FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NO. 0-22545
DSI TOYS, INC.
(Exact name of Registrant as specified in its charter)
TEXAS 74-1673513
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1100 WEST SAM HOUSTON PARKWAY NORTH
HOUSTON, TEXAS 77043
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (713) 365-9900
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of September 12, 1997, 6,000,000 shares of common stock, par value $.01 per
share, of DSI Toys, Inc. were outstanding.
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet as of July 31, 1997 and January 31, 1997. 1
Consolidated Statement of Operations for the Three Months Ended
July 31, 1997 and 1996 and the Six Months Ended July 31, 1997
and 1996........................................................... 2
Consolidated Statement of Cash Flows for the Six Months Ended
July 31, 1997 and 1996............................................. 3
Consolidated Statement of Shareholders' Equity for the
Six Months Ended July 31, 1997..................................... 4
Notes to Consolidated Financial Statements.......................... 5
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................... 7
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.................................................. 11
Item 6. EXHIBITS AND REPORTS ON FORM 8-K................................... 11
Signatures................................................................. 12
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DSI TOYS, INC.
Consolidated Balance Sheet
July 31, January 31,
1997 1997
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash ........................................................................... $ 1,981,062 $ 1,501,992
Restricted cash ................................................................ 150,000 150,000
Accounts receivable, net of allowance for doubtful accounts
of $133,670 and $104,781 ............................................... 14,181,681 4,219,942
Due from shareholder ........................................................... -- 151,667
Shareholder insurance proceeds receivable ...................................... -- 511,765
Inventories .................................................................... 8,304,491 4,615,087
Prepaid expenses ............................................................... 2,907,298 1,462,189
Deferred income taxes .......................................................... 370,000 362,000
------------ ------------
Total current assets ................................................... 27,894,532 12,974,642
Property and equipment, net ............................................................ 1,506,669 1,190,498
Shareholder insurance proceeds receivable .............................................. 1,145,694 920,987
Deferred debt issuance costs ........................................................... -- 679,906
Other assets ........................................................................... 128,429 537,868
------------ ------------
Total assets ............................................................ $ 30,675,324 $ 16,303,901
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ....................................... $ 13,785,362 $ 7,247,254
Current portion of long-term debt .............................................. 3,090,464 2,755,789
Income taxes payable ........................................................... 226,534 193,211
Deferred income taxes .......................................................... 100,000 158,000
------------ ------------
Total current liabilities .............................................. 17,202,360 10,354,254
Long-term debt ......................................................................... 2,870,000 8,203,108
Notes payable -- shareholder ........................................................... -- 6,000,000
Deferred income taxes .................................................................. 1,628,000 1,169,000
------------ ------------
Total liabilities ...................................................... 21,700,360 25,726,362
Shareholders' equity (deficit):
Preferred Stock, $.01 par value, 5,000,000 shares authorized,
none issued or outstanding ............................................. -- --
Common Stock, $.01 par value, 20,000,000 shares authorized
8,719,000 shares issued, 6,000,000 outstanding ........................ 87,190 62,190
Additional paid-in capital ..................................................... 21,082,528 3,443,093
Common stock warrants .......................................................... 102,500 100,000
Retained earnings .............................................................. 10,340,295 9,623,350
Cumulative translation adjustment .............................................. 23,043 9,498
------------ ------------
31,635,556 13,238,131
Less: treasury stock, 2,719,000 shares, at cost ................................ (22,660,592) (22,660,592)
------------ ------------
Total shareholders' equity (deficit) ..................................... 8,974,964 (9,422,461)
------------ ------------
Total liabilities and shareholders' equity ............................... $ 30,675,324 $ 16,303,901
============ ============
See accompanying notes to consolidated financial statements.
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DSI TOYS, INC.
