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, 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 September 8, 1998, 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, 1998 and
January 31, 1998 ............................................. 1
Consolidated Statement of Operations for the Three
Months and Six Months Ended July 31, 1998 and 1997............ 2
Consolidated Statement of Cash Flows for the Six
Months Ended July 31, 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............................................... 9
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 9
Item 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 9
Signatures..............................................................10
i
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DSI Toys, Inc.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
1998 1998
------------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash ................................................ $ 746,809 $ 383,690
Restricted cash ..................................... 150,000 150,000
Accounts receivable, net ............................ 7,787,819 8,008,288
Inventories ......................................... 6,613,443 6,437,418
Income tax receivable ............................... 1,148,649 642,264
Prepaid expenses .................................... 1,698,307 894,704
Deferred income taxes ............................... 499,000 183,000
------------ ------------
Total current assets ........................ 18,644,027 16,699,364
Property and equipment, net ................................. 1,570,816 1,252,572
Advances to shareholder (life insurance premiums) ........... 1,411,108 1,278,401
Deferred income taxes ....................................... 1,062,937 1,752,000
Other assets ................................................ 200,199 224,783
------------ ------------
$ 22,889,087 $ 21,207,120
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ............ $ 12,535,085 $ 9,740,201
Current portion of long-term debt ................... 7,368,808 585,783
Income taxes payable ................................ 90,485 108,630
------------ ------------
Total current liabilities ................... 19,994,378 10,434,614
Long Term Debt .............................................. -- 7,495,000
Deferred income taxes ....................................... 119,000 119,000
------------ ------------
Total liabilities ........................... 20,113,378 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 ................................... 4,064,269 4,437,653
Cumulative translation adjustment ................... 19,774 29,187
------------ ------------
25,436,301 25,819,098
Less: treasury stock, 2,719,000 shares, at cost ..... (22,660,592) (22,660,592)
------------ ------------
Total shareholders' equity .................... 2,775,709 3,158,506
------------ ------------
$ 22,889,087 $ 21,207,120
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
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DSI TOYS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31, SIX MONTHS ENDED JULY 31,
---------------------------- --------------------------
1998 1997 1998 1997
------- -------- -------- ------
<S> <C> <C> <C> <C>
Net sales ............................................. $ 17,524,808 $ 24,382,678 $ 23,450,934 $ 31,810,385
Costs of goods sold ................................... 13,914,469 17,184,400 18,428,076 21,888,309
------------ ------------ ------------ ------------
Gross profit .......................................... 3,610,339 7,198,278 5,022,858 9,922,076
Selling, general and administrative
expense ............................................. 2,983,404 4,326,968 5,192,626 7,344,663
------------ ------------ ------------ ------------
Operating income (loss) ............................... 626,935 2,871,310 (169,768) 2,577,413
Interest expense ...................................... 210,491 295,068 433,187 872,014
Other income .......................................... (25,850) (46,059) (37,222) (166,007)
------------ ------------ ------------ ------------
Income (loss) before income taxes ..................... 442,294 2,622,301 (565,733) 1,871,406
Provision for (benefit from) income taxes ............. 170,540 944,028 (192,349) 673,707
------------ ------------ ------------ ------------
Income (loss) before extraordinary item ............... 271,754 1,678,273 (373,384) 1,197,699
Extraordinary item (net of tax) ....................... -- (480,754) -- (480,754)
------------ ------------ ------------ ------------
Net income (loss) ..................................... $ 271,754 $ 1,197,519 $ (373,384) $ 716,945
