investment Warrant shall
not entitle the Holder to any voting rights or other rights as a shareholder of
the Company. No provision of this Investment Warrant, and no mere enumeration
herein of the rights or privileges of the Holder, shall give rise to any
liability of such Holder, whether such liability is asserted by the Company or
creditors of the Company.
7. TRANSFER AND REPLACEMENT OF INVESTMENT WARRANT.
a. RESTRICTION ON TRANSFER. This Investment Warrant and the rights
granted to the Holder are transferable, in whole or in part, upon surrender of
this Investment Warrant, together with a properly executed assignment in the
form attached hereto, at the office of the Company referred to in Paragraph 7(d)
below, PROVIDED, HOWEVER, that any transfer or assignment shall be subject to
the conditions set forth in Paragraph 7(e). Until due presentment for
registration of transfer on the books of the Company, the Company may treat the
registered Holder as the owner and Holder of this Investment Warrant for all
purposes, and the Company shall not be affected by any notice to the contrary.
b. REPLACEMENT OF INVESTMENT WARRANT. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction, or
mutilation of this Investment Warrant and, in the case of any such loss, theft,
or destruction, upon delivery of an indemnity agreement reasonably satisfactory
in form and amount to the Company, or, in the case of any such mutilation, upon
surrender and cancellation of this Investment Warrant, the Company, at its
expense, will execute and deliver, in lieu thereof, a new Investment Warrant of
like tenor.
c. CANCELLATION, PAYMENT OF EXPENSES. Upon the surrender of this
Investment Warrant in connection with any transfer or replacement as provided in
Paragraph 7, this Investment Warrant shall be promptly canceled by the Company.
The Company shall pay all taxes (other than securities transfer taxes) and all
other expenses (other than legal expenses, if any, incurred by the Holder) in
connection with the preparation, execution, and delivery of Investment Warrants
pursuant to this Paragraph 7.
Page 3
D. REGISTER. The Company shall maintain, at its principal executive
offices (or such other office of the Company as it may designate by notice to
the Holder), a register for this Investment Warrant, in which the Company shall
record the name and address of the person in whose name this Investment Warrant
has been issued, as well as the name and address of each transferee and each
prior owner of this Investment Warrant.
e. EXERCISE OR TRANSFER WITHOUT REGISTRATION. If, at the time of the
surrender of this Investment Warrant in connection with any conversion,
transfer, or exchange of this Investment Warrant, this Investment Warrant (or in
the case of any exercise, the Option Shares issuable hereunder) shall not be
registered under the Securities Act and under applicable state securities or
blue sky laws, the Company may require, as a condition of allowing such
exercise, transfer, or exchange (i) that the Holder or transferee of this
Investment Warrant, as the case may be, furnish to the Company a written opinion
of counsel, which opinion and counsel are reasonably acceptable to the Company,
to the effect that such exercise, transfer, or exchange may be made without
registration under said Act and under applicable state securities or blue sky
laws, and (ii) that the Holder or transferee execute and deliver to the company
an investment letter in form and substance acceptable to the Company. The first
Holder of this Investment Warrant, by taking and holding the same, represents to
the Company that such Holder is acquiring this Investment Warrant for investment
and not with a view to the distribution thereof.
f. LEGEND. The Option Shares issued upon exercise of this Investment
Warrant shall contain a legend stating that their transfer is subject to
restriction as set forth in section 7(e) of this Investment Warrant and shall
further contain the following legend:
"THESE SECURITIES ARE SUBJECT TO CERTAIN RIGHTS AND
RESTRICTIONS CONTAINED IN A SHAREHOLDERS' AND VOTING AGREEMENT
OF DSI TOYS, INC. DATED AS OF APRIL 15, 1999, COPIES OF WHICH
ARE ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY. A COPY OF
SUCH AGREEMENT WILL BE FURNISHED WITHOUT CHARGE TO THE HOLDER
OF THIS CERTIFICATE UPON RECEIPT BY THE COMPANY AT ITS
PRINCIPAL OFFICE OF A WRITTEN REQUEST FROM THE HOLDER
REQUESTING SUCH COPIES."
8. NOTICES. All notices, requests and other communications required or
permitted to be given or delivered hereunder to the Holder of this Investment
Warrant shall be in writing, and shall be personally delivered, or shall be sent
by certified or registered mail or by recognized overnight mail courier, postage
prepaid and addressed to such Holder at the address shown for such Holder on the
books of the Company, or at such other address as shall have been furnished to
the Company by notice from such Holder. All notices, requests, and other
communications required or permitted to be given or delivered hereunder to the
Company shall be in writing, and shall be personally delivered, or shall be sent
by certified or registered mail or by recognized overnight courier, postage
Page 4
prepaid and addressed to the office of the Company at 1100 W. Sam Houston
Parkway North, Suite A, Houston, Texas 77043, Attention: President, or at such
other address as shall have been furnished to the Holder of this Investment
Warrant by notice from the Company. Any such notice, request or other
communication may be sent by facsimile, but shall in such case be subsequently
confirmed by a writing personally delivered or sent by certified or registered
mail or by recognized overnight mail courier as provided above. All notices,
requests and other communications shall be deemed to have been given either at
the time of the receipt thereof by the person entitled to receive such notice at
the address of such person for purposes of this Paragraph 8 or, if mailed by
registered or certified mail or with a recognized overnight mail courier upon
deposit with the United States Post Office or such overnight mail courier, if
postage is prepaid and the mailing is properly addressed, as the case may be.
9. GOVERNING LAW. THIS INVESTMENT WARRANT SHALL BE GOVERNED AND
CONSTRUED AND ENFORCED IN ALL RESPECTS IN ACCORDANCE WITH THE LAWS OF THE STATE
OF TEXAS WITHOUT REGARD TO THE BODY OF LAW CONTROLLING CONFLICTS OF LAW.
10. MISCELLANEOUS.
a. AMENDMENTS. This Investment Warrant may only be amended by an
instrument signed by the Company and the Holder.
b. DESCRIPTIVE HEADINGS. The descriptive headings of the several
paragraphs of this Investment Warrant are inserted for purposes of reference
only, and shall not affect the meaning or construction of any of the provisions
of this Investment Warrant.
c. SEVERABILITY AND SAVINGS CLAUSE. If any one or more of the provisions
contained in this Investment Warrant is for any reason (i) objected to,
contested, or challenged by any court, government authority, agency, department,
commission or instrumentality of the United States or any state or political
subdivision thereof, or any securities industry self-regulatory organization
(collectively, "GOVERNMENTAL AUTHORITY"), or (ii) held to be invalid, illegal,
or unenforceable in any respect, the Company and the Holder agree to negotiate
in good faith to modify such objected to, contested, challenged, invalid,
illegal, or unenforceable provision. It is the intention of the Company and the
Holder that there shall be substituted for such objected to, contested,
challenged, invalid, illegal, or unenforceable provision a provision as similar
to such provision as may be possible and yet be acceptable to any objecting
Governmental Authority and be valid, legal and enforceable. Further, should any
provisions of this Investment Warrant ever be reformed or rewritten by a
judicial body, those provisions as rewritten will be binding, but only in that
jurisdiction, on the Holder and the Company as if contained in the original
Investment Warrant. The invalidity, illegality, or unenforceability of any one
or more provisions of this Investment Warrant will not affect the validity and
enforceability of any other provisions of this Investment Warrant.
Page 5
IN WITNESS WHEREOF, the undersigned has executed this Investment Warrant as
of the date first set forth above.
DSI TOYS, INC.
By: /s/ ROBERT L. WEISGARBER
---------------------------------
Name: ROBERT L. WEISGARBER
-------------------------------
Title: CHIEF FINANCIAL OFFICER
------------------------------
Page 6
[FORM OF ASSIGNMENT]
(TO BE EXECUTED BY THE REGISTERED HOLDER IF
SUCH HOLDER DESIRES TO TRANSFER THE INVESTMENT WARRANT)
FOR VALUE RECEIVED, ___________________________ hereby sells, assigns and
transfer unto
Name:
Address:
Taxpayer ID/Social Security No.:
the accompanying Investment Warrant, together with all right, title and interest
therein, and does hereby irrevocably constitute and appoint:
attorney, to transfer the accompanying Investment Warrant on the books of the
Company, with full power of substitution. The transferee's tax identification or
social security number is: ______________________________.
Dated: ___________________, 200__.
[HOLDER]
By:
Name:
Title:
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the accompanying Investment Warrant or any prior
assignment thereof in every particular, without alteration or enlargement or
change whatsoever.
Page 7
[FORM OF CONVERSION AGREEMENT]
(TO BE EXECUTED BY THE REGISTERED HOLDER IF
SUCH HOLDER DESIRES TO CONVERT THE INVESTMENT WARRANT)
To:
The undersigned hereby irrevocably elects to convert the accompanying Investment
Warrant to receive _________ shares of Common Stock issuable thereunder and
requests that certificates for such shares be issued in the name of:
Name:
Address:
Taxpayer ID/Social Security No.:
The undersigned represents that it is acquiring the shares of Common Stock for
its own account and not with a view to distributions, and it will not sell these
shares unless they have been registered under the Securities Act of 1933 or an
exemption from such registration requirement is available.
If such number of shares of Common Stock shall not be all the shares of Common
Stock into which the accompanying Investment Warrant may be converted, a new
Investment Warrant for the balance remaining of such shares of Common Stock
shall be registered in the name of and delivered to:
Name:
Address:
Taxpayer ID/Social Security No.:
Dated:_______________________, 200__.
[HOLDER]
By:
Name:
Title:
NOTICE
The signature to the foregoing Election must correspond to the name as
written upon the face of the accompanying Investment Warrant or any prior
assignment thereof in every particular, without alteration or enlargement or
change whatsoever.
Page 8
EXHIBIT 4.9
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
This Amended and Restated Registration Rights Agreement (this "Agreement"),
dated as of January 31, 2002, is made by and between DSI Toys, Inc., a Texas
corporation (the "Company"), and MVII, LLC, a California limited liability
company ("MVII"). This Agreement amends and restates in its entirety that
certain Registration Rights Agreement between the Company and MVII dated as of
March 19, 2001, which is hereby terminated, canceled and replaced by this
Agreement.
RECITALS:
WHEREAS, in exchange for a contribution to the capital of the Company in
the amount of $2,700,000 on or about March 19, 2001, the Company has issued to
MVII a certain Amended and Restated Investment Warrant (the "Investment
Warrant") dated as of the date hereof granting MVII the right to convert such
Investment Warrant into shares of common stock, par value $.01 per share, of the
Company (the "Common Stock") during the conversion period set forth therein; and
WHEREAS, the Company and MVII desire to enter into this Agreement to
provide for the registration with the Securities and Exchange Commission (the
"Commission"), under certain circumstances, of the Common Stock into which the
Investment Warrant may be converted by MVII.
AGREEMENT:
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:
1. REGISTRABLE SECURITIES. For purposes of this Agreement "Registrable
Securities" shall mean the shares of Common Stock issuable upon conversion of
the Investment Warrant. As to any particular Registrable Securities, once issued
such securities shall cease to be Registrable Securities when (a) a registration
statement with respect to the sale of such securities shall have become
effective under the Securities Act of 1933, as amended (the "Securities Act")
and such securities shall have been disposed of in accordance with such
registration statement, (b) they shall have been distributed to the public
pursuant to Rule 144 (or any successor provision) under the Securities Act, (c)
they shall have been otherwise transferred, new certificates for them not
bearing a legend restricting further transfer shall have been delivered by the
Company and subsequent disposition of them shall not require registration or
qualification under the Securities Act or any state law in force at the time a
transferee proposes to sell or otherwise dispose of the Registrable Securities,
or (d) they shall have ceased to be outstanding.
2. REGISTRATION RIGHTS.
(a) RIGHT TO PIGGYBACK. If the Company proposes to register any of its
securities under the Securities Act (other than a registration on Form S-4 or
Form S-8, any other form used solely in connection with an employee benefit or
stock ownership plan, or any successor similar
Page 1
forms or any other form not available for registering the Registrable Securities
for sale to the public) and the registration form to be used may be used for the
registration of the Registrable Securities (a "Piggyback Registration"), then
the Company will give prompt written notice to MVII of its intention to effect
such a registration (each a "Piggyback Notice"). Subject to subparagraphs (i)
and (ii) below, the Company will include in such registration all Registrable
Securities which MVII requests that the Company include in such registration by
written notice given to the Company within fifteen (15) days after the date of
sending of the Piggyback Notice.
(i) PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback Registration
relates to an underwritten public offering of equity securities by the Company
and the managing underwriters advise the Company in writing that in their
opinion the number of securities requested (and consented to) to be included in
such registration exceeds the number which can be sold in an orderly manner in
such offering within a price range acceptable to the Company, the Company will
include in such registration: (A) first, the securities proposed to be sold by
the Company; (B) second, the shares of Common Stock owned by MVII (the "Prior
Shares") subject to registration rights granted pursuant to that certain
Registration Rights Agreement dated June 1, 1999; (C) third, the shares of
Common Stock owned by the DSI Group (as such term is defined in the Registration
Rights Agreement dated June 1, 1999) (the "DSI Group Shares"); (D) fourth, the
Reiling Shares (as such term is defined in that certain Registration Rights
Agreement dated January 7, 2000; (E) fifth, the Registrable Securities; and (F)
sixth, other securities requested to be included in such registration.
