FORM 10-Q/A
(AMENDMENT NO. 1 TO FORM 10-Q)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NO. 0-22545
DSI TOYS, INC.
(Exact name of Registrant as specified in its charter)
TEXAS 74-1673513
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1100 WEST SAM HOUSTON PARKWAY NORTH
HOUSTON, TEXAS 77043
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (713) 365-9900
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of June 7, 1999, 8,383,157 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 April 30, 1999
and January 31, 1999..............................................1
Consolidated Statements of Operations for the
Three Months Ended April 30, 1999 and 1998........................2
Consolidated Statements of Cash Flows for the Three Months Ended
April 30, 1999 and 1998...........................................3
Consolidated Statements of Shareholders' Equity.....................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..................................................12
Item 2. Changes in Securities and Use of Proceeds..........................12
Item 4. Submission of Matters to a Vote of Security Holders................13
Item 5. Other Information..................................................14
Item 6. Exhibits and Reports on Form 8-K...................................14
Signatures.................................................................15
This amended Form 10-Q is being filed to reflect the restatement of certain
previously reported information as more fully described in Note 4 of Notes to
Consolidated Financial Statements contained herein. Portions of Part I Item 1 -
"Financial Statements", Part I - Item 2 - "Management's Discussion and Analysis
of Financial Conditions and Results of Operations" and Exhibit 27 - "Financial
Data Schedule" have been amended to reflect the restatement. The remaining
information in this amended Form 10-Q has not been updated to reflect any
changes in information that may have occurred subsequent to the date of the
reporting period to which the Form 10-Q relates.
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DSI TOYS, INC.
Consolidated Balance Sheet
(Restated)
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
1999 1999
------------ ------------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash ........................................................ $ 20,076 $ 554,197
Restricted cash ............................................. 150,000 150,000
Accounts receivable, net .................................... 1,066,765 1,069,725
Inventories ................................................. 3,973,206 4,207,704
Prepaid expenses ............................................ 1,791,053 1,503,970
Deferred income taxes ....................................... 801,000 801,000
------------ ------------
Total current assets ................................... 7,802,100 8,286,596
Property and equipment, net ........................................ 1,773,917 1,642,672
Deferred income taxes .............................................. 1,307,281 1,117,000
Other assets ....................................................... 514,398 364,511
------------ ------------
$ 11,397,696 $ 11,410,779
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities .................... $ 5,632,005 $ 6,799,290
Current portion of long-term debt ........................... 1,609,993 824,675
Income taxes payable ........................................ 227,004 271,920
------------ ------------
Total current liabilities .............................. 7,469,002 7,895,885
Long-term debt ..................................................... 2,254,094 2,540,522
Deferred income taxes .............................................. 113,789 113,000
------------ ------------
Total liabilities ...................................... 9,836,885 10,549,407
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, 6,566,038 shares outstanding . 87,190 87,190
Additional paid-in capital .................................. 17,647,472 21,162,568
Common stock warrants ....................................... 102,500 102,500
Accumulated other comprehensive income ...................... 12,020 14,296
Retained earnings ........................................... 1,657,125 2,155,410
------------ ------------
19,506,307 23,521,964
Less: treasury stock, 2,152,962 and 2,719,000 shares, at cost (17,945,496) (22,660,592)
------------ ------------
Total shareholders' equity ............................. 1,560,811 861,372
------------ ------------
$ 11,397,696 $ 11,410,779
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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DSI TOYS, INC.
Consolidated Statement of Operations
(Restated)
THREE MONTHS ENDED APRIL 30,
---------------------------
1999 1998
----------- -----------
(Unaudited)
Net sales ...................................... $ 3,927,695 $ 5,926,126
Costs of goods sold ............................ 2,859,191 4,513,607
----------- -----------
Gross profit ................................... 1,068,504 1,412,519
Selling, general and administrative expenses ... 1,699,898 2,275,575
----------- -----------
Operating loss ................................. (631,394) (863,056)
Interest expense ............................... 119,229 222,696
Other income ................................... (9,377) (11,372)
----------- -----------
Loss before income taxes ....................... (741,246) (1,074,380)
Benefit from income taxes ...................... (242,961) (362,890)
----------- -----------
Net Loss ....................................... $ (498,285) $ (711,490)
=========== ===========
BASIC EARNINGS PER SHARE
Loss per share ............................. $ (0.08) $ (0.12)
=========== ===========
Weighted average shares outstanding ........ 6,095,400 6,000,000
=========== ===========
DILUTED EARNINGS PER SHARE
Loss per share ............................. $ (0.08) $ (0.12)
=========== ===========
Weighted average shares outstanding ........ 6,095,400 6,000,000
=========== ===========
See accompanying notes to consolidated financial statements.