============ ============ ============ ============
BASIC EARNINGS PER SHARE
Earnings (loss) per share before extraordinary item $ 0.05 $ 0.30 $ (0.06) $ 0.26
============ ============ ============ ============
Earnings (loss) per share ......................... $ 0.05 $ 0.22 $ (0.06) $ 0.16
============ ============ ============ ============
Weighted average shares outstanding ............... 6,000,000 5,554,561 6,000,000 4,541,919
============ ============ ============ ============
DILUTED EARNINGS PER SHARE
Earnings (loss) per share before extraordinary item $ 0.05 $ 0.30 $ (0.06) $ 0.26
============ ============ ============ ============
Earnings (loss) per share ......................... $ 0.05 $ 0.22 $ (0.06) $ 0.16
============ ============ ============ ============
Weighted average shares outstanding ............... 6,000,000 5,554,561 6,000,000 4,541,919
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
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DSI TOYS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ (373,384) $ 716,945
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Extraordinary item ...................................... -- 480,754
Depreciation and amortization ........................... 267,984 235,422
Amortization and write-off of
debt discount and issuance costs ..................... -- 199,152
Provision for doubtful accounts ......................... 11,250 31,690
Gain on sale of equipment ............................... -- (4,106)
Deferred income taxes ................................... 373,063 393,000
Changes in assets and liabilities:
Accounts receivable .................................. 209,220 (9,993,429)
Due from shareholder ................................. -- 151,667
Inventories .......................................... (176,025) (3,689,403)
Income taxes receivable/payable ...................... (524,530) 33,323
Prepaid expenses ..................................... (803,603) (1,445,109)
Accounts payable and accrued liabilities ............. 2,794,883 6,538,103
------------ ------------
Net cash provided (used) by operating activitiies . 1,778,858 (6,351,991)
Cash flows from investing activities:
Capital expenditures ...................................... (586,228) (553,126)
Proceeds from sale of equipment ........................... -- 5,640
Life insurance premiums paid for shareholder .............. (132,707) --
Decrease in insurance receivable from shareholder ......... -- 287,058
Decrease in other assets .................................. 24,584 409,439
------------ ------------
Net cash provided (used) in investing activities .. (694,351) 149,011
Cash flows from financing activities:
Net borrowings (repayments) under revolving lines of credit (711,975) 2,425,186
Payments on long-term debt ................................ -- (13,423,618)
Net proceeds from issuance of common stock ................ -- 17,664,435
Proceeds from sale of warrants to underwriters ............ -- 2,500
------------ ------------
Net cash provided (used) by financing activities .. (711,975) 6,668,503
Effect of exchange rate changes on cash ....................... (9,413) 13,547
------------ ------------
Net increase in cash .......................................... 363,119 479,070
Cash and cash equivalents, beginning of period ................ 383,690 1,501,992
------------ ------------
Cash and cash equivalents, end of period ...................... $ 746,809 $ 1,981,062
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
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 and six months ended July
31, 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:
JULY 31, 1998 JANUARY 31, 1998
------------- ----------------
Trade receivables .............. $ 8,847,686 $ 10,999,014
Provisions for:
Discounts, markdowns and
return of defective
goods ...................... (906,008) (2,786,396)
Doubtful accounts ............ (153,859) (204,330)
------------ ------------
Accounts receivable, net ....... $ 7,787,819 $ 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
<PAGE>
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.
1998 net sales are expected to be less than 1997 net sales because the
Company's conservative 1998 strategy does not include any TV-promoted products.
For the future, the Company intends to (a) focus on strengthening and growing
core business; (b) continue to seek proprietary product from independent
inventors and designers; (c) look for strategic brand and product licensing
opportunities; and (d) strengthen product development and marketing to support
effective planning, risk assessment, product development, marketing and sales.