Consolidated Statement of Operations
Three Months Ended July 31, Six Months Ended July 31,
------------------------------- -------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Net sales .............................................. $ 24,382,678 $ 18,097,350 $ 31,810,385 $ 23,952,980
Costs of goods sold .................................... 17,184,400 13,435,756 21,888,309 17,050,947
------------ ------------ ------------ ------------
Gross profit ........................................... 7,198,278 4,661,594 9,922,076 6,902,033
Selling, general and administrative expenses ........... 4,326,968 2,474,351 7,344,663 5,260,379
------------ ------------ ------------ ------------
Operating income ....................................... 2,871,310 2,187,243 2,577,413 1,641,654
Interest expense ....................................... 295,068 607,795 872,014 1,187,607
Other income ........................................... (46,059) (10,441) (166,007) (35,385)
------------ ------------ ------------ ------------
Income before income taxes ............................. 2,622,301 1,589,889 1,871,406 489,432
Provision for income taxes ............................. 944,028 562,571 673,707 166,407
------------ ------------ ------------ ------------
Income before extraordinary item ....................... 1,678,273 1,027,318 1,197,699 323,025
Extraordinary item (net of tax) ........................ (480,754) -- (480,754) --
------------ ------------ ------------ ------------
Net income ............................................. $ 1,197,519 $ 1,027,318 $ 716,945 $ 323,025
============ ============ ============ ============
Earnings per share before
extraordinary item ............................. $ 0.30 $ 0.28 $ 0.26 $ 0.09
============ ============ ============ ============
Earnings per share ..................................... $ 0.22 $ 0.28 $ 0.16 $ 0.09
============ ============ ============ ============
Weighted average shares outstanding .................... 5,554,561 3,713,713 4,541,919 3,606,857
============ ============ ============ ============
See accompanying notes to financial statements.
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DSI TOYS, INC.
Consolidated Statement of Cash Flows
Six months ended July 31,
-------------------------------
1997 1996
------------ -----------
Cash flows from operating activities:
Net income .......................................................................... $ 716,945 $ 323,025
Adjustments to reconcile net income to net cash used in
operating activities:
Extraordinary item .......................................................... 480,754 --
Depreciation ................................................................ 235,422 285,068
Amortization of debt discount and issuance costs ............................ 199,152 77,435
Provision for doubtful accounts ............................................. 31,690 31,193
Gain on sale of equipment ................................................... (4,106) (1,457)
Deferred income taxes ....................................................... 393,000 279,738
Changes in assets and liabilities:
Accounts receivable ................................................. (9,993,429) (4,741,684)
Due from shareholder ................................................ 151,667 622,716
Inventories ......................................................... (3,689,403) (2,523,457)
Prepaid expenses .................................................... (1,445,109) (359,526)
Accounts payable and accrued liabilities ............................ 6,538,103 2,809,551
Income taxes payable ................................................ 33,323 (106,030)
------------ -----------
Net cash used in operating activities ....................... (6,351,991) (3,303,428)
Cash flows from investing activities:
Capital expenditures ................................................................ (553,126) (99,413)
Proceeds from sale of equipment ..................................................... 5,640 --
Decrease (increase) in insurance receivable from shareholder ........................ 287,058 (166,564)
Decrease (increase) in other assets ................................................. 409,439 (144,425)
------------ -----------
Net cash provided (used) by investing activities ............ 149,011 (410,402)
Cash flows from financing activities:
Net borrowings under revolving lines of credit ...................................... 2,425,186 1,998,961
Payments on long-term debt .......................................................... (13,423,618) (484,451)
Net proceeds from issuance of common stock .......................................... 17,664,435 --
Proceeds from sale of warrants to underwriters ...................................... 2,500 --
------------ -----------
Net cash provided by financing activities ................... 6,668,503 1,514,510
Effect of exchange rate changes on cash ..................................................... 13,547 12,380
------------ -----------
Net increase (decrease) in cash and cash equivalents ........................................ 479,070 (2,186,940)
Cash, beginning of period ................................................................... 1,501,992 2,660,456
------------ -----------
Cash, end of period ......................................................................... $ 1,981,062 $ 473,516
============ ===========
Supplemental disclosures of cash flow information:
Interest paid during the period ..................................................... $ 837,488 $ 1,123,655
Income taxes paid during the period ................................................. $ 279,443 $ 872,708
See accompanying notes to consolidated financial statements.
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DSI TOYS, INC.
Consolidated Statement of Shareholders' Equity
Common Stock Additional
------------------- Paid-in
Shares Amounts Capital Warrants
--------- ------- ------------ --------
Balance, January 31, 1997 ....... 6,219,000 $62,190 $ 3,443,093 $100,000
Net Income .............. -- -- -- --
Issuance of common stock 2,500,000 25,000 18,475,000 --
Stock issuance costs .... -- -- (835,565) --
Change in cumulative
translation adjustment -- -- -- --
Warrants issued ......... -- -- -- 2,500
--------- ------- ------------ --------
Balance, July 31, 1997 .......... 8,719,000 $87,190 $ 21,082,528 $102,500
========= ======= ============ ========
Cumulative
Translation Retained Treasury
Adjustment Earnings Stock Total
------- ----------- ------------ ------------
Balance, January 31, 1997 ....... $ 9,498 $ 9,623,350 $(22,660,592) $ (9,422,461)
Net Income .............. -- 716,945 -- 716,945
Issuance of common stock -- -- -- 18,500,000
Stock issuance costs .... -- -- -- (835,565)
Change in cumulative
translation adjustment 13,545 -- -- 13,545
Warrants issued ......... -- -- -- 2,500
------- ----------- ------------ ------------
Balance, July 31, 1997 .......... $23,043 $10,340,295 $(22,660,592) $ 8,974,964
======= =========== ============ ============
See accompanying notes to consolidated financial statements.