(ii) PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback
Registration relates to an underwritten public offering of equity securities by
holders of the Company's securities and the managing underwriters advise the
Company in writing that in their opinion the number of securities requested (and
consented to) to be included in such registration exceeds the number which can
be sold in an orderly manner within a price range acceptable to the holders
initially requesting such registration, the Company will include in such
registration: (A) first, the securities requested to be included therein by the
holders requesting such registration, (B) second, the Prior Shares, (C) third,
the DSI Group Shares, (D) fourth, the Reiling Shares, and (E) fifth, the
Registrable Securities.
(b) EXPENSES. All expenses incurred in connection with effecting each
registration pursuant to Section 2 hereof (other than underwriting fees,
disbursements, discounts and commissions relating to Registrable Securities,
which shall be borne by the holder of such Registrable Securities, and fees and
disbursements of counsel retained by such holder, which shall be borne by such
holder), including, without limitation, in each case, all registration, filing
and securities exchange fees; all fees and expenses of complying with securities
or blue sky laws; all word processing, duplicating and printing expenses,
messenger, delivery and shipping expenses; fees and disbursements of the
accountants and counsel for the Company including the expenses of any special
audits or "cold comfort" letters or opinions required by or incident to such
registrations; and premiums and other costs of policies of insurance against
liabilities arising out of the public offering of the Registrable Securities and
any fees and disbursements of underwriters not relating to Registrable
Securities) shall be borne by equally by the Company and MVII.
Page 2
3. REGISTRATION PROCEDURES. Whenever MVII has requested that any
Registrable Securities be registered pursuant to this Agreement in compliance
with the requirements of Section 2 herein:
(a) the Company will use its best efforts to effect the registration and
the sale of such Registrable Securities in accordance with the intended method
of distribution thereof and will as expeditiously as possible;
(i) prepare and file with the Commission a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, provided that before filing a
registration statement or prospectus or any amendments or supplements thereto,
the Company will furnish to the counsel selected by MVII copies of all such
documents proposed to be filed;
(ii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective: (A)
with respect to a registration statement on Form S-1, for a period of up to
thirty days, and (B) with respect to a registration statement on any other form,
for a period of up to six months; and comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement during such period in accordance with the intended
methods of distribution by the sellers thereof set forth in such registration
statement;
(iii) furnish to MVII such number of conformed copies of such
registration statement and of each such amendment and supplement thereto (in
each case including all exhibits), such number of copies of the prospectus
contained in such registration statement (including each preliminary prospectus
and any summary prospectus) and any other prospectus filed under Rule 424 under
the Securities Act, and such other documents, as MVII may reasonably request;
(iv) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
MVII reasonably requests and do any and all other acts or things which may be
reasonably necessary or advisable to enable MVII to consummate the disposition
in such jurisdictions of the Registrable Securities owned by MVII, provided that
the Company will not be required (A) to qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
subparagraph, (B) to subject itself to taxation in any such jurisdiction, or (C)
to consent to general service of process in any such jurisdiction;
(v) furnish to MVII a copy, or, upon request, a signed counterpart,
addressed to MVII (and the underwriters, if any) of (A) an opinion of counsel
for the Company, dated the effective date of such registration statement (or, if
such registration includes an underwritten public offering, dated the date of
the closing under the underwriting agreement), and (B) a "comfort" letter
addressed to the underwriters, dated the effective date of such registration
Page 3
statement (or, if such registration includes an underwritten public offering,
dated the date of the closing under the underwriting agreement), signed by the
independent public accountants who have audited the Company's financial
statements included in such registration statement, covering substantially the
same matters with respect to such registration statement (and the prospectus
included therein) and, in the case of the accountants' letter, with respect to
events subsequent to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' letters delivered to
the underwriters in underwritten public offerings of securities and, in the case
of the accountants' letter, such other financial matters, and, in the case of
the legal opinion such other legal matters, as MVII (or the underwriters, if
any) may reasonably request;
(vi) notify MVII, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any event
as a result of which the prospectus included in such registration statement
contains an untrue statement of a material fact or omits any fact necessary to
make the statements therein, in light of the circumstances under which they are
made, not misleading, and, at the request of MVII, the Company will prepare a
supplement or amendment to such prospectus so that, as thereafter delivered to
the purchasers of such Registrable Securities, such prospectus will not contain
an untrue statement of a material fact or omit to state any fact necessary to
make the statements therein, in light of the circumstances under which they are
made, not misleading, or of the determination by the Company that a
post-effective amendment to a registration statement would be required under the
Securities Act, and, at the request of MVII, the Company will prepare and file a
post-effective amendment to the registration statement as required under the
Securities Act.
(vii) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed and to be qualified for trading on each system on which similar
securities issued by the Company are from time to time qualified;
(viii) provide a transfer agent and registrar for all such
Registrable Securities not later than the effective date of such registration
statement and thereafter maintain such a transfer agent and registrar;
(ix) enter into such customary agreements and take all such other
actions as the underwriters, if any, reasonably request in order to expedite or
facilitate the disposition of such Registrable Securities;
(x) make available for inspection by any underwriter participating
in any disposition pursuant to such registration statement and any attorney,
accountant or other agent retained by any such underwriter, all financial and
other records, pertinent corporate documents and properties of the Company, and
causes the Company's officers, directors, employees and independent accountants
to supply all information reasonably requested by any such underwriter,
attorney, accountant or agent in connection with such registration statement;
provided that any person to whom such information is provided shall agree to
keep it confidential and use it only in connection with such offering;
Page 4
(xi) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering the
period of at least twelve months beginning with the first day of the Company's
first full calendar quarter after the effective date of the registration
statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act and Rule 158 thereunder; and
(xii) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any Registrable Securities included in such registration statement for sale in
any jurisdiction, the Company will use its reasonable best efforts promptly to
obtain the withdrawal of such order.
(b) The Company shall not be required to include any Registrable
Securities in any registration unless MVII furnishes to the Company in writing
such information with respect to MVII and the distribution of such Registrable
Securities as the Company may from time to time reasonably request in writing
and as shall be required by law or the Commission in connection therewith.
(c) If any such registration or comparable statement refers to MVII by
name or otherwise as the holder of any securities of the Company, MVII shall
have the right to require (i) the inclusion in such registration statement of
language, in form and substance reasonably satisfactory to MVII, to the effect
that the holding of such securities by MVII is not to be construed as a
recommendation by MVII of the investment quality of the Company's securities
covered thereby and that such holding does not imply that MVII will assist in
the meeting any future financial requirements of the Company, or (ii) in the
event that such reference to MVII is not required by the Securities Act or any
similar federal statute then in force, the deletion of the reference to MVII;
provided, that the respect to this clause (ii) MVII shall furnish to the Company
an opinion of counsel to such effect, which opinion and counsel shall be
reasonably satisfactory to the Company.
(d) MVII agrees that upon receipt of any notice from the Company of the
happening of any event of the kind described in the subdivision (a)(vi) of this
Section 3, such person will forthwith discontinue such person's disposition of
Registrable Securities pursuant to the registration statement relating to such
Registrable Securities until such person's receipt of the copies of the
supplemented or amended prospectus contemplated by subdivision (a)(vi) of this
Section 3 and, if so directed by the Company, will deliver to the Company (at
the Company's expense) all copies, other than permanent file copies, then in
such person's possession of the prospectus relating to such Registrable
Securities current at the time of receipt of such notice. Nothing contained in
this Agreement shall be deemed to require the Company to disclose any
information that, in the good faith opinion of the management of the Company, is
not yet required to be disclosed and would not be in the best interests of the
Company to disclose.
Page 5
4. UNDERWRITTEN OFFERINGS. If the Company at any time proposes to register
any of its securities under the Securities Act as contemplated by Section 2
hereof and such securities are to be distributed by or through one or more
underwriters, the Company will, if requested by MVII as provided in Section 2
hereof, arrange for such underwriters to include in the securities to be
distributed by such underwriters all of the Registrable Securities to be offered
and sold by MVII.
5. PREPARATION; REASONABLE INVESTIGATION. In connection with the
preparation and filing of each registration statement under the Securities Act
pursuant to the provisions hereof, the Company will give MVII and one counsel or
firm of counsel and one accountant or firm of accountants representing MVII the
opportunity to participate in the preparation of such registration statement,
each prospectus included therein or filed with the Commission, and each
amendment thereof or supplement thereto, and will give MVII such access to its
books and records and such opportunities to discuss the business of the Company
with its officers and the independent public accountants who have certified its
financial statements as shall be necessary, in the opinion of MVII's counsel, to
conduct a reasonable investigation within the meaning of the Securities Act.
6. INDEMNIFICATION.
(A) INDEMNIFICATION BY THE COMPANY. IN THE EVENT ANY REGISTRABLE
SECURITIES ARE INCLUDED IN A REGISTRATION STATEMENT HEREUNDER, TO THE EXTENT
PERMITTED BY LAW, THE COMPANY WILL, AND HEREBY DOES, INDEMNIFY AND HOLD HARMLESS
THE HOLDER OF SUCH REGISTRABLE SECURITIES, ITS DIRECTORS AND OFFICERS, EACH
OTHER PERSON WHO PARTICIPATES AS AN UNDERWRITER IN THE OFFERING OR SALE OF SUCH
SECURITIES AND EACH OTHER PERSON, IF ANY, WHO CONTROLS THE HOLDER OR ANY SUCH
UNDERWRITER WITHIN THE MEANING OF THE SECURITIES ACT, AGAINST ANY LOSSES,
CLAIMS, DAMAGES OR LIABILITIES, JOINT OR SEVERAL, TO WHICH THE HOLDER OR ANY
SUCH DIRECTOR OR OFFICER OR UNDERWRITER OR CONTROLLING PERSON MAY BECOME SUBJECT
UNDER THE SECURITIES ACT OR OTHERWISE, INSOFAR AS SUCH LOSSES, CLAIMS, DAMAGES
OR LIABILITIES (OR ACTIONS OR PROCEEDINGS, WHETHER COMMENCED OR THREATENED, IN
RESPECT THEREOF) ARISE OUT OF OR ARE BASED UPON ANY UNTRUE STATEMENT OR ALLEGED
UNTRUE STATEMENT OF ANY MATERIAL FACT CONTAINED IN ANY REGISTRATION STATEMENT
UNDER WHICH SUCH SECURITIES WERE REGISTERED UNDER THE SECURITIES ACT, ANY
PRELIMINARY PROSPECTUS, FINAL PROSPECTUS OR SUMMARY PROSPECTUS CONTAINED
THEREIN, OR ANY AMENDMENT OR SUPPLEMENT THERETO, OR ANY OMISSION OR ALLEGED
OMISSION TO STATE THEREIN A MATERIAL FACT REQUIRED TO BE STATED THEREIN OR
NECESSARY TO MAKE THE STATEMENTS THEREIN NOT MISLEADING, AND THE COMPANY WILL
REIMBURSE SUCH HOLDER AND EACH SUCH DIRECTOR, OFFICER, UNDERWRITER AND
CONTROLLER PERSON FOR ANY LEGAL OR ANY OTHER EXPENSES REASONABLY INCURRED BY
THEM IN CONNECTION WITH INVESTIGATING OR DEFENDING ANY SUCH LOSS, CLAIM,
LIABILITY, ACTION OR PROCEEDING; PROVIDED, THAT THE COMPANY SHALL NOT BE LIABLE
IN ANY SUCH CASE TO THE
Page 6
EXTENT THAT ANY SUCH LOSS, CLAIM, DAMAGE, LIABILITY (OR ACTION OR PROCEEDING IN
RESPECT THEREOF) OR EXPENSE ARISES OUT OF OR IS BASED UPON AN UNTRUE STATEMENT
OR ALLEGED UNTRUE STATEMENT OR OMISSION OR ALLEGED OMISSION MADE IN SUCH
REGISTRATION STATEMENT, ANY SUCH PRELIMINARY PROSPECTUS, FINAL PROSPECTUS,
SUMMARY PROSPECTUS, AMENDMENT OR SUPPLEMENT IN RELIANCE UPON AND IN CONFORMITY
WITH WRITTEN INFORMATION FURNISHED TO THE COMPANY BY THE HOLDER EXPRESSLY FOR
USE IN THE PREPARATION THEREOF, AND PROVIDED FURTHER THAT THE COMPANY SHALL NOT
BE LIABLE TO ANY PERSON WHO PARTICIPATES AS AN UNDERWRITER IN THE OFFERING OR
SALE OF REGISTRABLE SECURITIES OR ANY OTHER PERSON WHO CONTROLS SUCH UNDERWRITER
WITHIN THE MEANING OF THE SECURITIES ACT, IN ANY SUCH CASE TO THE EXTENT THAT
ANY SUCH LOSS, CLAIM, DAMAGE, LIABILITY (OR ACTION OR PROCEEDINGS IN RESPECT
THEREOF) OR EXPENSE ARISES OUT OF SUCH PERSON'S FAILURE TO SEND OR GIVE A COPY
OF THE FINAL PROSPECTUS, AS THE SAME MAY BE THEN SUPPLEMENTED OR AMENDED, TO THE
PERSON ASSERTING AN UNTRUE STATEMENT OR ALLEGED UNTRUE STATEMENT OR OMISSION OR
ALLEGED OMISSION AT OR PRIOR TO THE WRITTEN CONFIRMATION OF THE SALE OF
REGISTRABLE SECURITIES TO SUCH PERSON IF SUCH STATEMENT OR OMISSION WAS
CORRECTED IN SUCH FINAL PROSPECTUS. SUCH INDEMNITY SHALL REMAIN IN FULL FORCE
AND EFFECT REGARDLESS OF ANY INVESTIGATION MADE BY OR ON BEHALF OF THE HOLDER OR
ANY SUCH DIRECTOR, OFFICER, UNDERWRITER OR CONTROLLING PERSON AND SHALL SURVIVE
THE TRANSFER OF SUCH SECURITIES BY THE HOLDER.