The Company has employed a Senior Vice President to oversee product development
and has, effective August 20, 1998, employed a Senior Vice President to oversee
marketing and strategic planning.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain income
and expense items expressed as a percentage of net sales:
PERCENT OF NET SALES
----------------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JULY 31, JULY 31,
--------- ---------
1998 1997 1998 1997
------ ------ ------ ------
Net sales ............................ 100.0% 100.0% 100.0% 100.0%
Costs of goods sold .................. 79.4 70.5 78.6 68.8
----- ----- ----- -----
Gross profit ......................... 20.6 29.5 21.4 31.2
Selling, general and
administrative expenses ............. 17.0 17.8 22.1 23.1
----- ----- ----- -----
Operating income ..................... 3.6 11.7 (0.7) 8.1
Interest expense ..................... 1.2 1.2 1.8 2.7
Other income ......................... (0.1) (0.2) (0.2) (0.5)
----- ----- ----- -----
Income before income taxes ........... 2.5 10.7 (2.3) 5.9
Provision for income taxes ........... 1.0 3.9 (0.8) 2.1
----- ----- ----- -----
Income before extraordinary item ..... 1.5 6.8 (1.5) 3.8
----- ----- ----- -----
Extraordinary item (net of tax ) ..... 0.0 (1.9) 0.0 (1.5)
----- ----- ----- -----
Net income (loss) .................... 1.5% 4.9% (1.5)% 2.3%
===== ===== ===== =====
5
<PAGE>
THREE MONTHS ENDED JULY 31, 1998 COMPARED TO THE THREE MONTHS ENDED
JULY 31, 1997
NET SALES. Net sales for the three months ended July 31, 1998 decreased
$6.9 million, or 28.1%, to $17.5 million, from $24.4 million in the comparable
period in 1997.
Net sales of juvenile audio products during the second quarter ended July
31, 1998, remained relatively flat at $13.3 million compared to the similar
period in 1997.
Net sales of girls' toys decreased $5.9 million, or 89.6%, to $686,000
during the second quarter ended July 31, 1998, from $6.6 million in the
comparable period in 1997. The sales for the second quarter 1997 were driven by
the introduction of Baby Pick Me Up(TM) and Dreamie Sweets(TM) dolls. The
absence of a new doll introduction during the second quarter 1998 led to
comparatively lower sales in girls' toys.
Net sales of boys' toys decreased $898,000, or 27.3%, to $2.4 million in
the second quarter ended July 31, 1998, from $3.3 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. The
Company's new radio-control vehicle "Burnin' Thunder" is scheduled for
introduction in the third quarter.
Net sales of products in other categories during the second quarter ended
July 31, 1998, remained relatively flat at $1.2 million compared to the similar
period in 1997.
International net sales for the three months ended July 31, 1998 decreased
$652,000, or 12.1%, to $4.7 million, from $5.4 million in the comparable period
in 1997. The decline was due primarily to decreased sales to Canada, Italy, and
Greece, partially offset by an increase in sales to France.
GROSS PROFIT. Gross profit decreased 49.8% to $3.6 million for the second
quarter ended July 31, 1998, from $7.2 million in the comparable period in 1997.
Gross profit as a percentage of net sales decreased to 20.6% in the second
quarter ended July 31, 1998 from 29.5% in the second quarter of fiscal 1997.
Such decrease was primarily due to decreased sales of TV-promoted toys,
principally dolls, which generally have higher gross margins to cover the
related costs of TV advertising.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 31.1% to $3.0 million in the second quarter
ended July 31, 1998 from $4.3 million in the second quarter of fiscal 1997. The
decrease resulted primarily from absence of TV advertising expense in 1998.
INTEREST EXPENSE. As a result of debt repayment using the proceeds from
the Company's initial public offering in June, 1997, interest expense decreased
$84,000 to $211,000 in the second quarter ended July 31, 1998 from $295,000 in
the comparable period in 1997.
OTHER INCOME. Other income decreased $20,000 to $26,000 in the second
quarter ended July 31, 1998 from $46,000 in the comparable period in 1997. In
the quarter ended July 31, 1997, the Company received interest income related to
certain insurance proceeds.
SIX MONTHS ENDED JULY 31, 1998 COMPARED TO THE SIX MONTHS ENDED JULY 31, 1997
NET SALES. Net sales for the six months ended July 31, 1998 decreased $8.4
million, or 26.3%, to $23.4 million, from $31.8 million in the comparable period
in 1997.