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DSI TOYS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions for Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, the unaudited
consolidated financial statements of DSI Toys, Inc., together with its wholly
owned subsidiary, (the "Company") as of July 31, 1997 and for the three months
and six months ended July 31, 1997 and 1996 include all adjustments,
consisting only of normal recurring adjustments, which are necessary to
present fairly the financial position, results of operations and cash flows of
the Company for the periods indicated. These interim results are not
necessarily indicative of results for a full year. The balance sheet at
January 31, 1997 has been derived from the audited consolidated financial
statements at that date.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in this Form 10-Q pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
the financial information included herein should be read in conjunction with
the Company's consolidated financial statements and related notes included in
Amendment No. 2 to the Company's Registration Statement on Form S-1 (No. 333-
23961) filed with the Securities and Exchange Commission on May 28, 1997.
The terms "fiscal year" and "fiscal" refer to the Company's fiscal year
which is the year ending January 31 of the following calendar year mentioned
(e.g., a reference to fiscal 1996 is a reference to the fiscal year ended
January 31, 1997).
2. NOTES PAYABLE
Indebtedness consists of the following:
July 31, January 31,
1997 1997
----------- -----------
Bank revolver .................................. $ 2,870,000 $ 3,055,000
Subordinated bank note ......................... 1,418,918
Bank note ...................................... 5,000,000
Subordinated note payable to shareholder ....... 6,000,000
Subordinated note payable to shareholder ....... 1,000,000
Hong Kong credit facility ...................... 3,090,464 484,979
----------- -----------
5,960,464 16,958,897
Less - current portion ......................... 3,090,464 2,755,789
----------- -----------
$ 2,870,000 $14,203,108
=========== ===========
In June 1997, the Company renegotiated the Hong Kong credit facility,
which is available primarily for negotiating and collecting export sales,
opening back-to-back letters of credit secured by letters of credit from its
customers and purchasing component parts inventory. The credit limit was
increased to $8 million, and the facility is secured by a cash deposit of
$150,000 and the accounts receivable and inventory of DSI (HK) Ltd., the
wholly owned subsidiary of DSI Toys, Inc. Outstanding borrowings under the
loan bear interest at the bank's prime rate of interest.
3. INITIAL PUBLIC OFFERING
On June 3, 1997, the Company completed its initial public 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
-5-
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.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128") which establishes standards for computing and presenting earnings
per share. This statement simplifies the standards for computing earnings per
share ("EPS") previously found in APB Opinion No. 15, "Earnings per Share."
The new standard, which is effective for years ending after December 15, 1997,
replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires
a reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. For the three and six month
periods ended July 31, 1997, this new pronouncement would result in a basic
earnings per share before extraordinary item of $0.32 and $0.27, respectively,
basic earnings per share of $0.23 and $0.16, respectively; and diluted
earnings per share of $0.22 and $0.16, respectively.
-6-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
The Company designs, develops, markets and distributes a variety of toys
and children's consumer electronics. The Company's core product categories are
(i) juvenile audio products, including walkie-talkies, pre-school audio
products, pre-teen audio products and musical toys; (ii) girls' toys,
including dolls, play sets and accessories; and (iii) boys' toys, including
radio control vehicles, action figures and western and military action toys.
Historically, the majority of the Company's sales have been made to customers
based in the United States. All of the Company's international sales are
denominated in United States dollars. Therefore, the Company is not subject
to exchange rate risk with respect to international sales.
In December 1995, a series of transactions (the "Recapitalization") was
consummated whereby the Company repurchased 77.7% of the then outstanding
Common Stock from the then sole shareholder of the Company for $22.2 million
and issued 2,719,000 shares of Common Stock to a group of new investors. The
Recapitalization resulted in the incurrence of an aggregate of $17.9 million
of additional indebtedness. The stock purchased by the Company from its
former sole shareholder is held as treasury stock. On June 3, 1997, the
Company completed its initial public offering of 2,500,000 shares of its
Common Stock, which resulted in net proceeds to the Company of $17.7 million.
