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.
<PAGE>
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
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DSI TOYS, INC.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
July 31, January 31,
1997 1997
------------ ------------
(Unaudited)
<S> <C> <C>
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
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
DSI TOYS, INC.
Consolidated Statement of Operations
<TABLE>
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
------------------------------- -------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
DSI TOYS, INC.
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Six months ended July 31,
-------------------------------
1997 1996
------------ -----------
<S> <C> <C>
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
</TABLE>
See accompanying notes to consolidated financial statements.
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DSI TOYS, INC.
Consolidated Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional
------------------- Paid-in
Shares Amounts Capital Warrants
--------- ------- ------------ --------
<S> <C> <C> <C> <C>
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
========= ======= ============ ========
<CAPTION>
Cumulative
Translation Retained Treasury
Adjustment Earnings Stock Total
------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
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
======= =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
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
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<PAGE>
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.
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<PAGE>
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:
<TABLE>
<CAPTION>
PERCENT OF NET SALES
--------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 31, JULY 31,
---------------------- ----------------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
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%
===== ===== ===== =====
</TABLE>
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<PAGE>
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
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<PAGE>
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
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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.
-10-
<PAGE>
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.
-11-
<PAGE>
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)
-12-
<PAGE>
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.
-13-
EXHIBIT 10.1
June 6, 1997
Mr. M. D. Davis
DSI Toys, Inc.
1100 West Sam Houston Parkway (North)
Houston, Texas 77043
U.S.A.
Dear Mr. Davis,
We are pleased to inform you that we have renewed and modified the following
credit facility (Credit Facility) under the terms and conditions as set out
below. The Credit Facility is available in the amounts and for the purposes
detailed below with the understanding that total usage of the Credit Facility at
any one time is not to exceed US$8,000,000 or its foreign currency equivalent.
Borrower : DSI (HK) Ltd.
Lender : State Street Bank & Trust Company, Hong Kong Branch ("SSHK")
Availability : US$8,000,000 for opening back-to-back letters of credit and
for negotiating export bills against letters of guarantee
for discrepancies. Within the US$8,000,000, there are four
sublimits
:-
(i) Sublimit of US$3,000,000
- for creating packing loans upto 35% of each valid
export letter of credit from buyers ("master L/C")
or purchase order from Toys "R" Us or Kmart
pledged to SSHK. The advances against export
letters of credit are limited upto US$1,800,000
and upto US$1,200,000 against purchase orders.
Tenor for packing loans is the shorter of 90 days,
or letter of credit expiry, or the last shipment
date of a purchase order.
<PAGE>
(ii) Sublimit of US$500,000
- for opening simple letter of credit for purchase
of finished goods prior to receipt of master L/C
from buyers.
(iii) Sublimit of US$500,000
- for opening simple letters of credit for purchase
of finished goods supported by at least the same
amount of valid master L/C pledged to SSHK. This
type of simple letter of credit is to be called
"packing L/C" for the sake of distinguishing from
the regular simple L/C.
(iv) Sublimit of US$200,000
- for overdraft and/or issuance of standby letters
of credit for utilities and/or rental deposits
purposes.
Security : (i) Cash deposit of US$150,000 currently pledged to SSHK.
(ii) A debenture incorporating a floating charge over the
receivables and inventory of DSI (HK) Ltd.
Guarantee : Corporate guarantee of DSI Toys, Inc.
Conditions : (i) The Credit Facility is for financing the FOB sales of
DSI (HK) Ltd. only and not the domestic US sales of DSI
Toys, Inc.
(ii) All payments from Toys "R" Us and Kmart under the
purchase orders financed by SSHK must be remitted
direct by the buyers into DSI (HK) Ltd.'s account
maintained with SSHK.
- 2 -
<PAGE>
Financial
Statements : (i) Audited annual financial statements of both DSI Toys,
Inc. and DSI (HK) Ltd. within 180 days of their fiscal
year ends.
(ii) Unaudited quarterly financial statements of both DSI
Toys, Inc. and DSI (HK) Ltd. within 90 days of the end
of each quarter.