(B) INDEMNIFICATION BY THE HOLDERS. THE COMPANY MAY REQUIRE, AS A
CONDITION TO INCLUDING ANY REGISTRABLE SECURITIES IN ANY REGISTRATION STATEMENT
FILED PURSUANT TO SECTION 3 HEREOF, THAT THE COMPANY SHALL HAVE RECEIVED AN
UNDERTAKING SATISFACTORY TO IT FROM THE HOLDER OF SUCH REGISTRABLE SECURITIES,
TO INDEMNIFY AND HOLD HARMLESS (IN THE SAME MANNER AND TO THE SAME EXTENT AS SET
FORTH IN SUBDIVISION (A) OF THIS SECTION 6) EACH UNDERWRITER, EACH PERSON WHO
CONTROLS SUCH UNDERWRITER WITHIN THE MEANING OF THE SECURITIES ACT, THE COMPANY,
EACH DIRECTOR OF THE COMPANY, EACH OFFICER OF THE COMPANY AND EACH OTHER PERSON,
IF ANY, WHO CONTROLS THE COMPANY WITHIN THE MEANING OF THE SECURITIES ACT, WITH
RESPECT TO ANY STATEMENT OR ALLEGED STATEMENT IN OR OMISSION OR ALLEGED OMISSION
FROM SUCH REGISTRATION STATEMENT, ANY PRELIMINARY PROSPECTUS, FINAL PROSPECTUS
OR SUMMARY PROSPECTUS CONTAINED THEREIN, OR ANY AMENDMENT OR SUPPLEMENT THERETO,
IF SUCH STATEMENT OR ALLEGED STATEMENT OR OMISSION OR ALLEGED OMISSION WAS MADE
IN RELIANCE UPON AND IN STRICT CONFORMITY WITH WRITTEN INFORMATION FURNISHED TO
THE COMPANY BY THE HOLDER EXPRESSLY FOR USE IN THE PREPARATION OF SUCH
REGISTRATION STATEMENT, PRELIMINARY PROSPECTUS, FINAL PROSPECTUS, SUMMARY
PROSPECTUS, AMENDMENT OR SUPPLEMENT; PROVIDED THAT THE HOLDER SHALL
Page 7
NOT BE LIABLE TO THE COMPANY OR ANY PERSON WHO PARTICIPATES AS AN UNDERWRITER IN
THE OFFERING OR SALE OF REGISTRABLE SECURITIES OR ANY OTHER PERSON, IF ANY, WHO
CONTROLS SUCH UNDERWRITER WITHIN THE MEANING OF THE SECURITIES ACT, IN ANY SUCH
CASE TO THE EXTENT THAT ANY SUCH LOSS, CLAIM, DAMAGE, LIABILITY (OR ACTION OR
PROCEEDING IN RESPECT THEREOF) OR EXPENSE ARISES OUT OF SUCH PERSON'S FAILURE TO
SEND OR GIVE A COPY OF THE FINAL PROSPECTUS, AS THE SAME MAY BE THEN
SUPPLEMENTED OR AMENDED, TO THE PERSON ASSERTING AN UNTRUE STATEMENT OR ALLEGED
UNTRUE STATEMENT OR OMISSION OR ALLEGED OMISSION AT OR PRIOR TO THE WRITTEN
CONFIRMATION OF THE SALE OF REGISTRABLE SECURITIES TO SUCH PERSON IF SUCH
STATEMENT OR OMISSION WAS CORRECTED IN SUCH FINAL PROSPECTUS. SUCH INDEMNITY
SHALL REMAIN IN FULL FORCE AND EFFECT, REGARDLESS OF ANY INVESTIGATION MADE BY
OR ON BEHALF OF ANY UNDERWRITER, THE COMPANY OR ANY SUCH DIRECTOR, OFFICER OR
CONTROLLING PERSON AND SHALL SURVIVE THE TRANSFER OF SUCH SECURITIES BY THE
HOLDER. IN NO EVENT SHALL THE LIABILITY OF THE HOLDER UNDER THIS SECTION 6(B) BE
GREATER IN AMOUNT THAN THE DOLLAR AMOUNT OF THE PROCEEDS RECEIVED BY THE HOLDER
UPON THE SALE OF THE REGISTRABLE SECURITIES GIVING RISE TO SUCH INDEMNIFICATION
OBLIGATION.
(C) NOTICES OF CLAIMS, ETC. PROMPTLY AFTER RECEIPT BY AN INDEMNIFIED
PARTY OF NOTICE OF THE COMMENCEMENT OF ANY ACTION OR PROCEEDING INVOLVING A
CLAIM REFERRED TO IN THE PRECEDING SUBDIVISIONS OF THIS SECTION 6, SUCH
INDEMNIFIED PARTY WILL, IF A CLAIM IN RESPECT THEREOF IS TO BE MADE AGAINST AN
INDEMNIFYING PARTY, GIVE WRITTEN NOTICE TO THE LATTER OF THE COMMENCEMENT OF
SUCH ACTION; PROVIDED THAT THE FAILURE OF ANY INDEMNIFIED PARTY TO GIVE NOTICE
AS PROVIDED HEREIN SHALL NOT RELIEVE THE INDEMNIFYING PARTY OF ITS OBLIGATIONS
UNDER THE PRECEDING SUBDIVISIONS OF THIS SECTION 6, EXCEPT TO THE EXTENT THAT
THE INDEMNIFYING PARTY IS ACTUALLY PREJUDICED BY SUCH FAILURE TO GIVE NOTICE. IN
CASE ANY SUCH ACTION IS BROUGHT AGAINST AN INDEMNIFIED PARTY, UNLESS IN SUCH
INDEMNIFIED PARTY'S REASONABLE JUDGMENT A CONFLICT OF INTEREST BETWEEN SUCH
INDEMNIFIED AND INDEMNIFYING PARTIES MAY EXIST IN RESPECT OF SUCH CLAIM, THE
INDEMNIFYING PARTY SHALL BE ENTITLED TO PARTICIPATE IN AND TO ASSUME THE DEFENSE
THEREOF, JOINTLY WITH ANY OTHER INDEMNIFYING PARTY SIMILARLY NOTIFIED TO THE
EXTENT THAT IT MAY WISH, WITH COUNSEL REASONABLY SATISFACTORY TO SUCH
INDEMNIFIED PARTY, AND AFTER NOTICE FROM THE INDEMNIFYING PARTY TO SUCH
INDEMNIFIED PARTY OF ITS ELECTION SO TO ASSUME THE DEFENSE THEREOF, THE
INDEMNIFYING PARTY SHALL NOT BE LIABLE TO SUCH INDEMNIFIED PARTY FOR ANY LEGAL
OR OTHER EXPENSES SUBSEQUENTLY INCURRED BY THE LATTER IN CONNECTION WITH THE
DEFENSE THEREOF OTHER THAN REASONABLE COSTS OF INVESTIGATION. NO INDEMNIFYING
PARTY SHALL, WITHOUT THE CONSENT OF THE INDEMNIFIED PARTY, CONSENT TO ENTRY OF
ANY JUDGMENT OR ENTER INTO ANY
Page 8
SETTLEMENT WHICH DOES NOT INCLUDE AS AN UNCONDITIONAL TERM THEREOF THE GIVING BY
THE CLAIMANT OR PLAINTIFF TO SUCH INDEMNIFIED PARTY OF A FULL RELEASE FROM ALL
LIABILITY IN RESPECT TO SUCH CLAIM OR LITIGATION.
(D) OTHER INDEMNIFICATION. INDEMNIFICATION SIMILAR TO THAT SPECIFIED IN
THE PRECEDING SUBDIVISIONS OF THIS SECTION 6 (WITH APPROPRIATE MODIFICATIONS)
SHALL BE GIVEN BY THE COMPANY AND THE HOLDER WITH RESPECT TO ANY REQUIRED
REGISTRATION OR OTHER QUALIFICATION OF SECURITIES UNDER ANY FEDERAL OR STATE LAW
OR REGULATION OF ANY GOVERNMENTAL AUTHORITY OTHER THAN THE SECURITIES ACT.
(E) INDEMNIFICATION PAYMENTS. THE INDEMNIFICATION REQUIRED BY THIS
SECTION 6 SHALL BE MADE BY PERIODIC PAYMENTS OF THE AMOUNT THEREOF DURING THE
COURSE OF THE INVESTIGATION OR DEFENSE, AS AND WHEN BILLS ARE RECEIVED OR
EXPENSE, LOSS, DAMAGE OR LIABILITY IS INCURRED.
(F) CONTRIBUTION. IF THE INDEMNIFICATION PROVIDED FOR IN THIS SECTION 6
FROM THE INDEMNIFYING PARTY IS UNAVAILABLE TO AN INDEMNIFIED PARTY HEREUNDER IN
RESPECT OF ANY LOSSES, CLAIMS, DAMAGES, LIABILITIES OR EXPENSES REFERRED TO
HEREIN, THEN THE INDEMNIFYING PARTY, IN LIEU OF INDEMNIFYING SUCH INDEMNIFIED
PARTY, SHALL CONTRIBUTE TO THE AMOUNT PAID OR PAYABLE BY SUCH INDEMNIFIED PARTY
AS A RESULT OF SUCH LOSS, CLAIMS, DAMAGES, LIABILITIES OR EXPENSES IN SUCH
PROPORTION AS IS APPROPRIATE TO REFLECT THE RELATIVE FAULT OF THE INDEMNIFYING
PARTY AND INDEMNIFIED PARTIES IN CONNECTION WITH THE ACTIONS WHICH RESULTED IN
SUCH LOSSES, CLAIMS, DAMAGES, LIABILITIES OR EXPENSES, AS WELL AS ANY OTHER
RELEVANT EQUITABLE CONSIDERATIONS. THE RELATIVE FAULT OF SUCH INDEMNIFYING PARTY
AND INDEMNIFIED PARTIES SHALL BE DETERMINED BY REFERENCE TO, AMONG OTHER THINGS,
WHETHER ANY ACTION IN QUESTION, INCLUDING ANY UNTRUE STATEMENT OF MATERIAL FACT
OR OMISSION OR ALLEGED OMISSION TO STATE A MATERIAL FACT, HAS BEEN MADE BY, OR
RELATES TO INFORMATION SUPPLIED BY, SUCH INDEMNIFYING PARTY OR INDEMNIFIED
PARTIES, AND THE PARTIES' RELATIVE INTENT, KNOWLEDGE, ACCESS TO INFORMATION AND
OPPORTUNITY TO CORRECT OR PREVENT SUCH ACTION. THE AMOUNT PAID OR PAYABLE BY A
PARTY AS A RESULT OF THE LOSSES, CLAIMS, DAMAGES, LIABILITIES AND EXPENSES
REFERRED TO ABOVE SHALL BE DEEMED TO INCLUDE, SUBJECT TO THE LIMITATIONS SET
FORTH IN SECTION 6(C) HEREOF, ANY LEGAL OR OTHER FEES OR EXPENSES REASONABLY
INCURRED BY SUCH PARTY IN CONNECTION WITH ANY INVESTIGATION OR PROCEEDING.
THE PARTIES HERETO AGREE THAT IT WOULD NOT BE JUST AND EQUITABLE IF
CONTRIBUTION PURSUANT TO THIS SECTION 6(F) WERE DETERMINED BY PRO
Page 9
RATA ALLOCATION OR BY ANY OTHER METHOD OF ALLOCATION WHICH DOES NOT TAKE ACCOUNT
OF THE EQUITABLE CONSIDERATIONS REFERRED TO IN THE IMMEDIATELY PRECEDING
PARAGRAPH. NOTWITHSTANDING THE PROVISIONS OF THIS SECTION 6(F), NO UNDERWRITER
SHALL BE REQUIRED TO CONTRIBUTE ANY AMOUNT IN EXCESS OF THE AMOUNT BY WHICH THE
TOTAL PRICE AT WHICH THE REGISTRABLE SECURITIES UNDERWRITTEN BY IT AND
DISTRIBUTED TO THE PUBLIC WERE OFFERED TO THE PUBLIC EXCEEDS THE AMOUNT OF ANY
DAMAGES WHICH SUCH UNDERWRITER HAS OTHERWISE BEEN REQUIRED TO PAY BY REASON OF
SUCH UNTRUE OR ALLEGED UNTRUE STATEMENT OR OMISSION OR ALLEGED OMISSION, AND THE
HOLDER SHALL BE REQUIRED TO CONTRIBUTE ANY AMOUNT IN EXCESS OF THE AMOUNT BY
WHICH THE TOTAL PRICE AT WHICH THE REGISTRABLE SECURITIES WERE OFFERED TO THE
PUBLIC EXCEEDS THE AMOUNT OF ANY DAMAGES WHICH THE HOLDER HAS OTHERWISE BEEN
REQUIRED TO PAY BY REASON OF SUCH UNTRUE STATEMENT OR OMISSION. NO PERSON GUILTY
OF FRAUDULENT MISREPRESENTATION (WITHIN THE MEANING OF SECTION 11(F) OF THE
SECURITIES ACT) SHALL BE ENTITLED TO CONTRIBUTION FROM ANY PERSON WHO WAS NOT
GUILTY OF SUCH FRAUDULENT MISREPRESENTATION.