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DSI TOYS, INC.
Consolidated Statement of Cash Flows
(Restated)
<TABLE>
<CAPTION>
THREE MONTHS ENDED APRIL 30,
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................. $ (498,285) $ (711,490)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation ........................................... 108,571 105,289
Amortization and write-off of
debt discount and issuance costs .................... 10,036 --
Provision for doubtful accounts ........................ 4,420 2,848
Gain on sale of equipment .............................. (988) --
Deferred income taxes .................................. (189,492) (343,799)
Changes in assets and liabilities:
Accounts receivable ................................. (1,462) 4,912,925
Inventories ......................................... 234,498 1,084,418
Income taxes receivable/payable ..................... (44,916) 21,482
Prepaid expenses .................................... (287,083) (532,196)
Accounts payable and accrued liabilities ............ (1,167,284) (1,922,539)
----------- -----------
Net cash provided (used) by operating activities . (1,831,985) 2,616,938
Cash flows from investing activities:
Capital expenditures ...................................... (242,614) (237,286)
Proceeds from sale of equipment ........................... 3,787 --
(Increase) decrease in other assets ....................... (74,490) (48,244)
----------- -----------
Net cash used in investing activities ............ (313,317) (285,530)
Cash flows from financing activities:
Net borrowings (repayments) under revolving lines of credit 474,521 (2,402,990)
Net borrowings (repayments) on long-term debt ............. 24,368 (639)
Proceeds from issuance of common stock .................... 1,200,000 --
Debt issue costs .......................................... (85,433) --
----------- -----------
Net cash provided (used) by financing activities . 1,613,456 (2,403,629)
Effect of exchange rate changes on cash ....................... (2,275) (5,386)
----------- -----------
Net decrease in cash .......................................... (534,121) (77,607)
Cash and cash equivalents, beginning of period ................ 554,197 383,690
----------- -----------
Cash and cash equivalents, end of period ...................... $ 20,076 $ 306,083
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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DSI TOYS, INC.
Consolidated Statement of Shareholders' Equity
(UNAUDITED)
(RESTATED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------- PAID-IN COMPREHENSIVE RETAINED TREASURY
SHARES AMOUNT CAPITAL WARRANTS INCOME EARNINGS STOCK TOTAL
--------- -------- ------------ --------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1998 8,719,000 $ 87,190 $ 21,162,568 $ 102,500 $ 29,187 $ 3,159,252 $ (22,660,592) $ 1,880,105
Comprehensive loss:
Net loss (1,003,842) (1,003,842)
Foreign currency
translation adjustments,
net of tax (14,891) (14,891)
-----------
Comprehensive loss (1,018,733)
--------- -------- ------------ --------- ------------- ----------- ------------- -----------
Balance, January 31, 1999 8,719,000 87,190 21,162,568 102,500 14,296 2,155,410 (22,660,592) 861,372
Issuance 566,038 common
shares (3,515,096) 4,715,096 1,200,000
Comprehensive loss:
Net loss (498,285) (498,285)
Foreign currency
translation adjustments,
net of tax (2,276) (2,276)
-----------
Comprehensive loss (500,561)
---------------------------------------------------------------------------------------------------
Balance, April 30, 1999 8,719,000 $ 87,190 $ 17,647,472 $ 102,500 $ 12,020 $ 1,657,125 $ (17,945,496) $ 1,560,811
========= ======== ============ ========= ============= =========== ============= ===========
</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 of DSI Toys,
Inc. and its wholly-owned subsidiary (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and 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 / A for the year ended January 31, 1999.
In the opinion of the Company's management, all adjustments necessary for a
fair presentation of the results of operations for all periods reported have
been included. Such adjustments consist only of normal recurring items.
The results of operations for the three months ended April 30, 1999 are not
necessarily indicative of the results expected for the full year ending January
31, 2000 (effective December 31, 1999 the Company will change its fiscal year
end from January 31 to a calendar year end).