Cancellation : The Credit Facility, which is subject to review once
annually, is cancellable at any time by SSHK at its sole
discretion without prior notice to your company. Upon
cancellation, all of your company's obligations to SSHK,
whether actual, future or contingent, will be due and
payable.
If you accept the Credit Facility under the terms and conditions as outlined
above, please sign and return to us the enclosed duplicate of this facility
letter together with the board minutes resolving the acceptance of this letter.
We look forward to a long and mutually beneficial relationship.
Yours sincerely, Agreed and accepted by:
/S/ Paul Li
Paul Li /S/ M. D. Davis
Vice President Date: June 30, 1997
PL/am
- 3 -
EXHIBIT 10.2
DATED July 29, 1997
BY
DSI (HK) LIMITED
TO
STATE STREET BANK AND TRUST COMPANY
Hong Kong Branch
DEBENTURE
<PAGE>
CONTENTS Page
1 INTERPRETATION ............................................... 1
2 SECURED LIABILITIES .......................................... 2
3 SECURITY ..................................................... 3
4 RESTRICTIONS ................................................. 3
5 INSURANCE .................................................... 3
6 DEEDS, POLICIES AND DEBTS .................................... 4
7 NOTICE OF CRYSTALLISATION .................................... 4
8 INFORMATION .................................................. 4
9 POWERS OF THE BANK ........................................... 4
10 RECEIVERS .................................................... 5
11 PROTECTION OF PURCHASERS AND POWER OF ATTORNEY ............... 6
12 APPROPRIATION AND SET-OFF .................................... 6
13 PROTECTION OF SECURITY ....................................... 7
14 CURRENCY ..................................................... 7
15 PAYMENTS TO BE MADE WITHOUT DEDUCTION ........................ 8
16 CERTIFICATES ................................................. 8
17 MERGER OR AMALGAMATION ....................................... 8
18 COMMUNICATIONS ............................................... 8
19 REPRESENTATIONS AND WARRANTIES ............................... 9
20 LAW AND JURISDICTION ......................................... 9
21 ASSIGNMENT AND TRANSFER ...................................... 10
22 INDEMNITY .................................................... 10
23 MISCELLANEOUS ................................................ 10
<PAGE>
DEBENTURE
Dated: July 29, 1997.
BY: DSI (HK) LIMITED whose Hong Kong registration number is 330755 (the
"Company") and whose registered office is at Rooms 803-806 World Finance
Centre, South Tower, Harbour City, Tsimshatsui, Kowloon, Hong Kong (fax
number 2375 5633)
TO: STATE STREET BANK AND TRUST COMPANY Hong Kong Branch (the "Bank") of 32nd
Floor, Two Exchange Square, 8 Connaught Place, Central, Hong Kong (fax
number 2840 5453)
1 INTERPRETATION
1.1 Definitions: In this deed:-
"CHARGED PROPERTY" means the property and assets charged by the Company to
the Bank by clause 3;
"COMPANY'S LIABILITIES" means the Company's obligations and liabilities to
the Lender covenanted to be discharged or paid under clause 2.1;
"ENCUMBRANCE" includes any mortgage, charge (fixed or floating), pledge,
hypothecation or lien and any other arrangement or interest (whether by way
of assignment, trust, title retention or otherwise) which has the effect of
creating security or payment priority;
"ENVIRONMENTAL LAW" means any applicable law (whether statutory, common,
customary or otherwise) including (without limitation) any statute,
regulation, order, code of practice, approval or similar control made or
issued by any international, national or local government or regulatory
body concerning the protection, safety or health of humans or the
environment;
"EXPENSES" means all expenses (on a full indemnity basis), including
(without limitation) legal fees, from time to time paid or incurred by the
Bank or any receiver at any time in connection with the Charged Property or
the Company's Liabilities or in taking, perfecting, preserving, defending
or enforcing the Company's Liabilities or this deed (or any of the security
created by it) or in exercising any right or power under this deed or
otherwise;
"FACILITY AGREEMENT" means the facility letter dated 6 June 1997 from the
Bank to the Company, accepted by the Company on 30 June 1997;
"INTEREST" means, in relation to any obligation or liability of the
Borrower, interest at the rate or rates agreed between the Bank and the
Company from time to time in relation to that obligation or liability
(being at the date of this deed the Bank's prime rate for the relevant
currency from time to time in relation to each obligation or liability of
the Borrower under the Facility Agreement), provided that, in the absence
of any agreed rate
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in respect of that obligation or liability, "Interest" means interest at
the rate of 3% per annum above the Bank's prime rate for the relevant
currency from time to time;
"ORDINANCE" means the Conveyancing and Property Ordinance (Cap. 219) of the
laws of Hong Kong;
"PROCEEDS ACCOUNT" means the Company's account with the Bank (account no.