IF INDEMNIFICATION IS AVAILABLE UNDER THIS SECTION 6, THE INDEMNIFYING
PARTIES SHALL INDEMNIFY EACH INDEMNIFIED PARTY TO THE FULL EXTENT PROVIDED IN
SECTION 6(A) THROUGH SECTION 6(E) HEREOF WITHOUT REGARD TO THE RELATIVE FAULT OF
SAID INDEMNIFYING PARTY OR INDEMNIFIED PARTY OR OTHER EQUITABLE CONSIDERATION
PROVIDED FOR IN THIS SECTION 6(F).
7. FORMS. All references herein to particular forms of registration
statements are intended to include, and shall be deemed to include, references
to all successor forms which are intended to replace, or to apply to similar
transactions as, the forms herein referenced.
8. TRANSFER OF REGISTRATION RIGHTS. The registration rights granted
hereunder may be transferred by MVII at any time, in whole or in part, without
the consent of the Company and the terms and provisions set forth in this
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the respective successors and assigns of MVII, whether so expressed or not.
Notwithstanding the foregoing provisions of this Section 8, the registration
rights granted hereunder with respect to any Registrable Securities may not be
transferred if (a) a registration statement with respect to the disposition of
such Registrable Securities shall have become effective under the Securities Act
and such Registrable Securities shall have been disposed of pursuant to such
effective registration statement, or (b) such Registrable Securities shall have
been sold under circumstances in which all of the applicable conditions of Rule
144 (or any similar provisions then in force) under the Securities Act are met.
9. MISCELLANEOUS.
(a) NOTICES. All notices, consents, and other communications under this
Agreement shall be in writing and shall be delivered personally or by facsimile
transmission (with a
Page 10
copy sent by overnight delivery service or by first class certified or
registered mail) or by overnight delivery service or 72 hours after having been
mailed by first class certified or registered mail, return receipt requested,
postage prepaid:
If to the Company, at DSI Toys, Inc., 1100 W. Sam Houston Parkway N.,
Suite A, Houston, Texas 77043, Attention: President (fax: 713/365-9911), or at
such other address or addresses as may have been furnished in writing by the
Company to MVII, with a copy to Carrington, Coleman, Sloman & Blumenthal,
L.L.P., 200 Crescent Court, Suite 1500, Dallas, TX 75201, Attention: Gregg R.
Cannady, Esq. (fax: 214/855-1333).
If to MVII, at MVII, LLC, 654 Osos Street, San Luis Obispo, CA 93401,
Attention: E. Thomas Martin (fax: 805/545-7590) or at such other address or
addresses as may have been furnished in writing by MVII to the Company, with a
copy to Andre, Morris & Buttery, 1304 Pacific Street, San Luis Obispo, CA 93401,
Attention: J. Todd Mirolla, Esq. (fax: 805/543-0752).
Notices provided in accordance with this paragraph (a) shall be deemed
delivered upon personal delivery or two business days after deposit in the mail.
(b) REMEDIES. Any person having rights under any provision of this
Agreement to enforce such rights specifically to recover damages caused by
reason of any breach of any provision of this Agreement and to exercise all
other rights granted by law. The parties hereto agree and acknowledge that money
damages may not be an adequate remedy for any breach of the provisions of this
Agreement and that any party may in its sole discretion apply to any court of
law or equity of competent jurisdiction (without posting any bond or other
security) for specific performance and for other injunctive relief in order to
enforce or prevent violation of the provisions of this Agreement.
(c) AMENDMENTS AND WAIVERS. Except as otherwise provided herein, no
amendment, modification, termination or cancellation of this Agreement shall be
effective unless made in writing signed by all of the parties hereto.
(d) SEVERABILITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
(e) ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to such
subject matter.
(f) HEADINGS. The headings of this Agreement are for convenience only
and do not constitute a part of this Agreement.
(g) GOVERNING LAW. The construction, validity and interpretation of this
Agreement will be governed by the internal laws of the State of Texas without
giving effect to any choice of law or conflict of law provision or rule (whether
of the State of Texas or any other
Page 11
jurisdiction) that would cause the application of the laws of any jurisdiction
other than the State of Texas.
(h) FURTHER ASSURANCES. Each party to this Agreement hereby covenants
and agrees, without the necessity of any further consideration, to execute and
deliver any and all such further documents and take any and all such other
actions as may be necessary or appropriate to carry out the intent and purposes
of this Agreement and to consummate the transactions contemplated hereby.
(i) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be one and the same documents.
Page 12
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
THE COMPANY:
DSI TOYS, INC.,
a Texas corporation
By: /s/ ROBERT L. WEISGARBER
-----------------------------------
Name: ROBERT L. WEISGARBER
---------------------------------
Title: CHIEF FINANCIAL OFFICER
---------------------------------
MVII:
MVII, LLC,
a California limited liability company
By: /s/ E. THOMAS MARTIN
-----------------------------------
Name: E. THOMAS MARTIN
----------------------------------
Title: MANAGER
---------------------------------
Page 13
EXHIBIT 10.61
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment ("First Amendment") to the Employment Agreement by and
between DSI Toys, Inc. ("Employer") and Joseph S. Whitaker ("Employee") is
hereby made to be effective the 1st day of December, 2001.
WITNESSETH
1. Employer and Employee entered into that certain Employment Agreement
dated June 1, 2001 ("Agreement").
2. Employer and Employee mutually agree to hereby amend certain terms and
provisions of said Employment Agreement.
ARTICLE I
1.1 Effective December 1, 2001, the position set forth in Paragraph 1.2 of
the Agreement is President and Chief Executive Officer.
1.2 The term as set forth in Paragraph 1.3 of the Agreement is hereby
extended and shall end on November 30, 2004.
ARTICLE II
2.1 Effective December 1, 2001, the base salary as set forth in Paragraph 2.1
of the Agreement shall be One Hundred Eighty Thousand Dollars
($180,000.00) per year.
2.1(a) Effective December 1, 2001, Paragraph 2.1 (a) of the Agreement is hereby
restated in its entirety as follows: "At a minimum, the Base Salary shall
be adjusted annually on December 1, commencing December 1, 2002, to
reflect any increase in the Consumer Price Index - All Urban Wage Earners
(the "Index"). The Base Salary will not be adjusted downward to reflect
any decrease in the Index
2.2 Effective December 1, 2001, the automobile allowance set forth in
Paragraph 2.10 of the Agreement shall be Seven Hundred Fifty Dollars
($750.00) per month.
EXCEPT and as herein altered, changed and amended the Agreement remains
in full force and effect.
IN WITNESS WHEREOF, the Parties have executed this First Amendment in
duplicate originals to be effective the 1st day of December, 2001.
EMPLOYER EMPLOYEE
DSI Toys, Inc.
By: /s/ THOMAS V. YARNELL /s/ JOSEPH S. WHITAKER
-------------------------------------- ---------------------------
Thomas V. Yarnell Joseph S. Whitaker
Vice President / General Counsel
Exhibit 10.62
DAOHENGBANK
PRIVATE & CONFIDENTIAL
4 December 2001 Our Ref : D/P/CBD/0294/01
DSI (HK) Limited
Room 1401, 14/F.,
New T & T Centre,
Harbour City,
Tsim Sha Tsui,
Kowloon
Dear Sir(s) /Madam(s),
BANKING FACILITY (IES)
We refer to our recent discussions and are pleased to inform you that the
following facility(ies) (the "Facility") will be made available to you on the
specific terms and conditions outlined herein subject to our review from time to
time. The Facility would be deemed to be continued on the same terms and
conditions until and unless notice to the otherwise is advised to you.
FACILITY (IES) LIMIT (S) TERMS & CONDITIONS
1. Negotiation of USD6, 000,000.00
Export Bills
under LC with
discrepancies +
Packing Loan
1a. within facility item 1,
Packing Loan (USD2, 100, 000.00) Against lodgement of valid
export Letters of Credit
Issued by Banks acceptable to
us. Maximum advance will be
limited to 35% of the value of
each L/C and tenor within 90 days
or L/C expiry date, whichever
is earlier; and will be
repayable from the proceeds on
negotiation of the relative
export bills.
OTHER TERMS AND CONDITIONS
Upon availability of the above Facility, debenture in favour of State Street
Bank & Trust Company must be released.
The Facility is for financing the FOB sales of DSI (HK) Limited only and not the
domestic sales of DSI Toys, Inc..
Arrangement fee for HKD10,000.00 will be charged, payable upon acceptance of
this letter. Thereafter, unless and until the Facility is terminated or as
otherwise advised to you, a review fee at the same amount or such other amount
as we may at our entire discretion determine will be charged on a yearly basis.
The Facility is subject to our overriding right of withdrawal and repayment on
demand including the right to call for cash cover on demand for prospective and
contingent liabilities.
The nature and the amount of the Facility granted or to be granted by us may be
varied to such category(ies) and to such smaller or larger extent as we may at
our absolute discretion determine from time to time with or without notice to
you.
The rates of interest, fees and commission on the Facility is subject to
fluctuation at our absolute discretion determined from time to time with or
without notice to you and payable to the debit of your account with us. Late
payment/settlement of any loan/advance with specified due/repayment date will be
subject to an overdue interest charge at our then prevailing rate.
For the Facility adopting the prime rate, deposit rate or other specified
rate(s) as the basis of interest rate determination, in the event that the
prevailing interbank offer rate (HIBOR for Hong Kong Dollar loans, and LIBOR or
SIBOR for loans in other currencies) is higher than the prime rate, deposit rate
or other specified rate(s), we may at our entire discretion and without notice
to you adopt the prevailing interbank offer rate in lieu of the prime rate,
deposit rate or other specified rate(s) as the basis of interest rate
determination.
As security for the above Facility, we require a corporate guarantee for
USD6,000,000.00 from DSI Toys, Inc.. Please let us have the certified true
copy of extract from the minutes of a meeting of the board of directors of
DSI Toys, Inc. in relation to its extending the said guarantee to our Bank as
security for the Facility granted or to be granted to DSI (HK) Limited by our
Bank.
All legal costs and expenses incurred in connection with the preparation of
security documentation of the above security and all incidental attendances
thereto will be for your account.
By accepting this offer letter, you undertake and confirm that :
(a) annual bills business of not less than USD10,000,000.00 to be enrouted
to us,
(b) at present, neither you nor any of the following parties have any
relationship with the Bank's directors or employees:
1) in case you are a limited company, any of your shareholders and
directors;
2) in case you are a partnership, any of your partners; or
3) in case the Facility is secured by guarantee(s) or security provided
by other parties, any of such guarantor(s) or security provider(s);
and that you will notify the Bank promptly in writing if you or any of the above
parties (if any) become so related.
Your company is required to submit the latest annual audited (and, at our
discretion, half yearly unaudited) financial statements for our records within
six months from the relevant year end or half year end date of your financial
year.
To signify your acceptance of the above terms and conditions as well as your
authorization to us to proceed as above indicated, please sign and return to us
the duplicate copy of this letter together with the enclosed documents as per
attached schedule supported by a certified true copy of extract from the minutes
of a meeting of your board of directors. The Facility will be available subject
to all security documents being executed to our satisfaction.
This offer expires on 21 days from the date hereof.
Yours faithfully,
for DAO HENG BANK LIMITED
/s/ ROGER WONG /s/ DORIS TAM
--------------------------------- ----------------------------------
Roger Wong Doris Tam
Manager Senior Manager
Asset Risk Management Division Corporate Banking
The above Facility and terms and
conditions are acknowledged and
accepted by
/s/ ALFRED CHAN
--------------------------------------
DSI (HK) Limited ALFRED CHAN
MANAGING DIRECTOR
Signature Verified /s/ CHRIS K.W. MAK
-------------------
(AUTHORIZED SIGNATURE)
NAME OF BANK OFFICER
(CHRIS K.W. MAK)
EXHIBIT 10.63
MEMORANDUM OF REBORROWING OF PRINCIPAL
This Memorandum of Reborrowing of Principal ("Memorandum") is entered into
as of the 6th day of March, 2002, by and between DSI Toys, Inc. ("DSI"), a Texas
corporation, and MVII, LLC ("MVII"), a California limited liability company.