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
APRIL 30, JANUARY 31,
1999 1999
----------- -----------
Trade receivables ......................... $ 2,364,220 $ 2,984,619
Provisions for:
Discounts, markdowns and
return of defective goods .......... (1,169,361) (1,791,436)
Doubtful accounts ........................ (128,094) (123,458)
----------- -----------
Accounts receivable, net .................. $ 1,066,765 $ 1,069,725
=========== ===========
3. SEGMENT INFORMATION
Financial information for the three months ended April 30, 1999 and 1998
is as follows:
UNITED STATES HONG KONG CONSOLIDATED
----------- ----------- -----------
Three months ended April 30, 1999:
Net sales ................... 2,053,675 1,874,020 3,927,695
Operating loss .............. (400,378) (231,016) (631,394)
Total assets at April 30, 1999 8,331,791 3,065,905 11,397,696
Three months ended April 30, 1998:
Net sales .................... 3,199,664 2,726,462 5,926,126
Operating loss ............... 843,702 (19,354) (863,056)
Total assets at April 30, 1998 11,101,709 3,765,345 14,867,054
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4. RESTATEMENT OF FINANCIALS
The Company has restated previously reported financial results for all
periods presented herein to give effect to expensing of previously capitalized
split-dollar life insurance premium costs. All disclosures related to the
periods presented have been amended, as appropriate, to reflect the restatement
and are summarized as follows:
THREE MONTHS ENDED APRIL 30,
--------------------------------
1999 1998
------------- -------------
Selling, general and
Administrative expenses
As reported ............................ $ 1,633,544 $ 2,209,222
As restated ............................ $ 1,699,898 $ 2,275,575
Net income/(loss)
As reported ............................ $ (431,931) $ (645,137)
As restated ............................ $ (498,285) $ (711,490)
Basic earnings
(loss) per share
As reported ............................ $ (0.07) $ (0.11)
As restated ............................ $ (0.08) $ (0.12)
Diluted earnings
(loss) per share
As reported ............................ $ (0.07) $ (0.11)
As restated ............................ $ (0.08) $ (0.12)
The cumulative effect at January 31, 1998 was to reduce retained earnings
by $1,278,400.
As a result of the restatement of its financial statements as of April 30,
1999, the Company was not in compliance with a certain covenant under the
Revolver. However, as of July 31, 1999 and the date of the restated financial
statements herein, the Company was again in compliance with such covenant under
the Revolver. Sunrock Capital Corp. has executed and delivered a written waiver
of this covenant violation to the Company.
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<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, BUT ARE NOT LIMITED TO, CHANGING CONSUMER
PREFERENCES, LACK OF SUCCESS OF NEW PRODUCTS, LOSS OF THE COMPANY'S CUSTOMERS,
COMPETITION, AND OTHER FACTORS DISCUSSED IN THIS REPORT AND FROM TIME TO TIME IN
THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE
COMPANY'S ANNUAL REPORT ON FORM 10-K / A FOR THE FISCAL YEAR ENDED JANUARY 31,
1999.
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 1999 IS A REFERENCE TO THE PERIOD ENDING JANUARY 31, 2000
[EFFECTIVE DECEMBER 31, 1999, THE COMPANY WILL CHANGE ITS FISCAL YEAR END FROM
JANUARY 31 TO A CALENDAR YEAR END]).
GENERAL
The Company designs, develops, markets and distributes toys and children's
consumer electronics. Core product categories are (i) juvenile audio products,
including Tech-Link(TM) and Digi-Tech(TM) walkie-talkies, pre-teen audio
products and Kawasaki(R) musical toys; (ii) girls' toys, including dolls, play
sets and accessories; and (iii) boys' toys, including Kawasaki(R) and Burnin'
Thunder(TM) radio control vehicles, BlockMen(TM) construction sets 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.
On April 15, 1999, the Company entered into a Stock Purchase and Sale
Agreement (the "Stock Purchase Agreement") with MVII, LLC, a California limited
liability company controlled by E. Thomas Martin ("MVII"). Pursuant to the Stock
Purchase Agreement, MVII purchased 566,038 shares of Common Stock, par value
$.01 per share (the "Common Stock"), of the Company from the Company for $1.2
million on April 15, 1999, and purchased an additional 1,792,453 shares of
Common Stock from the Company for $3.8 million on June 1, 1999. Also, pursuant
to the Stock Purchase Agreement, on April 21, 1999, MVII commenced a tender
offer for 1.6 million shares of the outstanding Common Stock at $4.38 per share
net to the seller in cash (the "Offer"). On May 26, 1999, MVII accepted for
payment 1.6 million shares that were validly tendered and not withdrawn in the
Offer by the Company's shareholders. The Stock Purchase and Sale Agreement and
the transactions contemplated thereby were approved by the Company's
shareholders at the annual meeting of shareholders held on May 24, 1999.