121900101) or such other account as the Bank may specify from time to time;
"RELEVANT CURRENCY" means in relation to each of the Company's Liabilities
the currency in which it is from time to time denominated;
"TAX" includes any form of taxation, levy, duty, charge, contribution or
impost of whatever nature (including any applicable fine, penalty,
surcharge or interest) imposed by a Tax Authority;
"TAX AUTHORITY" means any local, municipal, governmental, state, federal or
other fiscal, revenue, customs and/or excise authority, body or official
anywhere in the world competent to impose Tax.
1.2 REFERENCES: In this deed, each reference to:-
"COMPANY'S LIABILITIES" or "Charged Property" is deemed to include a
reference to any part of them or it;
"COMPANY" or "BANK", where the context so admits, is deemed to include a
reference to its successors, assigns and/or transferees;
any document or agreement (including this deed) is deemed to include a
reference to such document or agreement as amended, novated, supplemented,
substituted or replaced from time to time;
a provision of a statute, rule or regulation is, unless otherwise
indicated, deemed to include a reference to such provision as amended,
modified or re-enacted from time to time;
the singular, where the context so admits, is deemed to include the plural
and vice versa; and
a person is deemed to include a reference to a company, partnership,
unincorporated body and any other entity and vice versa.
1.3 TITLES: The title of any provision of this deed shall not affect the
meaning of that or any other provision.
2 SECURED LIABILITIES
The Company covenants to:-
2
<PAGE>
2.1 GENERAL: discharge on demand from time to time all the Company's
obligations and liabilities to the Bank of any kind and in any currency
(whether present or future, actual or contingent and whether owed by the
Company as principal or surety or incurred alone or jointly with another
and whether owed to the Bank as original obligee or as assignee or
transferee), including (without limitation) (1) all such obligations and
liabilities under the Facility Agreement and (2) interest, fees, charges,
commission and expenses;
2.2 EXPENSES: pay to the Bank on demand from time to time the Expenses; and
2.3 INTEREST: pay to the Bank on demand from time to time Interest on the
Company's obligations and liabilities to the Bank covenanted to be
discharged and/or paid by the Company under clauses 2.1 and 2.2 from (1)
the date on which the Company has agreed to pay Interest on them or, if
there is no such agreement, from the date on which they become due or (in
the case of any Expense paid by the Bank) the date of the Bank's payment
until (2) the date of discharge or payment.
3 SECURITY
As a continuing security for the discharge on demand of the Company's
Liabilities and as beneficial owner, the Company charges to the Bank by way of
floating charge (1) all book debts and other debts and receivables now and in
the future owing to the Company and the proceeds of payment or realisation of
each of them and (2) all inventory and stock-in-trade now and in the future
belonging to the Company.
4 RESTRICTIONS
The Company will not without the previous written consent of the Bank do any of
the following:-
4.1 NEGATIVE PLEDGE: create or permit to arise or continue any Encumbrance
affecting the Charged Property or increase or extend any liability of the
Company secured on any of the Charged Property;
4.2 DEALING WITH DEBTS: deal with the Company's book debts and other debts and
receivables otherwise than by collecting them in the ordinary course of the
Company's business or (without limitation) realise its book debts and other
debts and receivables by means of block discounting, factoring or the like;
or
4.3 DISPOSALS OF CHARGED PROPERTY: dispose of the Charged Property, except in
the ordinary course of, and for the purposes of, carrying on its trading
business while the floating charge remains uncrystallised.