RECITALS
A. A Promissory Note dated January 7, 2000, in the original principal amount
of $5,000,000.00 (the "Original Principal") was executed by DSI payable to
the order of MVII (the "MVII Note"). The current principal balance of the
MVII Note is $3,850,000.00.
B. DSI desires to reborrow up to $600,000.00 of the Original Principal that
has been paid on the MVII Note. MVII desires to re-loan such amount to DSI.
C. The Loan and Security Agreement dated February 2, 1999, as amended from
time to time, (the "Loan Agreement") by and between DSI and Sunrock Capital
Corp., a Delaware corporation ("Sunrock") sets forth, in Section 9.9(c),
that "Borrower shall be permitted to reborrow principal amounts paid on the
MVII Note from time to time, PROVIDED, THAT, the outstanding principal
amount of the MVII Note shall not exceed the original principal amount of
the MVII Note; PROVIDED, FURTHER, THAT, the stated interest rate of such
indebtedness shall not be increased, the frequency of payments shall not be
increased and the principal amount of the MVII Note, as increased from time
to time, shall be payable no more frequently than monthly or in amounts
greater than the amounts permitted by clause (ii) (B) above. Borrower shall
promptly provide written notice to Lender of an increase in the outstanding
principal amount of the MVII Note pursuant to the authority granted in this
SECTION 9.9(C)."
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:
1. As of March 6, 2002, DSI shall reborrow from MVII, and MVII shall re-loan
to DSI, a sum up to $600,000.00 (the "Reborrowed Amount"), representing
DSI's reborrowing of a portion of the Original Principal that was
previously paid by DSI to MVII in accordance with the MVII Note. The
Reborrowed Amount is loaned pursuant to all the terms and obligations set
forth in the MVII Note, and shall be added to the existing principal
balance of the MVII Note.
2. The parties acknowledge that the Reborrowed Amount is subject to the terms
and conditions of the MVII Note, as well as all the terms and conditions of
that certain Subordination
Agreement dated January 7, 2000, by and among E. Thomas Martin, MVII and
Sunrock, together with any and all amendments thereto.
3. DSI represents and warrants to MVII that all conditions to DSI's right to
borrow the Reborrowed Amount, including but not limited to those set forth
in the Loan Agreement, have been satisfied.
4. The parties agree that they will execute such other instruments and
documents as are or may become necessary to carry out the intent and
purpose of this Memorandum, and/or to evidence DSI's indebtedness to MVII
for the Reborrowed Amount.
IN WITNESS WHEREOF, this Memorandum has been duly executed in triplicate
originals as of the day and date first written hereinabove.
DSI TOYS, INC.
By: /s/ ROBERT L. WEISGARBER
---------------------------
Robert L. Weisgarber
CFO
MVII, LLC
By: /s/ E. THOMAS MARTIN
---------------------------
E. Thomas Martin
Manager
Acknowledged this _____ day of March, 2002.
SUNROCK CAPITAL CORP.
By: /s/ Y. RENEE' HANNAH
---------------------------
Name: Y. RENEE' HANNAH
-------------------------
Title: Account Executive
------------------------
Exhibit 10.64
AMENDMENT NO. 7 TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 7 TO LOAN AND SECURITY AGREEMENT (this "AMENDMENT"), is
entered into on and as of this 20th day of March, 2002, by and between SUNROCK
CAPITAL CORP., a Delaware corporation ("LENDER"), and DSI TOYS, INC., a Texas
corporation ("BORROWER").
RECITALS
A. Borrower and Lender have entered into that certain Loan and Security
Agreement, dated as of February 2, 1999 (as the same has been, and may hereafter
be, amended, modified, supplemented or restated from time to time, the "LOAN
AGREEMENT").
B. Borrower desires to guaranty a portion of the obligations owing by DSI
(HK) Limited pursuant to that certain Banking Facility Letter dated as of
December 4, 2001, executed by Dao Heng Bank Limited and DSI (HK) Limited.
NOW, THEREFORE, in consideration of the premises herein contained herein
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 meanings as in the Loan Agreement, as
amended hereby.
ARTICLE II
AMENDMENTS
2.01 AMENDMENT TO EVENTS OF DEFAULT. Effective as of the date hereof,
SECTION 10.1 is hereby amended by amending and restating SECTION 10.1(N) in its
entirety to read as follows and by adding new Section 10.1(o), in each case as
follows:
"(n) DSI (HK) Limited shall fail to maintain its existing credit
facility with Dao Heng Bank Limited or one or more other credit facilities
for the benefit of DSI (HK) Limited acceptable to Lender, in either case
upon such terms and conditions as Lender may find adequate to provide
financing for the continued operations of DSI (HK) Limited in the manner
then conducted.
(o) Any claim or demand for payment or performance shall be made on,
or asserted against, Borrower in respect of any guarantee or other
agreement executed by Borrower in connection with any credit facility
maintained by DSI (HK) Limited, including, but not limited to, any claim
under Borrower's partial guaranty of any
1
indebtedness incurred, or to be incurred, by DSI (HK) and owing to Dao
Heng Bank Limited."
2.02 AMENDMENT TO SCHEDULE 9.10. Effective as of the date hereof, SCHEDULE
9.10 to the Loan Agreement is hereby amended and restated to read in its
entirety in the form hereto attached as EXHIBIT A.
ARTICLE III
RATIFICATIONS, REPRESENTATIONS, WARRANTIES AND COVENANTS
3.01 RATIFICATIONS. Except as expressly amended hereby, the terms and
provisions of the Loan 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
herewith, are, and shall continue to be, legal, valid, binding and enforceable
in accordance with their respective terms.
3.02 REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and
warrants to Lender that (a) the execution, delivery and performance of this
Amendment has been authorized by all requisite corporate action on the part of
Borrower and does not violate the Articles of Incorporation or Bylaws of
Borrower; (b) the representations and warranties contained in the Loan
Agreement, are true and correct on and as of the date hereof; (c) as of the date
hereof no Event of Default under the Loan Agreement 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 (d) 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.
3.03 PAYMENT OF LEGAL AND OTHER EXPENSES. 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. The fee, costs and expenses referred to in this SECTION 3.03 may be
charged by Lender to Borrower's loan account at the option of Lender.
ARTICLE IV
MISCELLANEOUS PROVISIONS
4.01 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 shall affect the
representations and warranties or the right of Lender to rely upon them.
4.02 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
2
other agreements, documents and instruments shall mean a reference to the Loan
Agreement, as amended hereby.
4.03 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.
4.04 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.
4.05 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.
4.06 HEADINGS. The headings, captions, and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
4.07 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.
4.08 FINAL AGREEMENT. THE FINANCING AGREEMENTS (INCLUDING THE LOAN
AGREEMENT AND THIS AMENDMENT), AS AMENDED HEREBY, REPRESENT THE ENTIRE
EXPRESSION OF THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF ON THE DATE
THIS AMENDMENT IS EXECUTED. THE FINANCING AGREEMENTS, AS AMENDED HEREBY, MAY NOT
BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES. 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.
4.09 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,
3
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 FINANCING AGREEMENT, DOCUMENT OR INSTRUMENT ENTERED INTO IN CONNECTION
THEREWITH.
Executed as of the day and year set forth first above.
DSI TOYS, INC.
By: /s/ R. L. WEISGARBER
-----------------------------
Name: R. L. WEISGARBER
---------------------------
Title: CFO
--------------------------
SUNROCK CAPITAL CORP.
By: /s/ Y. RENEE' HANNAH
-----------------------------
Name: Y. RENEE' HANNAH
---------------------------
Title: ACCOUNT EXECUTIVE
--------------------------
4
EXHIBIT A
SCHEDULE 9.10
Existing Loans, Advances and Guarantees
DSI TOYS, INC.:
LOANS:
None
ADVANCES:
Employee travel advances Employee travel advances in
ordinary course of business
GUARANTEES:
Kawasaki minimum royalty guarantee $600,000.00
Discovery communications, Inc. royalty guarantee $210,000.00
Continuing Guarantee, limited to $6,000,000, by
DSI Toys, Inc. to Dao Heng Bank Limited, a Hong
Kong banking and financial institution on the
Banking Facility Letter dated as of December 4,
2001, by and between Dao Heng Bank Limited and
DSI (HK) Limited
Exhibit 10.65
EXECUTION VERSION
UNCONDITIONAL GUARANTY AGREEMENT
THIS UNCONDITIONAL GUARANTY AGREEMENT (this "GUARANTY AGREEMENT") is
executed as of March 20, 2002 by DSI TOYS, INC., a Texas corporation
("GUARANTOR") for the benefit of DAO HENG BANK LIMITED, a Hong Kong banking and
financial institution ("LENDER").
R E C I T A L S
A. DSI (HK) Limited, a company incorporated under the laws of Hong Kong
("BORROWER") and Lender have executed a Banking Facility Letter dated as of
December 4, 2001 (as the same may be amended, extended, supplemented, or
restated, the "FACILITY LETTER"). Borrower is a wholly-owned subsidiary of
Guarantor.
B. Guarantor will benefit, either directly or indirectly, from Borrower's
execution of the Facility Letter.
C. It is expressly understood among Borrower, Guarantor, and Lender that
the execution and delivery of this Guaranty Agreement is a condition precedent
to Lender's obligations to extend credit under the Facility Letter.
D. In Guarantor's judgment, the value of the consideration received and to
be received by it under the Facility Letter is reasonably worth at least as much
as its liability and obligation under this Guaranty, and such liability and
obligation may reasonably be expected to benefit Guarantor either directly or
indirectly.
NOW, THEREFORE, as an inducement to Lender to enter into the Facility
Letter and to extend such credit under the Facility to Borrower as Lender may
from time to time agree to extend, and for other good and valuable
consideration, the receipt and legal sufficiency of which are hereby
acknowledged, Guarantor hereby guarantees payment of the Guaranteed Debt
(hereinafter defined) and hereby agrees as follows:
SECTION 1. DEFINITIONS
1.01. DEFINITIONS. For the purpose of this Guaranty Agreement, unless the
context otherwise requires, the following terms shall have the meanings assigned
to them in this SECTION 1 or recital above or in the first paragraph hereof
(each of which is incorporated herein by reference):
"BUSINESS DAY" means any day of the year on which commercial banks are
generally open for business in Hong Kong (except a Saturday or Sunday).
"FACILITY" means the definition assigned to the term "FACILITY" in the
Facility Letter.
"GUARANTEED DEBT" means (a) all principal, interest, attorneys' fees,
commitment fees, fees, liabilities for costs and expenses, and indebtedness
and liabilities of Borrower to Lender at any time created or arising in
connection with or under the Facility and the Facility Letter, and under
any renewals, modifications, increases and extensions of the Facility and
Facility Letter; and (b) all costs, expenses and fees, including but not
limited to court costs and attorneys' fees, arising in connection with the
collection of any or all amounts, indebtedness and liabilities of Borrower
to Lender described in item (A) of this definition in this SECTION 1.01.
1
"GUARANTOR CLAIMS" means all debts and liabilities of Borrower to
Guarantor, including, without limitation, all rights and claims of
Guarantor against Borrower (arising as a result of subrogation or
otherwise) as a result of Guarantor's payment of all or a portion of the
Guaranteed Debt, whether such debts and liabilities now exist or are
hereafter incurred or arise, or whether the obligations of Borrower thereon
be direct, contingent, primary, secondary, several, joint and several, or
otherwise, and irrespective of whether such debts or liabilities be
evidenced by note, contract, open account, or otherwise, and irrespective
of the person or persons in whose favor such debts or liabilities may, at
their inception, have been, or may hereafter be created, or the manner in
which they have been or may hereafter be acquired by Guarantor.
"HONG KONG" means the Hong Kong Special Administrative Region of The
People's Republic of China.
SECTION 2 NATURE AND SCOPE OF GUARANTY
2.01. GUARANTY OF PAYMENT; NATURE OF GUARANTY; LIMITATION ON LIABILITY.
Guarantor hereby irrevocably and unconditionally guarantees to Lender and its
successors and assigns the due and punctual payment of the Guaranteed Debt.
Guarantor hereby irrevocably and unconditionally covenants and agrees that it is
liable for the Guaranteed Debt as primary obligor. This Guaranty Agreement is
intended to be an irrevocable, absolute, continuing guaranty of payment and is
not a guaranty of collection, and Lender may enforce Guarantor's obligations
hereunder without first suing, or enforcing its rights or remedies against,
Borrower or any other obligor, or enforcing or collecting any present or future
collateral security for the Guaranteed Debt. This Guaranty Agreement may not be
revoked or rescinded by Guarantor. Notwithstanding anything to the contrary
contained herein, the liability of Guarantor to Lender under this Guaranty
Agreement shall not exceed the principal amount of US$6,000,000, PLUS all
interest, attorney's fees, and other costs and expenses referred to in SECTIONS
1.01 and 2.04 hereof.
2.02. GUARANTEED DEBT NOT REDUCED BY OFFSET. The Guaranteed Debt guaranteed
hereby, and the liabilities and obligations of Guarantor to Lender hereunder,
shall not be reduced, discharged or released because or by reason of any
existing or future offset, claim or defense of Borrower, or any other party,
against Lender or against payment of the Guaranteed Debt, whether such offset,
claim or defense arises in connection with the Guaranteed Debt (or the
transactions creating the Guaranteed Debt) or otherwise.