Net sales of juvenile audio products increased $586,000, or 3.6%, to $16.7
million during the six months ended July 31, 1998, from $16.1 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 $7.9 million, or 81.8%, to $1.8 million
during the six months July 31, 1998, from $9.7 million in the comparable period
in 1997. Sales for the second quarter 1997 were driven by the introduction of
Baby Pick Me Up(TM) and Dreamie Sweets(TM) dolls. The absence of a new doll
introduction during the first six months of 1998 led to comparatively lower
sales in girls' toys. Doll sales in the first two quarters of 1998
were comprised solely of final closeouts of 1997 inventory.
6
<PAGE>
Net sales of boys' toys decreased $1.3 million, or 29.5%, to $3.1 million
in the six months ended July 31, 1998, from $4.4 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. The
Company's new radio-control vehicle "Burnin' Thunder" is scheduled for
introduction in the third quarter.
Net sales of products in other categories increased $247,000, or 14.9%, to
$1.9 million, during the six months ended July 31, 1998, from $1.7 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 six months ended July 31, 1998 decreased
$945,000, or 14.8%, to $5.5 million, from $6.4 million in the comparable period
in 1997. The decline was due primarily to decreased sales to Canada, Italy, and
Greece, partially offset by an increase in sales to France.
GROSS PROFIT. Gross profit decreased 49.4% to $5.0 million for the six
months ended July 31, 1998, from $9.9 million in the comparable period in 1997.
Gross profit as a percentage of net sales decreased to 21.4% in the six months
ended July 31, 1998 from 31.2% in the first six months of fiscal 1997. Such
decrease was primarily due to decreased sales of TV-promoted toys, principally
dolls, which generally have higher gross margins to cover the related costs of
TV advertising.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 29.3% to $5.2 million in the six months ended
July 31, 1998 from $7.3 million in the first six months of fiscal 1997. The
decrease resulted primarily from the absence of TV advertising expense for the
first two quarters of fiscal 1998.
INTEREST EXPENSE. As a result of debt repayment using the proceeds from
the Company's initial public offering in June, 1997, interest expense decreased
$439,000 to $433,000 in the six months ended July 31, 1998 from $872,000 in the
comparable period in 1997.
OTHER INCOME. Other income decreased $129,000 to $37,000 in the six
months ended July 31, 1998 from $166,000 in the comparable period in 1997.
In the six months ended July 31, 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 $1.8 million
during the second quarter of fiscal 1998, consisting primarily of decreases in
accounts receivable and increases in accounts payable and accrued liabilities,
partially offset by the net loss and an increase in prepaid expenses and income
taxes receivable. Net cash used in investing activities during the second
quarter of fiscal 1998 was $694,000 and was primarily the result of capital
expenditures. Net cash used in financing activities was $712,000 during the
second quarter of fiscal 1998 and represented net payments under revolving lines
of credit. The Company's working capital deficit at July 31, 1998 was $1.4
million and unrestricted cash was $747,000.
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").
The Company's operating cash requirements for the remainder of fiscal 1998
and 1999 include payments totaling approximately $4.1 million related to
television advertisements run in November and December 1997. Such amount is due
to two media companies and, after a recent renegotiation, is currently being
paid in monthly installments through November 1999. The Company has budgeted
approximately $600,000 for capital expenditures, consisting primarily of
purchases of tools and molds for fiscal 1998.
7
<PAGE>
In addition, the Company is obligated to make future minimum royalty
payments under certain of its license agreements. As of July 31, 1998, the
Company was required to pay guaranteed royalties under these licenses of $19,000
in fiscal 1998 and $150,000 per year from 1999 through year 2002.