All of the net proceeds were used to repay debt of the Company.
The Company expects that the amounts it expends for advertising will
increase in connection with its greater emphasis on the development of
proprietary products. A portion of the annual advertising expenses will be
accrued during each fiscal quarter based on the amount of net sales of the
related product for such fiscal quarter compared to the projected annual net
sales for such product. To the extent actual net sales vary from estimates,
adjustments in the quarterly accruals of advertising expenses will be made.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain income
and expense items expressed as a percentage of net sales:
PERCENT OF NET SALES
--------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
---------------------- ----------------------
1997 1996 1997 1996
----- ----- ----- -----
Net sales ...................................................... 100.0% 100.0% 100.0% 100.0%
Costs of goods sold ............................................ 70.5 74.2 68.8 71.2
----- ----- ----- -----
Gross profit ................................................... 29.5 25.8 31.2 28.8
Selling, general and administrative expenses ................... 17.8 13.7 23.1 22.0
----- ----- ----- -----
Operating income ............................................... 11.7 12.1 8.1 6.8
Interest expense ............................................... 1.2 3.4 2.7 5.0
Other income ................................................... (0.2) (0.1) (0.5) (0.2)
----- ----- ----- -----
Income before income taxes ..................................... 10.7 8.8 5.9 2.0
Provision for income taxes ..................................... 3.9 3.1 2.1 0.7
----- ----- ----- -----
Income before extraordinary item ............................... 6.8 5.7 3.8 1.3
Extraordinary item (net of tax) ................................ (1.9) (1.5)
----- -----
Net income ..................................................... 4.9% 5.7% 2.3% 1.3%
===== ===== ===== =====
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THREE MONTHS ENDED JULY 31, 1997 COMPARED TO THE THREE MONTHS ENDED JULY 31,
1996
NET SALES. Net sales for the three months ended July 31, 1997 increased
$6.3 million, or 34.7%, to $24.4 million, from $18.1 million in the comparable
period in 1996.
Net sales of juvenile audio products increased $2.1 million, or 18.6%, to
$13.3 million during the second quarter of fiscal 1997, from $11.2 million in
the comparable period in 1996. This increase was due primarily to increased
sales of walkie-talkies as well as sales of the newly introduced
Kawasaki(Registered Trademark) Air Guitar(Trademark). Net sales of girls' toys
increased $2.3 million, or 54.8%, to $6.6 million during the second quarter of
fiscal 1997, from $4.3 million in the comparable period in 1996. The increase
was due primarily to sales of Baby Pick Me Up(Trademark) and Dreamie
Sweets(Trademark), dolls introduced in 1997. Such sales increases were
partially offset by decreased sales of Rosie(Registered Trademark), a doll first
introduced in 1995. Net sales of boys' toys increased $1.5 million, or 83.8%,
to $3.3 million in the second quarter of fiscal 1997, from $1.8 million in the
comparable period in 1996. The growth in net sales of boys' toys was primarily
attributable to the newly introduced Kawasaki(Registered Trademark)
Ninja(Registered Trademark) Supergyro(Trademark) Motorcycle. Net sales of
products in other categories increased $380,000, or 43.8%, to $1.2 million,
during the second quarter of fiscal 1997, from $860,000 in the comparable period
in 1996. This increase was due primarily to the introduction of the Hoppin'
Poppin' Spaceballs(Trademark) game.
International net sales for the three months ended July 31, 1997 were $5.4
million, approximately the same as the comparable period in 1996.
GROSS PROFIT. Gross profit increased 54.4% to $7.2 million for the second
quarter of fiscal 1997, from $4.7 million in the comparable period in 1996.
Gross profit as a percentage of net sales increased to 29.5% in the second
quarter of fiscal 1997 from 25.8% in the second quarter of fiscal 1996. Such
increase was related to increased sales of TV-promoted toys, principally dolls,
which generally have higher margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 74.9% to $4.3 million in the second quarter of
fiscal 1997 from $2.5 million in the second quarter of fiscal 1996. The
increase resulted primarily from television advertising, marketing and promotion
expenses related to the introduction of several new products. The Company has
produced commercials and purchased significant airtime for four products for
fiscal 1997 as compared to two products for the prior year.