2.03. PAYMENT BY GUARANTOR. If all or any part of the Guaranteed Debt shall
not be punctually paid when due, whether at maturity or earlier by acceleration
or otherwise, Guarantor shall, immediately upon demand by Lender, and without
presentment, protest, notice of protest, notice of nonpayment, notice of
intention to accelerate or acceleration or any other notice whatsoever, pay in
lawful money of the United States of America, the amount due on the Guaranteed
Debt to Lender at Lender's office set forth in SECTION 6.02 hereof or such other
location as directed in writing by Lender. Such demand(s) may be made at any
time coincident with or after the time for payment of all or part of the
Guaranteed Debt, and may be made from time to time with respect to the same or
different items of Guaranteed Debt. Such demand shall be deemed made, given and
received in accordance with SECTION 6.02 hereof.
2.04. PAYMENT OF EXPENSES. In the event that Guarantor should breach or
fail to timely perform any provisions of this Guaranty Agreement, Guarantor
shall, immediately upon demand by Lender, pay Lender all costs and expenses
(including court costs and reasonable attorneys' fees) incurred by Lender in the
enforcement hereof or the preservation of Lender's rights hereunder. The
covenant contained in this SECTION 2.04 shall survive the payment of the
Guaranteed Debt.
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2.05. NO DUTY TO PURSUE OTHERS. It shall not be necessary for Lender (and
Guarantor hereby waives any rights which Guarantor may have to require Lender),
in order to enforce such payment by Guarantor, first to: (i) institute suit or
exhaust its remedies against Borrower or others liable on the Guaranteed Debt or
any other person, (ii) enforce Lender's rights against any security which shall
ever have been given to secure the Guaranteed Debt, (iii) enforce Lender's
rights against any other guarantors of the Guaranteed Debt, (iv) join Borrower
or any others liable on the Guaranteed Debt in any action seeking to enforce
this Guaranty Agreement, (v) exhaust any remedies available to Lender against
any security which shall ever have been given to secure the Guaranteed Debt, or
(vi) resort to any other means of obtaining payment of the Guaranteed Debt.
Lender shall not be required to mitigate damages or take any other action to
reduce, collect or enforce the Guaranteed Debt. Further, Guarantor expressly
waives each and every right to which it may be entitled by virtue of the
suretyship law of the state of Texas, including without limitation, any rights
pursuant to RULE 31, TEXAS RULES OF CIVIL PROCEDURE, ARTICLES 1986 AND 1987,
REVISED CIVIL STATUTES OF TEXAS AND CHAPTER 34 OF THE TEXAS BUSINESS AND
COMMERCE CODE.
2.06. WAIVER OF NOTICES, ETC. Guarantor agrees to the provisions of the
Facility Letter, and hereby waives notice of: (i) any loans or advances made by
Lender to Borrower, (ii) acceptance of this Guaranty Agreement, (iii) any
amendment or extension of the Facility Letter or of any other instrument or
document pertaining to all or any part of the Guaranteed Debt, (iv) the
execution and delivery by Borrower and Lender of any other loan or credit
agreement or of Borrower's execution and delivery of any promissory notes or
other documents in connection therewith, (v) the occurrence of any breach by
Borrower or event of default in connection with the Guaranteed Debt, and any
instruments, agreements or security documents with respect thereto, (vi)
Lender's transfer or disposition of the Guaranteed Debt, or any part thereof,
(vii) sale or foreclosure (or posting or advertising for sale or foreclosure) of
any collateral for the Guaranteed Debt, (viii) protest, proof of nonpayment or
default by Borrower, or (ix) any other action at any time taken or omitted by
Lender, and, generally, all demands and notices of every kind in connection with
this Guaranty Agreement, the Facility Letter, and any documents or agreements
evidencing, securing or relating to any of the Guaranteed Debt and the
obligations hereby guaranteed.
2.07. EFFECT OF BANKRUPTCY, OTHER MATTERS. In the event that, pursuant to
any insolvency, bankruptcy, reorganization, receivership or other debtor relief
law, or any judgment, order or decision thereunder, or for any other reason: (i)
Lender must rescind or restore any payment, or any part thereof, received by
Lender in satisfaction of the Guaranteed Debt, as set forth herein, any prior
release or discharge from the terms of this Guaranty Agreement given to
Guarantor by Lender shall be without effect, and this Guaranty Agreement shall
remain in full force and effect; or (ii) Borrower shall cease to be liable to
Lender for any of the Guaranteed Debt (other than by reason of the indefeasible
payment in full thereof by Borrower), the obligations of Guarantor under this
Guaranty Agreement shall remain in full force and effect. It is the intention of
Lender and Guarantor that Guarantor's obligations hereunder shall not be
discharged except by Guarantor's performance of such obligations and then only
to the extent of such performance. Without limiting the generality of the
foregoing, it is the intention of Lender and Guarantor that the filing of any
bankruptcy or similar proceeding by or against Borrower or any other person or
party obligated on any portion of the Guaranteed Debt shall not affect the
obligations of Guarantor under this Guaranty Agreement or the rights of Lender
under this Guaranty Agreement, including, without limitation, the right or
ability of Lender to pursue or institute suit against Guarantor for the entire
Guaranteed Debt.
2.08. FINANCIAL INFORMATION. Guarantor agrees to deliver to Lender, balance
sheets, profit and loss statements, reconciliations of capital and surplus,
changes in financial condition, schedules of sources and application of funds,
and other financial information of Guarantor as shall be required by Lender, not
later than sixty (60) days after the end of each second fiscal quarter and each
fiscal year of Guarantor,
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which statements shall be certified by an independent certified public
accounting firm acceptable to Lender.
SECTION 3 ADDITIONAL EVENTS AND CIRCUMSTANCES NOT REDUCING OR DISCHARGING
GUARANTOR'S OBLIGATIONS
Guarantor hereby consents and agrees to each of the following, and agrees
that Guarantor's obligations under this Guaranty Agreement shall not be
released, diminished, impaired, reduced or adversely affected by any of the
following, and waives any common law, equitable, statutory or other rights
(including without limitation rights to notice) which Guarantor might otherwise
have as a result of or in connection with any of the following:
3.01. MODIFICATIONS, ETC. Any renewal, extension, increase, modification,
alteration or rearrangement of all or any part of the Guaranteed Debt, or of the
Facility Letter or other document, instrument, contract or understanding between
Borrower and Lender, or any other parties, pertaining to the Guaranteed Debt;
3.02. ADJUSTMENT, ETC. Any adjustment, indulgence, forbearance or
compromise that might be granted or given by Lender to Borrower or Guarantor;
3.03. CONDITION, COMPOSITION OR STRUCTURE OF BORROWER OR GUARANTOR. The
insolvency, bankruptcy, arrangement, adjustment, composition, structure,
liquidation, disability, dissolution or lack of power of Borrower or any other
party at any time liable for the payment of all or part of the Guaranteed Debt;
or any dissolution of Borrower or Guarantor, or any sale, lease or transfer of
any or all of the assets of Borrower or Guarantor, or any changes in name,
business, location, composition, structure or changes in the shareholders,
partners or members (whether by accession, secession, cessation, death,
dissolution, transfer of assets or other matter) of Borrower or Guarantor; or
any reorganization of Borrower or Guarantor;
3.04. INVALIDITY OF GUARANTEED DEBT. The invalidity, illegality or
unenforceability of all or any part of the Guaranteed Debt, or any document or
agreement executed in connection with the Guaranteed Debt, for any reason
whatsoever, including without limitation the fact that (i) the Guaranteed Debt,
or any part thereof, exceeds the amount permitted by law, (ii) the act of
creating the Guaranteed Debt or any part thereof is ULTRA VIRES, (iii) the
officers or representatives executing documents or otherwise creating the
Guaranteed Debt acted in excess of their authority, (iv) the Guaranteed Debt
violates applicable usury laws, (v) the Borrower has valid defenses, claims or
offsets (whether at law, in equity or by agreement) which render the Guaranteed
Debt wholly or partially uncollectible from Borrower, (vi) the creation,
performance or repayment of the Guaranteed Debt (or the execution, delivery and
performance of any document or instrument representing part of the Guaranteed
Debt or executed in connection with the Guaranteed Debt, or given to secure the
repayment of the Guaranteed Debt) is illegal, uncollectible or unenforceable, or
(vii) the Facility Letter or other documents or instruments pertaining to the
Guaranteed Debt have been forged or otherwise are irregular or not genuine or
authentic.
3.05. RELEASE OF OBLIGORS. Any full or partial release of the liability of
Borrower on the Guaranteed Debt or any part thereof, or of the Guarantor, or any
other person or entity now or hereafter liable, whether directly or indirectly,
jointly, severally, or jointly and severally, to pay, perform, guarantee or
assure the payment of the Guaranteed Debt or any part thereof, it being
recognized, acknowledged and agreed by Guarantor that Guarantor may be required
to pay the Guaranteed Debt in full without assistance or support of any other
party, and Guarantor has not been induced to enter into this Guaranty Agreement
on the basis of a contemplation, belief, understanding or agreement that other
parties will be liable to perform the Guaranteed Debt, or that Lender will look
to other parties to perform the Guaranteed Debt;
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notwithstanding the foregoing, Guarantor does not hereby waive or release
(expressly or impliedly) any rights of subrogation, reimbursement or
contribution which it may have, after payment in full of the Guaranteed Debt,
against others liable on the Guaranteed Debt; Guarantor's rights of subrogation
and reimbursement are, however, subordinate to the rights and claims of Lender;
3.06. OTHER SECURITY. The taking or accepting of any other security,
collateral or guaranty, or other assurance of payment, for all or any part of
the Guaranteed Debt;
3.07. RELEASE OF COLLATERAL, ETC. Any release, surrender, exchange,
subordination, deterioration, waste, loss or impairment (including without
limitation negligent, willful, unreasonable or unjustifiable impairment) of any
collateral, property or security, at any time existing in connection with, or
assuring or securing payment of, all or any part of the Guaranteed Debt;
3.08. CARE AND DILIGENCE. The failure of Lender or any other party to
exercise diligence or reasonable care or act, fail to act or comply with any
duty in the administration, preservation, protection, enforcement, sale
application, disposal or other handling or treatment of all or any part of
Guaranteed Debt or any collateral, property or security at any time securing any
portion thereof, including, without limiting the generality of the foregoing,
the failure to conduct any foreclosure or other remedy fairly or in such a way
so as to obtain the best possible price or a favorable price or otherwise act or
fail to act;
3.09. STATUS OF LIENS. The fact that any collateral, security, security
interest or lien contemplated or intended to be given, created or granted as
security for the repayment of the Guaranteed Debt shall not be properly
perfected or created, or shall prove to be unenforceable or subordinate to any
other security interest or lien, it being recognized and agreed by Guarantor
that Guarantor is not entering into this Guaranty Agreement in reliance on, or
in contemplation of the benefits of, the validity, enforceability,
collectibility or value of any of the collateral for the Guaranteed Debt;
notwithstanding the foregoing, Guarantor does not hereby waive or release
(expressly or impliedly) any right to be subrogated to the rights of Lender in
any collateral or security for the Guaranteed Debt after payment in full of the
Guaranteed Debt; Guarantor's rights of subrogation are, however, subordinate to
the rights, claims, liens and security interests of Lender;
3.10. OFFSET. The Guaranteed Debt guaranteed hereby, and the liabilities
and obligations of Guarantor to Lender hereunder, shall not be reduced,
discharged or released because of or by reason of any existing or future right
of offset, claim or defense of Borrower against Lender, or any other party, or
against payment of the Guaranteed Debt, whether such right of offset, claim or
defense arises in connection with the Guaranteed Debt (or the transactions
creating the Guaranteed Debt) or otherwise;
3.11. MERGER. The reorganization, merger or consolidation of Borrower or
Guarantor into or with any other corporation or entity;
3.12. PREFERENCE. Any payment by Borrower to Lender is held to constitute a
preference under bankruptcy laws, or for any reason Lender is required to refund
such payment or pay such amount to Borrower or someone else; or
3.13. OTHER ACTIONS TAKEN OR OMITTED. Any other action taken or omitted to
be taken with respect to the Facility Letter, the Guaranteed Debt, or the
security and collateral therefor, whether or not such action or omission
prejudices Guarantor or increases the likelihood or risk that Guarantor will be
required to pay the Guaranteed Debt pursuant to the terms hereof; it is the
unambiguous and unequivocal intention of Guarantor that Guarantor shall be
obligated to pay the Guaranteed Debt when due, notwithstanding any occurrence,
circumstance, event, action, or omission whatsoever, whether
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contemplated or uncontemplated, and whether or not otherwise or particularly
described herein, except for the full and final payment and satisfaction of the
Guaranteed Debt.
SECTION 4 REPRESENTATIONS AND WARRANTIES
To induce Lender to enter into the Facility Letter and extend credit under
the Facility to Borrower, Guarantor represents and warrants to Lender that:
4.01. BENEFIT. Guarantor is the parent company and the beneficial owner of
all the issued shares of Borrower and has received, or will receive, direct or
indirect benefit from the making of this Guaranty and the Guaranteed Debt.