As a result of the transactions consummated pursuant to the Stock Purchase
Agreement, MVII has made a total investment in the Company's Common Stock of $12
million. Of that $12 million, $5 million was paid by MVII directly to the
Company for Common Stock. MVII currently is the record owner of approximately
47% of the Company's outstanding shares of Common Stock. When MVII's record
ownership is combined with MVII's rights under the Shareholders' and Voting
Agreement dated April 15, 1999, by and among the Company, MVII, Messrs. Davis,
Conrad, Matlock and Smith and a limited partnership controlled by Mr. Crosby
(the "Voting Agreement"), executed in connection with the Stock Purchase
Agreement, MVII is the beneficial owner of approximately 61% of the Company's
outstanding shares of Common Stock. Furthermore, the Voting Agreement entitles
MVII to nominate all but two of the members of the Company's board of directors.
On June 1, 1999, DSI accepted the resignations of Messrs. Crosby, Smith, Conrad
and Neitz from its Board. Such vacancies have been filled by MVII's nominees,
namely Messrs. E. Thomas Martin, Robert L. Burke, Joseph S. Whitaker, and John
McSorley. At the Company's annual meeting of shareholders on May 24, 1999, the
Company's shareholders approved such appointments. On June 1, 1999, E. Thomas
Martin was appointed by the Company to serve as Chairman of the Board.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain income
and expense items expressed as a percentage of net sales:
PERCENT OF NET SALES
THREE MONTHS ENDED
APRIL 30,
------------------
1999 1998
------ ------
Net sales .............................................. 100.0% 100.0%
Costs of goods sold .................................... 72.8 76.2
------ ------
Gross profit ........................................... 27.2 23.8
Selling, general and administrative
expenses ............................................... 43.3 38.4
------ ------
Operating (loss) profit ................................ (16.1) (14.6)
Interest expense ....................................... 3.0 3.8
Other income ........................................... (.2) (.2)
------ ------
(Loss) Income before income taxes ...................... (18.9) (18.2)
Benefit from income taxes .............................. (6.2) (6.1)
------ ------
Net (Loss) Income ...................................... (12.7)% (12.1)%
====== ======
THREE MONTHS ENDED APRIL 30, 1999 COMPARED TO THE THREE MONTHS ENDED APRIL 30,
1998
NET SALES. Net sales for the three months ended April 30, 1999 decreased
$2.0 million, or 33.7%, to $3.9 million, from $5.9 million in the comparable
period in 1998. This decrease was due primarily to decreased sales of juvenile
audio products and girls' toys, partially offset by increased sales of boys'
toys.
Net sales of juvenile audio products decreased $1.3 million, or 38.0%, to
$2.1 million during the first quarter ended April 30, 1999, from $3.4 million in
the comparable period in 1998. This decrease was due primarily to decreased
sales in walkie-talkies and electronic musical toys, reflecting the maturity of
the line and the addition of new competitors entering the marketplace. Net sales
of girls' toys decreased $696,000, or 65.0%, to $377,000 during the first
quarter ended April 30, 1999, from $1.1 million in the comparable period in
1998. This decrease was due primarily to close-out sales of dolls during first
quarter 1998. Net sales of boys' toys increased $296,000, or 41.0%, to $1.0
million in the first quarter ended April 30, 1999, from $721,000 in the
comparable period in 1998. The increase was due primarily to the expansion of
the BlockMen(TM) construction sets with the new Military Desert and Space
Squad(TM) themes reflecting BlockMen's continued strength in the marketplace.
The radio-controlled Kawasaki(R) Ninja(R) motorcycle product line was also a
contributing factor to the increase. Net sales of products in other categories
decreased $302,000, or 41.9%, to $418,000 during the first quarter ended April
30, 1999, from $720,000 in the comparable period in 1998.
International net sales for the three months ended April 30, 1999
increased $75,000, or 10.6%, to $787,000, from $712,000 in the comparable period
in 1998. The increase was due primarily to increased sales and marketing efforts
in France, Australia, and Denmark.
GROSS PROFIT. Gross profit decreased 24.4% to $1.1million for the first
quarter ended April 30, 1999, from $1.4 million in the comparable period in
1998. Gross profit as a percentage of net sales increased to 27.2% in the first
quarter ended April 30, 1999, from 23.8% in the first quarter of fiscal 1998.
Such increase was primarily due to the Company's final closeout of dolls
inventory in first quarter 1998 which were at lower margin percentage.
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<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $576,000, or 25.3%, to $1.7 million in the
first quarter ended April 30, 1999, from $2.3 million in the first quarter of
fiscal 1998. The decrease resulted primarily from discounts negotiated from an
existing vendor.
