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 APRIL 30, 1998
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 June 12, 1998, 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 April 30, 1998 and January 31, 1998...1
Consolidated Statement of Operations for the Three Months Ended
April 30, 1998 and 1997..............................................2
Consolidated Statement of Cash Flows for the Three Months Ended April
30, 1998 and 1997....................................................3
Notes to Consolidated Financial Statements.............................4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................5
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS......................................................8
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................8
Signatures.....................................................................9
DSI TOYS, INC.
CONSOLIDATED BALANCE SHEET
APRIL 30, JANUARY 31,
1998 1998
------------ ------------
ASSETS (Unaudited)
Current assets:
Cash ................................................................... $ 306,083 $ 383,690
Restricted cash ........................................................ 150,000 150,000
Accounts receivable, net ............................................... 3,092,515 8,008,288
Inventories ............................................................ 5,353,000 6,437,418
Income tax receivable .................................................. 601,884 642,264
Prepaid expenses ....................................................... 1,426,900 894,704
Deferred income taxes .................................................. 183,000 183,000
------------ ------------
Total current assets ............................................... 11,113,382 16,699,364
Property and equipment, net .................................................. 1,384,569 1,252,572
Advances to shareholder (life insurance premiums) ............................ 1,344,754 1,278,401
Deferred income taxes ........................................................ 2,096,076 1,752,000
Other assets ................................................................. 273,027 224,783
------------ ------------
$ 16,211,808 $ 21,207,120
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ............................... $ 7,817,662 $ 9,740,201
Current portion of long-term debt ...................................... 5,677,154 585,783
Income taxes payable ................................................... 89,732 108,630
Deferred income taxes .................................................. 277 --
------------ ------------
Total current liabilities .......................................... 13,584,825 10,434,614
Long Term Debt ............................................................... -- 7,495,000
Deferred income taxes ........................................................ 119,000 119,000
------------ ------------
Total liabilities .................................................. 13,703,825 18,048,614
Shareholders' equity:
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 shares outstanding ............. 87,190 87,190
Additional paid-in capital ............................................. 21,162,568 21,162,568
Common stock warrants .................................................. 102,500 102,500
Retained earnings ...................................................... 3,792,516 4,437,653
Cumulative translation adjustment ...................................... 23,801 29,187
------------ ------------
25,168,575 25,819,098
Less: treasury stock, 2,719,000 shares, at cost ........................ (22,660,592) (22,660,592)
------------ ------------
Total shareholders' equity ......................................... 2,507,983 3,158,506
------------ ------------
$ 16,211,808 $ 21,207,120
============ ============
See accompanying notes to consolidated financial statements.
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DSI TOYS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED APRIL 30,
---------------------------
1998 1997
----------- -----------
(Unaudited)
Net sales ...................................... $ 5,926,126 $ 7,427,707
Costs of goods sold ............................ 4,513,607 4,703,910
----------- -----------
Gross profit ................................... 1,412,519 2,723,797
Selling, general and administrative expenses ... 2,209,222 3,017,694
----------- -----------
Operating loss ................................. (796,703) (293,897)
Interest expense ............................... 222,696 576,946
Other income ................................... (11,372) (119,948)
----------- -----------
Loss before income taxes ....................... (1,008,027) (750,895)
Benefit from income taxes ...................... (362,890) (270,322)
----------- -----------
Net loss ....................................... $ (645,137) $ (480,573)
=========== ===========
Basic earnings per share
Loss per share ............................. $ (0.11) $ (0.14)
=========== ===========
Weighted average shares outstanding ........ 6,000,000 3,500,000
=========== ===========
Diluted earnings per share
Loss per share ............................. $ (0.11) $ (0.14)
=========== ===========
Weighted average shares outstanding ........ 6,000,000 3,500,000
=========== ===========
See accompanying notes to consolidated financial statements.