INTEREST EXPENSE. As a result of debt repayment using the proceeds of the
Company's initial public offering, interest expense decreased $310,000 to
$300,000 in the second quarter of fiscal 1997 from $610,000 in the comparable
period in 1996.
OTHER INCOME. Other income increased $36,000, to $46,000 in the second
quarter of fiscal 1997 from $10,000 in the comparable period in 1996. This
increase was due primarily to interest income on certain insurance proceeds.
EXTRAORDINARY ITEM. As a result of debt repayment using the proceeds of the
Company's initial public offering, $480,000 of debt issuance cost (net of tax)
was written off.
SIX MONTHS ENDED JULY 31, 1997 COMPARED TO THE SIX MONTHS ENDED JULY 31, 1996
NET SALES. Net sales in the first half of fiscal 1997 increased $7.8
million, or 32.8%, to $31.8 million, from $24.0 million in the comparable period
in fiscal 1996.
Net sales of juvenile audio products increased $2.8 million, or 21.4%, to
$16.1 million during the six months ended July 31, 1997, from $13.2 million in
the comparable period in 1996. This increase was due primarily to increased
sales of walkie-talkies as well as sales of the newly introduced
Kawasaki(Registered Trademark) Air Guitar(Trademark). Net sales of girls' toys
increased by $2.2 million, or 30.4%, to $9.7 million during the first half of
1997, from $7.4 million in the comparable period in 1996. The increase was due
primarily to sales of Baby Pick Me Up(Trademark) and Dreamie Sweets(Trademark),
dolls introduced in 1997. Such sales increases were partially offset by
decreased sales of Rosie(Registered Trademark), a doll first introduced in 1995.
Net sales of boys' toys increased $2.2 million, or 104.1%, to $4.4 million in
the first half of
-8-
1997 from $2.2 million in the comparable period in 1996. The growth in net sales
of boys' toys was primarily attributable to the newly introduced
Kawasaki(Registered Trademark) Ninja(Registered Trademark) Supergyro(Trademark)
Motorcycle. Net sales of products in other categories increased $520,000, or
45.6%, to $1.7 million during the first half of 1997, from $1.1 million in the
comparable period in 1996. This increase was due primarily to the introduction
of the Hoppin' Poppin' Spaceballs(Trademark) game.
International net sales for the first half of fiscal 1997 were $6.4 million,
approximately the same as the comparable period in fiscal 1996.
GROSS PROFIT. Gross profit increased approximately 43.8% to $9.9 million
during the first half of fiscal 1997, from $6.9 million in the comparable period
in 1996. Gross profit as a percentage of net sales increased to 31.2% during
the first half of fiscal 1997 from 28.8% in the first half of fiscal 1996. Such
increase was related to increased sales of TV-promoted toys, principally dolls,
which generally have higher margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 39.6% to $7.3 million during the first half of
fiscal 1997 from $5.3 million in the comparable period in 1996. The increase
resulted primarily from television advertising, marketing and promotional
expenses related to the introduction of several new products. The Company has
produced commercials and purchased significant airtime for four products for
fiscal 1997 as compared to two products for the prior year.
INTEREST EXPENSE. As a result of debt repayment using the proceeds of the
Company's initial public offering, interest expense decreased $320,000 to
$870,000 during the first six months of fiscal 1997 from $1,190,000 in the
comparable period of the prior year.
OTHER INCOME. Other income increased $131,000, to $166,000 during the first
six months of fiscal 1997 from $35,000 in the comparable period in 1996. This
increase was due primarily to interest income on certain insurance proceeds.
EXTRAORDINARY ITEM. As a result of debt repayment using proceeds of the
Company's initial public offering, $480,000 of debt issuance cost (net of tax)
was written off.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has funded its operations and capital requirements
from cash generated from operations and borrowings. The Company's primary
capital needs have consisted of acquisitions of inventory, and funding accounts
receivable and capital expenditures for product development. The Company's
working capital at July 31, 1997 was $10.7 million and unrestricted cash was
$2.0 million.
The Company's operating activities used net cash of $6.4 million during the
first half of fiscal 1997, consisting primarily of financing accounts receivable
and the seasonal build-up of inventories and prepaid advertising expenses. Net
cash provided by investing activities during the first half of fiscal 1997 was
$149,000, and was the net result of the repayment of an insurance receivable
from a shareholder offset by capital expenditures. Net cash provided by
financing activities was $6.7 million during the first half of fiscal 1997 and
represented net borrowings under revolving lines of credit, payments on long-
term debt, and net proceeds from a public offering.