5 INSURANCE
5.1 COVER: The Company will to the Bank's reasonable satisfaction keep
comprehensively insured for its full reinstatement cost (due allowance
being made for inflation during the period of insurance and reinstatement)
all of the Charged Property which is of an insurable nature in such name
and in such offices as the Bank shall in writing approve and on such terms,
for such amounts and of such types as would be effected by prudent
companies carrying on business similar to the Company (including in respect
of
3
<PAGE>
environmental pollution) and on terms requiring the insurers not to cancel
the policy without giving at least 14 days' prior notice to the Bank.
5.2 POLICY ENDORSEMENT/PREMIUMS: The Company will have the policies of
insurance of the Charged Property endorsed with notice of the Bank's
interest and will punctually pay when due all premiums payable in respect
of any insurance of the Charged Property and if required by the Bank will
deliver to the Bank evidence satisfactory to the Bank of payment of such
premiums.
5.3 PROCEEDS: The Company will hold in trust for the Bank all money received
under any insurance of the Charged Property and at the Bank's option will
apply the same in making good the relevant loss or damage or in or towards
discharge of the Company's Liabilities.
5.4 DEFAULT: If the Company defaults in its obligations under this clause 5 the
Bank may enter the Charged Property and effect insurance as specified in
clause 5.1 (without becoming liable to account as mortgagee in possession).
6 DEEDS, POLICIES AND DEBTS
6.1 DEEDS AND POLICIES: The Company will from time to time deposit with the
Bank all deeds and documents of title relating to the Charged Property and
all insurance policies relating to the Charged Property.
6.2 DEBTS: The Company will pay into the Proceeds Account the proceeds of
payment or realisation of all the Company's book debts and other debts and
receivables.
7 NOTICE OF CRYSTALLISATION
The Bank may at any time by written notice to the Company convert the floating
charge created by this deed into a fixed charge as regards any of the Charged
Property specified in the notice.
8 INFORMATION
The Company covenants with the Bank from time to time to furnish to the Bank
such information regarding the assets, liabilities, business and affairs of the
Company (including, without limitation, the Charged Property) as the Bank may
reasonably require.
9 POWERS OF THE BANK
9.1 EXERCISE OF POWERS: Paragraph 11 of the fourth schedule to the Ordinance
shall not apply and the Bank may exercise its power of sale and other
powers under the Ordinance or any other law or this deed at any time after
the date of this deed.
9.2 RECEIVERS: The Bank may, under the hand of any person authorised by it to
do so or by a deed, appoint or remove a receiver or receivers of the
Charged Property, fix and pay the fees of a receiver and remove any
receiver so appointed and appoint another in his place, but any receiver
shall be deemed to be the agent of the Company and the Company shall be
solely responsible for the receiver's acts, defaults and remuneration.
4
<PAGE>
9.3 OTHER POWERS: All or any of the powers conferred on a receiver by clause 10
may be exercised by the Bank without first appointing a receiver or despite
any such appointment.
9.4 POSSESSION: The Bank will not be liable to account to the Company as
mortgagee in possession for any money not actually received by the Bank and
if the Bank or any receiver takes possession of the Charged Property it or
he may at any time relinquish such possession.