At September 8, 1998, the Company had an additional borrowing capacity of
an aggregate of $6.8 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. It is
also uncertain whether the Revolver and the Hong Kong Facility can be renewed on
similar terms when the current agreements expire. Based on current projections
for the remainder of 1998, it is likely that the Company will fall out of
compliance with certain of the covenants of the Revolver in the third quarter
1998. While there can be no assurance, the Company believes that Bank One will
grant waivers of covenant violations if necessary. If Bank One does not waive
such violations, however, it could declare the entire outstanding balance
immediately due and payable. The Company also believes that it can obtain
acceptable credit from other sources if the Revolver and Hong Kong Facility must
be replaced, and it is considering its options in this regard. In addition, the
Company is considering financing alternatives, including issuing additional debt
and equity securities.
Effective August 17, 1998 listing of the Company's Common Stock was moved
to the Nasdaq SmallCap Market from the Nasdaq National Market because the
Company's net tangible assets are below the Maintenance Standards for continued
listing on the Nasdaq National Market. Management does not believe that the move
to the SmallCap Market will have any material adverse effect on trading of the
Company's common stock or on the Company's ability to issue additional equity if
required.
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. OTHER
INFORMATION
On June 16, 1998, the Company exercised its option to renew its license
agreement with Kawasaki Motors Corp., U.S.A. for four years through December 31,
2002 covering radio-controlled vehicles, toy musical instruments, children's and
juvenile radios, walkie-talkies, FM microphones, and flying toys. The license
continues to be non-exclusive; however, in 1994 when the Company commenced its
relationship with Kawasaki, Kawasaki and its licensing agent represented to the
Company that no license agreements would be entered into with other toy
companies covering goods licensed to the Company. The Company knows of no
competitor who has been given a license from Kawasaki on goods covered by the
Company's license agreement. Although the license agreement is country specific,
the expansive list of covered countries gives the Company distribution rights in
substantially all of the countries in which the Company distributes products.
The license agreement provides for guaranteed future minimum royalty payments of
$150,000 per year, or $600,000 over the four-year term of the license.
8
<PAGE>
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on June 23, 1998. The
following are the results of certain matters voted upon at the meeting:
(a) With respect to the election of directors whose terms expired in 1998,
shares were voted as follows:
RICHARD R. NEITZ DOUGLAS A. SMITH
---------------- ----------------
For .............................. 5,226,878 5,184,270
Withheld ......................... 69,220 111,828
--------- ---------
5,296,098 5,296,098
========= =========
Messrs. Neitz and Smith were elected for terms expiring on the date of the
annual meeting of shareholders in 2001. The following members of the Board
of Directors have terms expiring on the date of the annual meeting of
shareholders in the years indicated: Jack R. Crosby and Barry B. Conrad -
1999, Joseph N. Matlock and M. D. Davis - 2000.
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.
9
<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 14, 1998 /s/ M.D. DAVIS
M.D. Davis
Chairman and Chief Executive Officer
Dated: September 14, 1998 By: /s/ J. RUSSELL DENSON
J. Russell Denson
Executive Vice President and Chief
Financial Officer (Principal Finanical
and Accounting Officer)
10
<PAGE>
NOTES TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- --------
27 Financial Data Schedule
11
<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, 1998 and
is qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 896,809
<SECURITIES> 0
<RECEIVABLES> 8,847,686
<ALLOWANCES> (1,059,867)
<INVENTORY> 6,613,443
<CURRENT-ASSETS> 18,644,027
<PP&E> 5,334,934
<DEPRECIATION> (3,764,118)
<TOTAL-ASSETS> 22,889,087
<CURRENT-LIABILITIES> 19,994,378
<BONDS> 0
0
0
<COMMON> 87,190
<OTHER-SE> 2,775,709
<TOTAL-LIABILITY-AND-EQUITY> 22,889,087
<SALES> 23,450,934
<TOTAL-REVENUES> 23,450,934
<CGS> 18,428,076
<TOTAL-COSTS> 5,192,626
<OTHER-EXPENSES> 37,222
<LOSS-PROVISION> 11,250
<INTEREST-EXPENSE> 433,187
<INCOME-PRETAX> (565,733)
<INCOME-TAX> (192,349)
<INCOME-CONTINUING> (373,384)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (373,384)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