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DSI TOYS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED APRIL 30,
----------------------------------
1998 1997
----------- -----------
Cash flows from operating activities: (Unaudited)
Net loss ................................................................... $ (645,137) $ (480,573)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization ............................................ 105,289 94,347
Amortization and write-off of
debt discount and issuance costs ...................................... -- 42,810
Provision for doubtful accounts .......................................... 2,848 15,234
Gain on sale of equipment ................................................ -- (3,523)
Deferred income taxes .................................................... (343,799) (262,000)
Changes in assets and liabilities:
Accounts receivable ................................................... 4,912,925 (2,015,766)
Due from shareholder .................................................. -- (4,001)
Inventories ........................................................... 1,084,418 (709,318)
Income taxes receivable/payable ....................................... 21,482 (4,809)
Prepaid expenses ...................................................... (532,196) (703,890)
Accounts payable and accrued liabilities .............................. (1,922,539) (252,942)
----------- -----------
Net cash provided (used) by operating activities .................... 2,683,291 (4,284,431)
Cash flows from investing activities:
Capital expenditures ....................................................... (237,286) (329,788)
Proceeds from sale of equipment ............................................ -- 4,255
Life insurance premiums paid for shareholder ............................... (66,353) (66,354)
Repayments by shareholder .................................................. -- 342,505
Decrease (increase) in other assets ........................................ (48,244) 122,863
----------- -----------
Net cash provided (used) in investing activities .................... (351,883) 73,481
Cash flows from financing activities:
Net borrowings (repayments) under revolving lines of credit ................ (2,402,990) 3,586,179
Payments on long-term debt ................................................. (639) (320,329)
----------- -----------
Net cash provided (used) by financing activities .................... (2,403,629) 3,265,850
Effect of exchange rate changes on cash ........................................ (5,386) 20,417
----------- -----------
Net decrease in cash ........................................................... (77,607) (924,683)
Cash and cash equivalents, beginning of period ................................. 383,690 1,501,992
----------- -----------
Cash and cash equivalents, end of period ....................................... $ 306,083 $ 577,309
=========== ===========
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 of DSI Toys,
Inc. and its wholly-owned subsidiary (the "Company") have been prepared in
accordance with the instructions to Form 10-Q. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements and should be read in conjunction
with the financial statements and notes thereto appearing in the Company's
Annual Report on Form 10-K for the year ended January 31, 1998.
In the opinion of the Company's management, all adjustments necessary for a
fair presentation of the results of operations for all periods reported have
been included. Such adjustments consist only of normal recurring items.
The results of operations for the three months ended April 30, 1998 are not
necessarily indicative of the results expected for the full year ending January
31, 1999.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
APRIL 30, 1998 JANUARY 31, 1998
-------------- ----------------
Trade receivables $3,931,569 $10,999,014
Provisions for:
Discounts, markdowns and
return of defective goods (669,814) (2,786,396)
Doubtful accounts (169,240) (204,330)
--------------- ----------------
Accounts receivable, net $3,092,515 $8,008,288
=============== ================
3. COMPREHENSIVE INCOME
Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130")
which establishes standards for reporting and display of comprehensive income
and its components. Adoption of SFAS 130 did not have a material impact on the
Company's financial statements.
-4-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995: STATEMENTS IN THIS REPORT THAT ARE NOT HISTORICAL FACTS, INCLUDING
STATEMENTS ABOUT PLANS AND EXPECTATIONS REGARDING PRODUCTS AND OPPORTUNITIES,
DEMAND AND ACCEPTANCE OF NEW AND EXISTING PRODUCTS, CAPITAL RESOURCES AND FUTURE
FINANCIAL CONDITION AND RESULTS ARE FORWARD-LOOKING. FORWARD-LOOKING STATEMENTS
INVOLVE RISKS AND UNCERTAINTIES, WHICH MAY CAUSE THE COMPANY'S ACTUAL RESULTS IN
FUTURE PERIODS TO DIFFER MATERIALLY AND ADVERSELY FROM THOSE EXPRESSED. THESE
UNCERTAINTIES AND RISKS INCLUDE CHANGING CONSUMER PREFERENCES, LACK OF SUCCESS
OF NEW PRODUCTS, LOSS OF THE COMPANY'S CUSTOMERS, LIQUIDITY OF THE COMPANY,
COMPETITION, AND OTHER FACTORS DISCUSSED IN THIS REPORT AND FROM TIME TO TIME IN
THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
EXCEPT AS OTHERWISE INDICATED, REFERENCES TO THE "COMPANY" REFER TO DSI
TOYS, INC. AND ITS WHOLLY OWNED SUBSIDIARY, DSI (HK) LTD. ("DSI (HK)"). THE
TERMS "FISCAL YEAR" AND "FISCAL" REFER TO THE COMPANY'S FISCAL YEAR WHICH IS THE
YEAR ENDING JANUARY 31 OF THE FOLLOWING CALENDAR YEAR MENTIONED (E.G., A
REFERENCE TO FISCAL 1997 IS A REFERENCE TO THE FISCAL YEAR ENDED JANUARY 31,
1998).