10 RECEIVERS
10.1 POWERS: Any receiver appointed by the Bank shall be a receiver and manager
and shall (in addition to the powers conferred upon receivers under the
laws of Hong Kong, including without limitation the Ordinance) have the
following powers exercisable upon such terms and conditions as he thinks
fit:-
10.1.1 POSSESSION/MANAGEMENT: to take possession of and generally to
take the benefit of and manage the Charged Property and any
business of the Company in relation to the Charged Property;
10.1.2 CONTRACTS: to enter into, carry into effect, complete, deliver,
perform, repudiate, rescind or vary any deed, contract,
transaction or arrangement to which the Company is or is to be a
party in relation to the Charged Property;
10.1.3 DISPOSALS: to sell, charge or otherwise deal with and dispose of
the Charged Property without restriction;
10.1.4 EXECUTION OF DOCUMENTATION: to carry into effect and complete any
transaction in relation to the Charged Property by executing
deeds or documents in the name of or on behalf of the Company;
10.1.5 INSURANCE/BONDS: to insure the Charged Property and effect
indemnity insurance or other similar insurance and obtain bonds
or give commitments, guarantees, indemnities and security in
relation to the Charged Property;
10.1.6 ADVISERS/EMPLOYEES: to engage, rely on the advice of and
discharge advisers, consultants, officers, managers, agents,
workmen and others in relation to the Charged Property;
10.1.7 SUPPLIES: to purchase materials, tools, equipment, goods or
supplies for the purpose of the realisation of the Charged
Property;
10.1.8 LITIGATION: to bring, continue or defend any claim, dispute,
action or legal proceedings and enter into any arrangement or
compromise in relation to the Charged Property;
10.1.9 BORROWING AND SECURITY: to redeem any security over the Charged
Property and to borrow or raise any money and secure the payment
of any money on the Charged Property in priority to the Company's
Liabilities for the purpose of the exercise of his powers and/or
defraying any costs or liabilities incurred by him in such
exercise;
5
<PAGE>
10.1.10 ACCESS: to have access to and make use of the premises and the
accounting and other records of the Company and the services of
its staff for all or any of the purposes set out in this clause;
10.1.11 OTHER ACTS: to do any other acts which he may consider to be
incidental or conducive to any of his powers or to the
realisation of the Charged Property.
10.2 JOINT RECEIVERS: In the case of joint receivers any power may be exercised
jointly or severally.
10.3 APPLICATION OF RECEIPTS: The receiver shall apply all money he receives
first in repayment of all money borrowed by him and in payment of his
expenses and liabilities (including the payment of preferential debts),
secondly in payment of his fees and thirdly in or towards satisfaction of
the Company's Liabilities (with expenses incurred by the Bank in connection
with this deed being satisfied first, interest being satisfied second and
principal thereafter) and the surplus (if any) shall be paid to the Company
or other persons entitled to it.
11 PROTECTION OF PURCHASERS AND POWER OF ATTORNEY
11.1 PROTECTION OF PURCHASERS: No purchaser or other person shall be obliged or
concerned to see or enquire whether the right of the Bank to appoint a
receiver or the right of the Bank or any receiver to exercise any of the
powers conferred by this deed has arisen or become exercisable nor be
concerned with notice to the contrary or with the propriety of the exercise
or purported exercise of such powers.
11.2 POWER OF ATTORNEY: The Company by way of security irrevocably appoints the
Bank and any receiver severally to be the attorney for the Company (with
full power of substitution and delegation) in the name of the Company, the
Bank or such receiver and on the Company's behalf and as the Company's act
and deed to sign or execute all such deeds, instruments and documents and
do all such acts and things as may be required by the Bank or any receiver
pursuant to this deed or the exercise of any of their powers.
12 APPROPRIATION AND SET-OFF
12.1 APPROPRIATION: Subject to clause 12.2, the Bank may apply all payments
received in respect of the Company's Liabilities in or towards discharge of
such part of the Company's Liabilities as it thinks fit.
12.2 NOTICE OF OTHER INTEREST: The Bank may open a new account or accounts upon
the Bank receiving actual or constructive notice of any charge or interest
affecting the Charged Property and whether or not the Bank opens any such
account no payment received by the Bank after receiving such notice shall
(if followed by any payment out of or debit to the relevant account) be
appropriated towards or have the effect of discharging the Company's
Liabilities outstanding at the time of receiving such notice.