4.02. FAMILIARITY AND RELIANCE. Guarantor is familiar with, and has
independently reviewed books and records regarding, the financial condition of
the Borrower and is familiar with the value of any and all collateral intended
to be created as security for the payment of the Guaranteed Debt; HOWEVER,
Guarantor is not relying on such financial condition or the collateral as an
inducement to enter into this Guaranty Agreement.
4.03. NO REPRESENTATION BY LENDER. Neither Lender nor any other party has
made any representation, warranty or statement to Guarantor in order to induce
the Guarantor to execute this Guaranty Agreement.
4.04. GUARANTOR'S FINANCIAL CONDITION. As of the date hereof, and after
giving effect to this Guaranty Agreement and the contingent obligation evidenced
hereby, Guarantor is, and will be, solvent, and has and will have assets which,
fairly valued, exceed its obligations, liabilities and debts.
4.05. DIRECTORS' DETERMINATION OF BENEFIT. The board of directors of
Guarantor, acting pursuant to a duly called and constituted meeting, after
proper notice, or pursuant to a valid unanimous consent, has determined that
this Guaranty directly or indirectly benefits Guarantor and is in the best
interests of Guarantor.
4.06. LEGALITY. The execution, delivery and performance by Guarantor of
this Guaranty Agreement and the consummation of the transactions contemplated
hereunder: (i) have been duly authorized by all necessary corporate and
stockholder action of Guarantor, and (ii) do not, and will not, contravene or
conflict with any law, statute or regulation whatsoever to which Guarantor is
subject or constitute a default (or an event which with notice or lapse of time
or both would constitute a default) under, or result in the breach of, any
indenture, mortgage, deed of trust, charge, lien, or any contract, agreement or
other instrument to which Guarantor is a party or which may be applicable to
Guarantor or any of its assets, or violate any provisions of its Certificate of
Incorporation, Bylaws or any other organizational document of Guarantor; this
Guaranty Agreement is a legal and binding obligation of Guarantor and is
enforceable in accordance with its terms, except as limited by bankruptcy,
insolvency or other laws of general application relating to the enforcement of
creditors' rights.
4.07 ORGANIZATION AND GOOD STANDING. Guarantor: (i) is, and will continue
to be, a corporation duly organized and validly existing in good standing under
the laws of the State of Texas, and (ii) possesses all requisite authority,
power, licenses, permits and franchises necessary to own its assets, to conduct
its business and to execute and deliver and comply with the terms of this
Guaranty Agreement.
4.08. SURVIVAL. All representations and warranties made by Guarantor herein
shall survive the execution hereof.
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SECTION 5 SUBORDINATION OF CERTAIN INDEBTEDNESS
5.01. SUBORDINATION OF GUARANTOR CLAIMS. Until the Guaranteed Debt shall be
paid and satisfied in full and Guarantor shall have performed all of its
obligations hereunder, Guarantor shall not receive or collect, directly or
indirectly, from Borrower or any other party any amount upon the Guarantor
Claims.
5.02. CLAIMS IN BANKRUPTCY. In the event of receivership, bankruptcy,
reorganization, arrangement, debtor's relief, or other insolvency proceedings
involving Borrower as debtor, Lender shall have the right to prove its claim in
any such proceeding so as to establish its rights hereunder and receive directly
from the receiver, trustee or other court custodian dividends and payments which
would otherwise be payable upon Guarantor Claims. Guarantor hereby assigns such
dividends and payments to Lender. Should Lender receive, for application upon
the Guaranteed Debt, any such dividend or payment which is otherwise payable to
Guarantor, and which, as between Borrower and Guarantor, shall constitute a
credit upon the Guarantor Claims, then upon payment to Lender in full of the
Guaranteed Debt, Guarantor shall become subrogated to the rights of Lender to
the extent that such payments to Lender on the Guarantor Claims have contributed
toward the liquidation of the Guaranteed Debt, and such subrogation shall be
with respect to that proportion of the Guaranteed Debt which would have been
unpaid if Lender had not received dividends or payments upon the Guarantor
Claims.
5.03. PAYMENTS HELD IN TRUST. In the event that, notwithstanding SECTIONS
5.01 and 5.02 above, Guarantor should receive any funds, payment, claim or
distribution which is prohibited by such Sections, Guarantor agrees to hold in
trust for Lender, in kind, all funds, payments, claims or distributions so
received, and agrees that he shall have absolutely no dominion over such funds,
payments, claims or distributions so received except to pay them promptly to
Lender, and Guarantor covenants promptly to pay the same to Lender.
5.04. LIENS SUBORDINATE. Guarantor agrees that any liens, security
interests, judgment liens, charges or other encumbrances upon Borrower's assets
securing payment of the Guarantor Claims shall be and remain inferior and
subordinate to any liens, security interests, judgment liens, charges or other
encumbrances upon Borrower's assets securing payment of the Guaranteed Debt,
regardless of whether such encumbrances in favor of Guarantor or Lender
presently exist or are hereafter created or attach. Without the prior written
consent of Lender, Guarantor shall not: (i) exercise or enforce any creditor's
right it may have against Borrower, or (ii) foreclose, repossess, sequester or
otherwise take steps or institute any action or proceedings (judicial or
otherwise, including without limitation the commencement of, or joinder in, any
liquidation, bankruptcy, rearrangement, debtor's relief or insolvency
proceeding) to enforce any liens, mortgages, deeds of trust, security interest,
collateral rights, judgments or other encumbrances on assets of Borrower held by
Guarantor.
5.05. NOTATION OF RECORDS. All promissory notes, accounts receivable
ledgers or other evidences of the Guarantor Claims accepted by or held by
Guarantor shall contain a specific written notice thereon that the indebtedness
evidenced thereby is subordinated under the terms of this Guaranty Agreement.
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SECTION 6 MISCELLANEOUS
6.01. WAIVER. No failure to exercise, and no delay in exercising, on the
part of Lender, any right hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right. The rights of Lender hereunder shall
be in addition to all other rights provided by law. No modification or waiver of
any provision of this Guaranty Agreement, nor consent to departure therefrom,
shall be effective unless in writing and no such consent or waiver shall extend
beyond the particular case and purpose involved. No notice or demand given in
any case shall constitute a waiver of the right to take other action in the
same, similar or other instances without such notice or demand.
6.02 NOTICE. Any notice, demand, request or other communication which any
party hereto may be required or may desire to give hereunder shall be in writing
and shall be deemed to be effective (a) if by telecopy or other facsimile
transmission, on the day and time on which delivered to such party at the
address, or telecopy number specified below; (b) if by mail, on the day which it
is received after being deposited, first class postage prepaid, return receipt
requested, addressed to such a party at the address specified below; or (c) if
by FedEx or other reputable express mail service, on the next Business Day (or
the second Business Day, in the case of international delivery) following the
delivery to such express mail service for next Business Day delivery, addressed
to such party at the address set forth below:
If to Guarantor:
DSI Toys, Inc.
1100 West Sam Houston Parkway North
Houston, Texas 77043
United States of America
Telephone: 713-365-9900
Fax: 713-365-9911
Attention: Mr. Thomas V. Yarnell
If to Lender:
Dao Heng Bank Limited
16th Floor, The Center
99 Queen's Road Central
Hong Kong, SAR
Telephone: 852-2218-8125/852-2218-8136
Fax: 852-2285-3068
Attention: Ms. Catherine Ng and Ms. Doris Tam
Any party may change its address for purposes of this Guaranty Agreement by
giving notice of such change to the other party pursuant to this SECTION 6.02.
6.03. GOVERNING LAW; WAIVER OF VENUE; WAIVER OF JURY TRIAL. This Guaranty
Agreement has been prepared, and is intended to be performed in the State of
Texas, United States of America, and the substantive laws of such state shall
govern the validity, construction, enforcement and interpretation of this
Guaranty Agreement. For purposes of this Guaranty Agreement and the resolution
of disputes hereunder, Guarantor hereby irrevocably submits and consents to, and
waives any objection to, the non-exclusive jurisdiction of the courts of the
State of Texas located in Harris County, Texas and of the federal court located
in the Southern Judicial District of Texas, Houston Division. GUARANTOR HEREBY
WAIVES TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING BROUGHT
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IN CONNECTION WITH THIS GUARANTY AGREEMENT OR THE FACILITY LETTER, WHICH WAIVER
IS INFORMED AND VOLUNTARY.
6.04. INVALID PROVISIONS. If any provision of this Guaranty Agreement is
held to be illegal, invalid, or unenforceable under present or future laws
effective during the term of this Guaranty Agreement, such provision shall be
fully severable and this Guaranty Agreement shall be construed and enforced as
if such illegal, invalid or unenforceable provision had never comprised a part
of this Guaranty Agreement, and the remaining provisions of this Guaranty
Agreement shall remain in full force and effect and shall not be affected by the
illegal, invalid or unenforceable provision or by its severance from this
Guaranty Agreement, unless such continued effectiveness of this Guaranty
Agreement, as modified, would be contrary to the basic understandings and
intentions of the parties as expressed herein.
6.05. ENTIRETY AND AMENDMENTS. This Guaranty Agreement embodies the entire
agreement between the parties and supersedes all prior agreements and
understandings, if any, relating to the subject matter hereof, and this Guaranty
Agreement may be amended only by an instrument in writing executed by an
authorized officer of the party against whom such amendment is sought to be
enforced.
6.06. PARTIES BOUND; ASSIGNMENT. This Guaranty Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors, assigns and legal representatives; PROVIDED, HOWEVER, that Guarantor
may not, without the prior written consent of Lender, assign any of its rights,
powers, duties or obligations hereunder.
6.07. HEADINGS. Section headings are for convenience of reference only and
shall in no way affect the interpretation of this Guaranty Agreement.
6.08. MULTIPLE COUNTERPARTS. This Guaranty Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same agreement, and any of the parties hereto may execute this Guaranty
Agreement by signing any such counterpart.
6.09. RIGHTS AND REMEDIES. If Guarantor becomes liable for any indebtedness
owing by Borrower to Lender, by endorsement or otherwise, other than under this
Guaranty Agreement, such liability shall not be in any manner impaired or
affected hereby and the rights of Lender hereunder shall be cumulative of any
and all other rights that Lender may ever have against Guarantor. The exercise
by Lender of any right or remedy hereunder or under any other instrument, or at
law or in equity, shall not preclude the concurrent or subsequent exercise of
any other right or remedy.
6.10 PAYMENTS. All sums payable under this Guaranty Agreement shall be paid
in immediately available funds, without offset, in lawful money of the United
States of America. Payment by check or draft shall not constitute payment in
immediately available funds until the required amount is actually received by
Lender in full.
REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURE PAGE FOLLOWS.
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EXECUTED as of the day and year first above written.
GUARANTOR:
DSI TOYS, INC.
By: /s/ ROBERT L. WEISGARBER
-----------------------------------
Name: Robert L. Weisgarber
Title: CFO
STATE OF TEXAS Section
Section
COUNTY OF HARRIS Section
This instrument was acknowledged before me on this 20th day of March,
2002, by Robert L. Weisgarber, as an CFO of DSI Toys, Inc.
/s/ LINDA FELD
--------------------------------------------
Notary Public in and for the State of Texas
(CORPORATE SEAL)
EXHIBIT 10.66
AMENDMENT NO. 8 TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 8 TO LOAN AND SECURITY AGREEMENT (this "AMENDMENT"), is
entered into as of March 29, 2002, to be effective for all purposes as of
December 31, 2001, by and between SUNROCK CAPITAL CORP., a Delaware corporation
("LENDER"), and DSI TOYS, INC., a Texas corporation ("BORROWER").
RECITALS
A. Borrower and Lender have entered into that certain Loan and Security
Agreement, dated as of February 2, 1999 (as the same has been, and may hereafter
be, amended, modified, supplemented or restated from time to time, the "LOAN
AGREEMENT").
B. The Borrower and Lender have agreed to amend and modify the Loan
Agreement as set forth below, subject to the terms, conditions and limitations
in the Loan Agreement and this Amendment.
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, hereby 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 meanings as in the Loan Agreement,
as amended hereby.
ARTICLE II
AMENDMENTS
2.01 DEFINITION OF EIGHTH AMENDMENT. SECTION 1 of the Loan Agreement
is hereby amended by adding the following SUBSECTION 1.34:
"1.34 "Eighth Amendment" shall mean that certain Amendment No. 8 to
Loan and Security Agreement, executed as of March 29, 2002, to be effective
for all purposes as of December 31, 2001, by and between Lender and
Borrower."
2.02 DEFINITION OF OVERADVANCE FACILITY. SECTION 1 of the Loan
Agreement is hereby amended by adding the following SUBSECTION 1.35:
"1.35 "Overadvance Facility" shall mean the Loans made under SECTION
2.2(b) of the Loan Agreement."
2.03 AMENDMENT TO SEASONAL INVENTORY ADVANCES. SECTION 2.2 of the Loan
Agreement is hereby amended and restated to read in its entirety as follows:
"2.2 SEASONAL INVENTORY ADVANCES.