GENERAL
The Company designs, develops, markets and distributes 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-controlled 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.
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
------------------
APRIL 30,
--------
1998 1997
----- -----
Net sales ................................................ 100.0% 100.0%
Costs of goods sold ...................................... 76.2 63.3
----- -----
Gross profit ............................................. 23.8 36.7
Selling, general and administrative expenses ............. 37.3 40.6
----- -----
Operating loss ........................................... (13.5) (3.9)
Interest expense ......................................... 3.8 7.8
Other income ............................................. (.2) (1.6)
----- -----
Loss before income taxes ................................. (17.1) (10.1)
Benefit from income taxes ................................ (6.1) (3.6)
----- -----
Net loss ................................................. (11.0)% (6.5)%
===== =====
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THREE MONTHS ENDED APRIL 30, 1998 COMPARED TO THE THREE MONTHS ENDED APRIL
30, 1997
NET SALES. Net sales for the three months ended April 30, 1998 decreased
$1.5 million, or 20.2%, to $5.9 million, from $7.4 million in the comparable
period in 1997.
Net sales of juvenile audio products increased $580,000, or 20.5%, to $3.4
million during the three months ended April 30, 1998, from $2.8 million in the
comparable period in 1997. Continued strength in walkie-talkies, as well as the
introduction of two new guitars, led to this increase. Net sales of girls' toys
decreased $2.0 million, or 64.8%, to $1.1 million during the first quarter ended
April 30, 1998, from $3.1 million in the comparable period in 1997. Doll sales
in the first quarter of 1998 were comprised solely of final close-outs of 1997
inventory. Net sales of boys' toys decreased $401,000, or 35.7%, to $721,000 in
the first quarter ended April 30, 1998, from $1.1 million in the comparable
period in 1997. The decrease in net sales of boys' toys was primarily
attributable to decreased sales of the radio-controlled Kawasaki(R) Ninja(R)
motorcycles, partially offset by an increase in boy's role-play products. Net
sales of products in other categories increased $300,000, or 70.6%, to $720,000,
during the first quarter ended April 30, 1998, from $422,000 in the comparable
period in 1997. This increase was due primarily to the introduction of
Squiggles(TM), an outdoor water game.
International net sales for the three months ended April 30, 1998 decreased
$293,000, or 29.2%, to $712,000, from $1.0 million in the comparable period in
1997. The decline was due primarily to decreased sales to Italy, Australia, and
Greece, partially offset by an increase in sales to the United Kingdom.
GROSS PROFIT. Gross profit decreased 48.1% to $1.4 million for the first
quarter ended April 30, 1998, from $2.7 million in the comparable period in
1997. Gross profit as a percentage of net sales decreased to 23.8% in the first
quarter ended April 30, 1998 from 36.7% in the first quarter of fiscal 1997.
Such decrease was related primarily to decreased sales of dolls. Doll sales in
the first quarter of 1998 were comprised solely of final close-outs of 1997
inventory.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 26.8% to $2.2 million in the first quarter
ended April 30, 1998 from $3.0 million in the first quarter of fiscal 1997. The
decrease resulted primarily from reduced TV advertising expense.
INTEREST EXPENSE. As a result of debt repayment using the proceeds from the
Company's initial public offering in June, 1997, interest expense decreased
$354,000 to $223,000 in the first quarter ended April 30, 1998 from $577,000 in
the comparable period in 1997.
OTHER INCOME. Other income decreased $109,000 to $11,000 in the first
quarter ended April 30, 1998 from $120,000 in the comparable period in 1997. In
the quarter ended April 30, 1997, the company received interest income related
to certain insurance proceeds.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has funded its operations and capital
requirements with cash generated from operations and borrowings. The Company's
primary capital needs have consisted of acquisitions of inventory, financing
accounts receivable and capital expenditures for product development.