12.3 SET-OFF: The Bank shall be entitled at any time or times without notice
(both before and after demand) to set off any liability of the Company to
the Bank against any liability of
6
<PAGE>
the Bank to the Company (in either case whether actual or contingent,
present or future and irrespective of the branch or office, currency or
place of payment) and may for such purpose convert or exchange any
currency.
12.4 RESTRICTION: Despite any term to the contrary in relation to any deposit or
credit balance at any time on any account of the Company with the Bank, no
such deposit or balance shall be repayable or capable of being assigned,
mortgaged, charged or otherwise disposed of or dealt with by the Company
before every liability of the Company to the Bank has been discharged, but
the Bank may permit any withdrawal without affecting the continued
application of this clause.
13 PROTECTION OF SECURITY
13.1 PRESERVATION OF SECURITY AND RIGHTS: This deed is in addition to any other
rights or security, present or future, held by the Bank from the Company or
any other person for the Company's Liabilities and shall not merge with or
prejudice or be prejudiced by any such rights or security or any other
contractual or legal rights of the Bank, all or any of which the Bank may
take, perfect, enforce, renew, vary, release or refrain from taking,
perfecting or enforcing without releasing, reducing or otherwise affecting
the Bank's rights under this deed.
13.2 CHANGE IN COMPANY'S CONSTITUTION: The Bank's rights under this deed shall
not be affected by any change in the Company's constitution or composition
or by the bankruptcy, liquidation, insolvency, death, incapacity or
disability of the Company.
13.3 FURTHER ASSURANCE: The Company will at its own cost at the Bank's or any
receiver's request execute any deed or document and take any action
required by the Bank or any receiver to perfect or protect this security or
its priority or further to secure on the Charged Property the Company's
Liabilities or for facilitating the realisation of the Charged Property or
the exercise of any rights or powers of the Bank or any receiver or for
establishing the nature or extent of the Charged Property.
14 CURRENCY
14.1 RELEVANT CURRENCY: The Company's liability under this deed is to discharge
the Company's Liabilities in the Relevant Currency.
14.2 RECEIPT IN WRONG CURRENCY: If at any time the Bank receives a payment
(including by set-off) referable to any of the Company's Liabilities from
any source in a currency other than the Relevant Currency, then:-
14.2.1 EFFECT: such payment shall take effect as a payment to the Bank
of the amount in the Relevant Currency which the Bank is able to
purchase (after deduction of any relevant costs) with the amount
of the payment so received in accordance with its usual practice;
and
14.2.2 INDEMNITY: if such payment is made under a court order and is
treated by clause 14.2.1 as a payment of an amount which falls
short of the relevant liability of the Company expressed in the
Relevant Currency, the Company as a separate and
7
<PAGE>
independent obligation shall on demand from time to time
indemnify the Bank against such shortfall and pay Interest on
such shortfall from the date of such payment to the date on which
the shortfall is paid.
15 PAYMENTS TO BE MADE WITHOUT DEDUCTION
15.1 NO DEDUCTIONS: All sums payable by the Company to the Bank shall be paid in
the Relevant Currency in immediately available funds and shall be paid to
the credit of such account as the Bank may designate. All such payments
shall be made in full without set-off of any sum owing by the Bank to the
Company or counter-claim and free and clear of any deduction of or
withholding for or on account of any Tax or for any other reason, except to
the extent that any such deduction or withholding is required by law.
15.2 GROSSING-UP: If at any time the Company is required by law to make any
deduction or withholding from any payment due from the Company to the Bank,
the Company shall simultaneously pay to the Bank whatever additional amount
is necessary to ensure that the Bank receives a net sum equal to the
payment it would have received had no deduction or withholding been made.
16 CERTIFICATES
A certificate signed by an official of the Bank as to the amount due or owing
from the Company shall be conclusive evidence against the Company, except in the
case of manifest error or any question of law.
17 MERGER OR AMALGAMATION
The Company's Liabilities shall extend to all liabilities of the Company to the
Bank notwithstanding any change of name of the Bank and/or the Bank's absorption
by or in or amalgamation with any other entity or the acquisition of all or part
of its undertaking by any other entity and to all sums in respect of advances
and other banking facilities from such other entity.