(a) In addition to the Loans permitted under Section 2.1 above and
2.2(b) below, but subject to, and upon the terms and conditions contained
herein (including, without limitation, the provisions set forth in Sections
2.4 and 2.5 below), Lender agrees to make Loans to Borrower from time to
time up to the lesser of:
(1) the Maximum Credit LESS Loans extended under Section
2.1 above; and
(2) (i) during the period commencing January 1, 2002, and
extending through June 30, 2002, (A) ten percent (10%) of the Value
of Eligible Inventory; and (B) ten percent (10%) of the Value of
Eligible In-Transit Inventory; or
(ii) during the period commencing January 1, 2003, and
extending through June 30, 2003, the sum of: (A) ten percent (10%)
of the Value of Eligible Inventory; and (B) ten percent (10%) of
the Value of Eligible In-Transit Inventory; or
(iii) during the period commencing January 1, 2004, and
extending through June 30, 2004, the sum of: (A) ten percent (10%)
of the Value of Eligible Inventory; and (B) ten percent (10%) of
the Value of Eligible In-Transit Inventory (All Loan amounts
calculated pursuant to Section 2.2(a)(2)(i) through (iii),
inclusive, shall be subject to reduction for all applicable
Availability Reserves); and
(b) In addition to the Loans permitted under SECTIONS 2.1 and
2.2(a) above and notwithstanding the provisions of Section 2.4 to the
contrary, but otherwise subject to, and upon the terms and conditions
contained herein (including, without limitation, the provisions set forth
in Sections 2.4 and 2.5 below), Lender agrees to allow overadvances to
remain outstanding up to, but not greater than, the following amounts
during the following periods:
(i) $500,000 during the period commencing March 28, 2002,
and ending on June 7, 2002;
(ii) $375,000 during the period commencing June 8, 2002, and
ending June 14, 2002;
(iii) $250,000 during the period commencing June 15, 2002,
and ending June 21, 2002; and
(iv) $125,000 during the period commencing June 22, 2002,
and ending June 28, 2002.
No overdvances shall remain outstanding pursuant to this Section
2.2(b) from and after June 29, 2002. In addition to the other
rights and remedies available to Lender upon the occurrence of any
Default or Event of Default, Lender may demand immediate payment of
any amounts outstanding pursuant to this Section 2.2(b) upon the
occurrence and during the continuation of any Default or Event of
Default without exercising any other rights or remedies or
otherwise limiting the rights of Lender otherwise pursuant to this
Agreement or applicable law."
2.04 AMENDMENT TO INTEREST AND FEES. SECTION 3.1 of the Loan Agreement
is hereby amended and restated to read in its entirety as follows:
"3.1 INTEREST.
(a) Borrower shall pay to Lender interest on the outstanding
principal amount of the non-contingent Obligations, other than the Overadvance
Facility, at the rate of three quarters of one percent (.75%) per annum in
excess of the Prime Rate, except that, at Lender's option, without notice,
Borrower shall pay to Lender interest at the lesser of (A) the Maximum Legal
Rate and (B) the Prime Rate, plus four percent (4%): (i) on the non-contingent
Obligations for (1) the period from and after the date of termination or
non-renewal hereof until such time as Lender has received full and final payment
of all such Obligations (notwithstanding entry of any judgment against
Borrower), and (2) the period from and after the date of the occurrence of an
Event of Default for so long as such Event of Default is continuing as
determined by Lender and (ii) on the Loans at any time outstanding in excess of
the amounts available to Borrower under Section 2 (whether or not such
excess(es), arise or are made with or without Lender's knowledge or consent and
whether made before or after an Event of Default).
(b) Borrower shall pay to Lender interest on the outstanding
principal amount of the Overadvance Facility at the rate of two an three
quarters of one percent (2.75%) per annum in excess of the Prime Rate, except
that, at Lender's option, without notice, Borrower shall pay to Lender interest
at the lesser of (A) the Maximum Legal Rate and (B) the Prime Rate, plus four
percent (4%): (i) on the Overadvance Facility for (1) the period from and after
the date of termination or non-renewal hereof until such time as Lender has
received full and final payment of all such Obligations (notwithstanding entry
of any judgment against Borrower), and (2) the period from and after the date of
the occurrence of an Event of Default for so long as such Event of Default is
continuing as determined by Lender and (ii) on the Loans made under the
Overadvance Facility at any time outstanding in excess of the amounts available
to Borrower under Section 2 (whether or not such excess(es), arise or are made
with or without Lender's knowledge or consent and whether made before or after
an Event of Default).
(c) All interest shall be payable by Borrower to Lender monthly in
arrears not later than the first day of each calendar month and shall be
calculated on the basis of a three hundred sixty (360) day year and actual days
elapsed. The interest rates set forth in Sections
3.1(a) and 3.1(b) shall increase or decrease by an amount equal to each increase
or decrease in the Prime Rate effective as of the date on which the applicable
increase or decrease in the Prime Rate shall be published in the printed version
of the Wall Street Journal (Eastern Edition, New York Metro) or such other
publication as Lender may select in accordance with the terms hereof. All
interest accruing hereunder on and after an Event of Default or termination or
non-renewal hereof shall be payable on demand. In no event shall charges
constituting interest payable by Borrower to Lender exceed the maximum amount or
the rate permitted under any applicable law or regulation, and if any part or
provision of this Agreement is in contravention of any such law or regulation,
such part or provision shall be deemed amended to conform thereto. No
agreements, conditions, provisions or stipulations contained in this Agreement
or any other instrument, document or agreement between Borrower and Lender or
default of Borrower, or the exercise by Lender of the right to accelerate the
payment of the maturity of principal and interest, or to exercise any option
whatsoever contained in this Agreement or any other Financing Agreement, or the
arising of any contingency whatsoever, shall entitle Lender to contract for,
charge, or receive, in any event, interest exceeding the maximum rate of
interest permitted by applicable state or federal law in effect from time to
time (hereinafter "Maximum Legal Rate"). In no event shall Borrower be obligated
to pay interest exceeding such Maximum Legal Rate and all agreements, conditions
or stipulations, if any, which may in any event or contingency whatsoever
operate to bind, obligate or compel Borrower to pay a rate of interest exceeding
the Maximum Legal Rate, shall be without binding force or effect, at law or in
equity, to the extent only of the excess of interest over such Maximum Legal
Rate. In the event any interest is contracted for, charged or received in excess
of the Maximum Legal Rate ('"Excess"), Borrower acknowledges and stipulates that
any such contract, charge, or receipt shall be the result of an accident and
bona fide error, and that any Excess received by Lender shall be applied, first,
to reduce the principal then unpaid hereunder; second, to reduce the other
Obligations; and third, returned to Borrower, it being the intention of the
parties hereto not to enter at any time into a usurious or otherwise illegal
relationship. Borrower recognizes that, with fluctuations in the Prime Rate and
the Maximum Legal Rate, such a result could inadvertently occur. By the
execution of this Agreement, Borrower covenants that (i) the credit or return of
any Excess shall constitute the acceptance by Borrower of such Excess, and (ii)
Borrower shall not seek or pursue any other remedy, legal or equitable, against
Lender, based in whole or in part upon contracting for, charging or receiving of
any interest in excess of the maximum authorized or receiving of any interest in
excess of the maximum authorized by applicable law. For the purpose of
determining whether or not any Excess has been contracted for, charged or
received by Lender, all interest at any time contracted for, charged or received
by Lender in connection with this Agreement shall be amortized, prorated,
allocated and spread in equal parts during the entire term of this Agreement."
2.05 AMENDMENT TO NET WORTH. SECTION 9.14 of the Loan Agreement is
hereby amended and restated to read in its entirety as follows:
"9.14 NET WORTH. The Borrower will not permit its Net Worth to be
less than the following respective amounts at the following respective
dates:
2.06 AMENDMENT TO NET INCOME. SECTION 9.19 of the Loan Agreement is
hereby amended and restated to read in its entirety as follows:
"9.19 NET INCOME. The Borrower will not permit its Net Income to be
less than the following respective cumulative amounts for the periods ended
as of the following respective dates, each of which dates shall be a date
of determination for purposes of the definition of Net Income set forth at
SUBSECTION 1.31 hereof:
DATE Net Income
12/31/01 ($1,500,000)
03/31/02 ($2,500,000)
06/30/02 ($3,500,000)
09/30/02 ($500,000)
12/31/02 $1,000,000
03/31/03 ($2,500,000)
06/30/03 ($3,500,000)
09/30/03 ($500,000)
12/31/03 $1,000,000
03/31/04 ($2,500,000)"
ARTICLE III
ADDITIONAL DEFAULTS
3.01 ACKNOWLEDGEMENT OF AVAILABILITY RESTRICTIONS. Borrower acknowledges
and agrees that the Overadvance Facility does not create "excess availability"
for advances of Loans as calculated under SECTION 2.1 of the Loan Agreement, and
that the ability to make principal
payments pursuant to SECTION 9.9(c) of the Loan Agreement is subject to the
limitations set forth in SECTION 9.9(c) of the Loan Agreement, including the
payment in full of the Overadvance Facility. Any payment of indebtedness in
violation of SECTION 9.9(c) of the Loan Agreement will result in an immediate
Event of Default under the Loan Agreement and the other Financing Agreements.
The Lender will have all of the rights and remedies provided in the Loan
Agreement, the other Financing Agreements, the Uniform Commercial Code and other
applicable law, all of which rights and remedies may be exercised without notice
to or consent by the Borrower or any Obligor.
3.02 SUBORDINATION AGREEMENT. Borrower's failure to deliver to Lender an
amendment to the Subordination Agreement, together with corresponding amendments
to the Loan Agreement, on or before May 31, 2002, executed by E. Thomas Martin
and MVII (as such term is defined in the Loan Agreement) and acknowledged by
Borrower, which amendment shall be in a form satisfactory to Lender and shall
(a) eliminate payments of the subordinated debt owing to such persons at all
times prior to payment in full of the Overadvance Facility and (b) contain such
other and additional limitations on the payment of the principal portion of the
subordinated indebtedness from and after May 31, 2002, as shall be acceptable to
Lender at its sole option, will result in an immediate Event of Default under
the Loan Agreement and the other Financing Agreements. The Lender will have all
of the rights and remedies provided in the Loan Agreement, the other Financing
Agreements, the Uniform Commercial Code and other applicable law, all of which
rights and remedies may be exercised without notice to or consent by the
Borrower or any Obligor.
ARTICLE IV
CONDITIONS TO EFFECTIVENESS
This Amendment shall become effective upon satisfaction of the following
conditions:
(a) the execution of this Amendment by Borrower and Lender.
(b) payment by Borrower of all fees and expenses required to be paid by
Borrower pursuant to Section 5.03 of this Amendment.
ARTICLE V
RATIFICATIONS, REPRESENTATIONS, WARRANTIES AND COVENANTS
5.01 RATIFICATIONS. Except as expressly amended hereby, the terms and
provisions of the Loan 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
herewith, 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 that (a) the execution, delivery and performance of this
Amendment has been authorized by all requisite corporate action on the part of
Borrower and does not violate the Articles of
Incorporation or Bylaws of Borrower; (b) the representations and warranties
contained in the Loan Agreement, are true and correct on and as of the date
hereof; (c) upon the effectiveness of this Amendment, no Event of Default under
the Loan Agreement 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 (d) 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 (assuming execution and delivery of this Amendment).
5.03 FEE PAYABLE TO LENDER PAYMENT OF LEGAL AND OTHER EXPENSES. Upon the
execution of this Amendment by Lender, Borrower hereby agrees to pay to Lender a
commitment fee in the amount of $15,000.00, which may be charged by Lender to
Borrower's loan account without further agreement or consent of Borrower. In
addition 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.
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 shall affect the
representations and warranties or the right of Lender to rely upon them.
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 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.
6.04 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.
6.05 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.
6.06 HEADINGS. The headings, captions, and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
6.07 APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS
EXECUTEDPURSUANT 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.
6.08 FINAL AGREEMENT. THE FINANCING AGREEMENTS (INCLUDING THE LOAN
AGREEMENT AND THIS AMENDMENT), AS AMENDED HEREBY, REPRESENT THE ENTIRE
EXPRESSION OF THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF ON THE DATE
THIS AMENDMENT IS EXECUTED. THE FINANCING AGREEMENTS, AS AMENDED HEREBY, MAY NOT
BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES. 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.
6.09 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 FINANCING AGREEMENT, DOCUMENT OR INSTRUMENT
ENTERED INTO IN CONNECTION THEREWITH.
[Signature Page Follows]
Executed as of the day and year first written above.
DSI TOYS, INC.
By: /s/ R. L. WEISGARBER
-----------------------------
Name: R. L. WEISGARBER
---------------------------
Title: CFO
--------------------------
SUNROCK CAPITAL CORP.
By: /s/ THOMAS M. ROMANOWSKI
-----------------------------
Name: THOMAS M. ROMANOWSKI
---------------------------
Title: SVP
--------------------------
Exhibit 21
SUBSIDIARIES
Subsidiary Jurisdiction of Organization
---------- ----------------------------
DSI(HK) Limited Hong Kong
Meritus Industries Limited Hong Kong
RSP Products Limited Hong Kong
Elite Dolls Limited Hong Kong
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