The Company's operating activities provided net cash of $2.7 million
during the first quarter of fiscal 1998, consisting primarily of net decreases
in inventories and accounts receivable, partially offset by the net loss,
decreases in accounts payable and accrued liabilities and increases in prepaid
expense. Net cash used in investing activities during the first quarter of
fiscal 1998 was $352,000 and was primarily the result of capital expenditures.
Net cash used in financing activities was $2.4 million during the first quarter
of fiscal 1998 and represented net payments under revolving lines of credit and
payments on long-term debt. The Company's working capital at April 30, 1998 was
$(2.5) million and unrestricted cash was $306,000.
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 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").
-6-
Effective January 31, 1998, the Company renegotiated certain terms,
including the covenants, of the Revolver. The renegotiated terms include
interest at the bank's prime rate and maturity at March 31, 1999. The maximum
loan limit remains at $10 million, subject to the availability of sufficient
eligible inventory and accounts receivable.
The Company's operating cash requirements for the remainder of fiscal 1998
include payment of approximately $4.2 million related to television
advertisements run in November and December 1997. Such amount is due to two
media companies and is being paid in monthly installments through October 1998.
The Company has budgeted approximately $600,000 for capital expenditures,
consisting primarily of purchases of tools and molds for fiscal 1998.
At June 12, 1998, the Company had an additional borrowing capacity of an
aggregate of $3.6 million under the Revolver and the Hong Kong Credit Facility.
It is uncertain that cash flows from operations and the available borrowings
under the Revolver and the Hong Kong Credit Facility will be sufficient to meet
the Company's operating cash requirements and fund the Company's anticipated
capital expenditures over the next twelve months. Accordingly, the Company is
considering financing alternatives, including issuing additional debt and equity
securities.
The Company's Common Stock is listed on the Nasdaq National Market
("Nasdaq"). At January 31, 1998, and as of the date of this report, the
Company's net tangible assets are below the Maintenance Standards for continued
listing on Nasdaq. The Company requested an extension of time through the third
quarter of fiscal 1998 to achieve compliance; however, this request was denied.
The Company now expects to make an oral presentation to Nasdaq by late July 1998
on its plan to achieve compliance. Such plan may include issuing additional
equity securities in order to maintain the Company's listing. However, there can
be no assurance that the Company will be able to maintain the listing of its
securities on Nasdaq. Delisting of the Company's Common Stock could have a
material adverse effect on the Company's liquidity and could make it difficult
for the Company to obtain future financing.
As part of the Company's strategy, the Company will evaluate potential
acquisitions of other toy businesses or product lines that the Company believes
would complement its existing business. The Company has no present understanding
or agreement with respect to any acquisition.
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 to the
retailers' distribution centers on a scheduled basis from May through October.
During fiscal 1997, 73.9% of the Company's net sales were made during the
Company's second and third fiscal quarters (May through October), generally in
connection with retail sales for the Christmas holiday season. As a result of
the seasonality of the Company's business, the Company expects that it will
incur a loss in the first quarter and fourth quarter of each fiscal year, even
in years in which the Company is profitable for the entire year.
-7-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 27, 1997, a former independent sales representative for the
Company sued the Company and the Estate of Tommy Moss for additional royalties
and sales commissions in Probate Court No. 3 of Harris County, Texas. The
representative also is seeking to recover exemplary damages, interest, costs and
attorneys' fees. Although the Company believes that it has fulfilled its
obligations to this representative and intends to defend against the claims,
there can be no assurance as to the outcome of this lawsuit.
The Company is involved in various legal proceedings and claims incident
to the normal conduct of its business. The Company believes that such legal
proceedings and claims, individually and in the aggregate, are not likely to
have a material adverse effect on its financial position or results of
operations. The Company maintains product liability and general liability
insurance in amounts it believes to be reasonable.
ITEM 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.
-8-
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: June 15, 1998 /s/ M. D. DAVIS
--------------------------------------------
M. D. Davis
Chairman and Chief Executive Officer
Dated: June 15, 1998 By: /s/ J. RUSSELL DENSON
--------------------------------------------
J. Russell Denson
Executive Vice President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
-9-
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
27 Financial Data Schedule.
-10-