18 COMMUNICATIONS
18.1 WRITTEN: All communications under this deed must be in writing.
18.2 ADDRESSES: Any communication may be sent by prepaid post, fax or delivered
to the Bank or the Company at its address or fax number shown on page 1
above unless it has communicated another address or fax number to the other
in which case it must be sent to the last address or fax number so
communicated to the other for this purpose. Communications to the Company
may also be (1) sent in such manner or delivered to a place of business for
it last known to the Bank or the Company's registered office in Hong Kong
from time to time or (2) delivered to one of its officers.
18.3 DELIVERY: A communication by the Bank by post will be deemed made on the
day after posting, postage prepaid (but, if to another country, five days
after posting by airmail, postage prepaid). A communication by the Bank by
fax will be deemed made when the Bank's fax machine records a complete
transmission. A communication by the Company will be deemed made only when
actually received by the Bank.
8
<PAGE>
19 REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to the Bank that:-
19.1 COMPLIANCE WITH LEGAL RESTRICTIONS: none of the provisions, covenants and
obligations on its part contained in this deed contravenes any of the
provisions of its memorandum or articles of association or other
constitutional documents nor will this deed or its performance infringe any
law or obligation binding upon it;
19.2 STATUS: (1) it is duly constituted and in good standing under the laws of
Hong Kong and is not insolvent or in liquidation or administration or
subject to any other insolvency procedure, (2) no receiver, manager,
trustee, custodian or analogous officer has been appointed in respect of
any part of its property, undertaking or assets and (3) it has the
appropriate power and authority to own its property and assets and to carry
on its business as now conducted;
19.3 OBLIGATIONS BINDING: the obligations expressed as being assumed by it under
this deed constitute its valid, legal and binding obligations;
19.4 CORPORATE CAPACITY AND APPROVALS FOR THIS DEED: it has the appropriate
power to enter into and perform the terms and conditions of this deed and
has taken all necessary action to authorise the execution, delivery and
performance of this deed;
19.5 AUTHORISATIONS: it holds (and has at all times complied with in all
material respects) all authorisations required to carry on its business and
is not aware of any event or circumstance which could reasonably be
expected adversely to affect its right to hold and/or to obtain renewal of
all such authorisations and/or to obtain any new authorisations which will
or may be required in the future pursuant to any regulatory provisions in
order to carry on its business;
19.6 OTHER APPROVALS FOR THIS DEED: no consent, permit, licence, approval,
authorisation or registration of or with any governmental, judicial or
other authority or other third party is required or desirable in connection
with the execution, performance, validity or enforceability of this deed
other than the registration of this deed at the Companies Registry;
19.7 NO ENCUMBRANCES: there is no Encumbrance affecting any of the Company's
property, undertaking or assets other than (1) the Encumbrance created by
the Company in the Bank's favour over a deposit of US$150,000 by the
Company with the Bank by an assignment of deposit dated 3 May 1992 and (2)
the charge created by this deed; and
19.8 HEALTH, SAFETY AND ENVIRONMENT: except as previously disclosed in writing
to the Bank, the Company has complied with Environmental Law.
20 LAW AND JURISDICTION
20.1 LAW: This deed is governed by and will be construed in accordance with Hong
Kong law.
9
<PAGE>
20.2 JURISDICTION OF HONG KONG COURTS: The Company irrevocably agrees that the
Hong Kong courts are to have non-exclusive jurisdiction to settle any
disputes and to entertain any suit, action or proceedings in each case
arising out of or in connection with this deed.
21 ASSIGNMENT AND TRANSFER
21.1 COMPANY'S CONSENT TO ASSIGNMENT BY BANK: By this deed the Company gives its
irrevocable consent and continuing agreement to the assignment by the Bank
of any one or more of its rights under this deed.
21.2 NO ASSIGNMENT/TRANSFER BY COMPANY: The Company may not assign and/or
transfer any one or more of its rights and/or obligations under this deed.