The seasonal nature of the toy business results in complex working capital
needs. The Company's working capital needs, which the Company generally
satisfies through short-term borrowings, are greatest in the first two fiscal
quarters. To manage these working capital requirements, the Company maintains a
line of credit facility (the "Hong Kong Credit Facility") with State Street Bank
and Trust Company, Hong Kong Branch, and a revolving credit facility with Bank
One, Texas, N.A. (the "Revolver").
The Company believes that available borrowings under the Revolver and the
Hong Kong Credit Facility and cash from operations will be sufficient to meet
the Company's operating cash requirements, fund the Company's anticipated
capital expenditures and fund scheduled debt service for the foreseeable future.
The Company has budgeted approximately $850,000 for capital expenditures,
consisting of purchases of tools, molds, office equipment
-9-
and furnishings, for fiscal 1997. At September 5, 1997, the Company had an
additional borrowing capacity of an aggregate of $10.2 million under the
Revolver and the Hong Kong Credit Facility.
The Company is obligated to make future minimum royalty payments under
certain of its license agreements. As of July 31, 1997, the Company was
required to pay $15,000 of guaranteed royalties under these licenses in fiscal
1997 and $297,000 thereafter.
As a part of the Company's strategy, the Company will evaluate potential
acquisitions of other toy businesses or product lines which the Company believes
would complement its existing business. The Company has no present
understanding or agreement with respect to any acquisitions.
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.
SEASONALITY
The toy industry is very seasonal with the Christmas holiday season
representing over two-thirds of total annual retail toy sales. The Company has
experienced this seasonal pattern in its net sales. To accommodate this peak
selling season, holiday toy lines are introduced early in the first calendar
quarter. Retailers generally commit to their holiday season purchases during
the first two calendar quarters and those orders are generally shipped from Asia
to the retailers' distribution centers on a scheduled basis from May through
September. As a result of the seasonality of the Company's business, the
Company expects to incur a loss in the first quarter of each fiscal year for the
foreseeable future and may incur a loss in the fourth quarter of such fiscal
year depending upon the timing of product shipments.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical facts included in this Form 10-Q, including
statements in this Management's Discussion and Analysis of Financial Condition
and Results of Operations regarding the Company's financial position, business
strategy, plans and objectives of management of the Company for future
operations and debt service requirements, are forward-looking statements. The
words "anticipate," "believe," "expect," "plan," "intend," "estimate,"
"project," "will," "could," "may" and similar expressions are intended to
identify forward-looking statements. Although the Company believes that the
expectations reflected in these forward-looking statements are reasonable, there
can be no assurance that the actual results or developments anticipated by the
Company will be realized or, even if substantially realized, that they will have
the expected effects on its business or operations. Among the factors that
could cause actual results to differ materially from the Company's expectations
are general economic conditions, changing consumer preferences, lack of success
of new products, loss of one of the Company's largest customers, dependence on
independent designers, licenses and other proprietary rights, reliance on
manufacturers based in Hong Kong and China, reliance on key personnel,
competition and government regulation. All subsequent oral and written forward-
looking statements attributable to the Company or persons acting on its behalf
are expressly qualified in their entirety by these factors. The Company assumes
no obligation to update any of these statements.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings and claims incident to
the normal conduct of its business. The Company believes that such legal
proceedings and claims, individually and in the aggregate, are not likely to
have a material adverse effect on its financial position or results of
operations. The Company maintains product liability and general liability
insurance in amounts it believes to be reasonable. There have been no material
developments in the legal proceedings noted in Amendment No. 2 to the Company's
Registration Statement on Form S-1 (No. 333-23961) filed with the Securities and
Exchange Commission on May 28, 1997 and in the Quarterly Report on Form 10-Q for
the period ended April 30, 1997 filed with the Securities and Exchange
Commission on June 23, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits
The information required by this Item 6(a) is set forth in the Index to
Exhibits accompanying this quarterly report and is incorporated herein by
reference.
(b)Reports Submitted on Form 8-K: None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DSI Toys, Inc.
Dated: September 12, 1997 /s/ M. D. DAVIS
M. D. Davis
Chairman and Chief Executive Officer
Dated: September 12, 1997 By: /s/ J. RUSSELL DENSON
J. Russell Denson
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
10.1 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.
10.2 Debenture by DSI (HK) Limited to State Street Bank and Trust Company,
Hong Kong Branch, dated July 29, 1997.
11 Computation of Earnings Per Share.
27 Financial Data Schedule.
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