21.3 CONFIDENTIALITY: The Bank may give such information relating to the Company
or this deed as it thinks fit to any person proposing to take an assignment
and/or transfer from the Bank and/or to enter into contractual relations
with the Bank with respect to this deed.
22 INDEMNITY
The Company will indemnify the Bank on demand against any loss or expense
(including, without limitation, legal fees) sustained or incurred as a result
either of a failure by the Company to perform any of its obligations under this
deed or of any representation or warranty made in this deed having been
incorrect when made.
23 MISCELLANEOUS
23.1 INTEREST: Interest payable by the Company to the Bank will accrue both
before and after judgment on a daily basis and on the basis of a 360 or 365
days' year (as the Bank shall determine) and shall be compounded (both
before and after judgment) at such intervals as the Bank shall determine.
Interest will be payable on demand made by the Bank from time to time.
After a demand Interest will also be calculated on the Company's
Liabilities together with accrued Interest as at the date of the demand.
23.2 SEVERABILITY: Each of the provisions of this deed shall be severable and
distinct from one another and if at any time any one or more of those
provisions (or any part thereof) is or becomes invalid, illegal or
unenforceable the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired.
23.3 VARIATIONS: No variation of the terms of this deed shall be valid unless in
writing signed by the Company and confirmed in writing by the Bank.
23.4 DELAY OR OMISSION BY BANK: The Bank's rights and powers under this deed
will not be affected or impaired by any delay or omission by the Bank in
exercising them or any previous exercise of any such rights or powers.
10
<PAGE>
This deed was duly signed and sealed as a deed and delivered on the date which
first appears on page 1.
The common seal of DSI (HK) )
LIMITED was affixed in the presence of:- )
Authorised signatory's signature /S/Yau Wing Kong, Tommy
Full name Yau Wing Kong, Tommy
11
Exhibit 11
DSI TOYS, INC. AND SUBSIDIARY
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31, SIX MONTHS ENDED JULY 31,
-------------------------------- -------------------------------
1997 1996 1997 1996
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Income before extraordinary item ................ $ 1,678,273 $ 1,027,318 $ 1,197,700 $ 323,025
=========== =========== =========== ==========
Net Income ...................................... $ 1,197,519 $ 1,027,318 $ 716,946 $ 323,025
=========== =========== =========== ==========
Weighted average common shares
outstanding during the period ................... 5,554,561 3,713,713 4,541,919 3,606,857
=========== =========== =========== ==========
Earnings per common share before
extraordinary item .............................. $ 0.30 $ 0.28 $ 0.26 $ 0.09
=========== =========== =========== ==========
Earnings per common share ....................... $ 0.22 $ 0.28 $ 0.16 $ 0.09
=========== =========== =========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DSI TOYS,
INC. FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED JULY 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JUL-31-1997
<CASH> 2,131,062
<SECURITIES> 0
<RECEIVABLES> 14,315,351
<ALLOWANCES> (133,670)
<INVENTORY> 8,304,491
<CURRENT-ASSETS> 27,894,532
<PP&E> 4,582,063
<DEPRECIATION> (3,075,394)
<TOTAL-ASSETS> 30,675,324
<CURRENT-LIABILITIES> 17,202,360
<BONDS> 2,870,000
0
0
<COMMON> 87,190
<OTHER-SE> 8,887,774
<TOTAL-LIABILITY-AND-EQUITY> 30,675,324
<SALES> 31,810,385
<TOTAL-REVENUES> 31,810,385
<CGS> 21,888,309
<TOTAL-COSTS> 7,344,663
<OTHER-EXPENSES> 166,007
<LOSS-PROVISION> 31,690
<INTEREST-EXPENSE> 872,014
<INCOME-PRETAX> 1,871,406
<INCOME-TAX> 673,707
<INCOME-CONTINUING> 1,197,699
<DISCONTINUED> 0
<EXTRAORDINARY> (480,754)
<CHANGES> 0
<NET-INCOME> 716,945
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