INTEREST EXPENSE. Interest expense during the first quarter ended April
30, 1999 decreased $103,000, or 46.5%, to $119,000 from $223,000 in the similar
period in 1998. This was primarily due to a reduction of inventory and
receivables carrying costs.
OTHER INCOME. Other income decreased $2,000, or 17.5% to $9,000 in the
first quarter ended April 30, 1999, from $11,000 in the comparable period in
1998, reflecting the effect of changes in levels of short-term investments and
foreign exchange translation.
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.
For the three months ended April 30, 1999, the Company's operating
activities used net cash of $1.8million, consisting primarily of decreases in
accounts payable and accrued liabilities, and increases in prepaid expenses,
partially offset by the decreases in inventories. Net cash used in investing
activities was $313,000 and was primarily the result of capital expenditures.
Net cash provided in financing activities was $1.6 million and represented net
borrowing under revolving lines of credit and proceeds of $1.2 million from the
sale of Common Stock. The Company's working capital at April 30, 1999, was
$333,000 and unrestricted cash was $20,000, and the Company's working capital at
April 30, 1998, was $(2.5) million and unrestricted cash was $306,000. On June
1, 1999, the Company received $3.8 million from the sale of Common Stock to
MVII.
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
credit facilities secured principally by accounts receivable and inventory. The
Company currently has a line of credit facility with State Street Bank and Trust
Company - Hong Kong Branch (the "Hong Kong Credit Facility") and a revolving
credit facility with Sunrock Capital Corp. (the "Revolver"). At June 7, 1999 the
Company had a short-term loan balance of $2.0 million and had additional
borrowing capacity of an aggregate of $4.1 million under the Revolver and the
Hong Kong Credit Facility.
The Company's operating cash requirements for the remainder of fiscal 1999
include payments totaling approximately $2.0 million related to television
advertisements run in November and December 1997. The Company has projected
approximately $900,000 for capital expenditures, consisting primarily of
purchases of tools and molds for fiscal 1999.
In addition, the Company is obligated to make future minimum royalty
payments under certain of its license agreements. As of April 30, 1999, the
Company was required to pay guaranteed royalties under these licenses of
$173,000, $227,000, $222,000, and $150,000 per year from 1999 through year 2002.
As a result of the restatement of its financial statements as of April 30,
1999, the Company was not in compliance with a certain covenant under the
Revolver. However, as of July 31, 1999 and the date of the restated financial
statements herein, the Company was again in compliance with such covenant under
the Revolver. Sunrock Capital Corp. has executed and delivered a written waiver
of this covenant violation to the Company.
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 retail 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
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<PAGE>
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 1998, 80% 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.
YEAR 2000 COMPLIANCE
Many existing computer systems and programs process transactions using two
digits rather than four digits for the year of a transaction. Unless the
hardware and/or the software has been modified, a significant number of those
computer systems and programs may process a transaction with a date of the year
"2000" as the year "1900", which could cause the system or the program to fail
or create erroneous results before, on or after January 1, 2000 (the "Y2K
Issue").
The Company's principal computer systems consist of: (i) management
information software ("MIS") for accounts receivable, general ledger, payables,
order entry, sales reporting, inventory tracking, product distribution, and
production scheduling; (ii) electronic data interchange ("EDI") for
order-taking, invoicing and the like between the Company and its major
customers; and (iii) local area network and personal computer operating systems.
The MIS systems at the Company's Hong Kong subsidiary have been upgraded
and successfully tested to be Y2K compliant. The MIS systems at the Company's
U.S. headquarters are in the process of being upgraded, replaced and tested. To
date, the Company has completed approximately 90% of its upgrades and
replacements and approximately 60% of its testing. Completion of all remediation
and testing of the MIS systems is expected to be completed by September 30,
1999.
The Company is currently reprogramming, or replacing, and testing the EDI
software. The Company is communicating with its customers to evaluate their EDI
Y2K compliance. The Company believes that over the upcoming months its major
customers plan to test their EDI systems for internal, intermediary and supplier
Y2K compliance. The Company would be unable to receive and invoice orders from a
customer though EDI if the customer or its EDI intermediaries were not Y2K
compliant. Although the Company does not transmit electronic orders to its
independent manufacturers, delays or non-delivery of goods to the Company could
arise from Y2K Issues affecting their businesses and presently the Company is
communicating with its independent manufacturers to evaluate their Y2K
compliance. The effect of non-compliance by independent manufacturers and other
third parties is not determinable.
The Company's local area network operating system will require upgrades
according to vendors, but such upgrades are available at minimal cost. The
Company also intends to replace personal computers and software found not to be
Y2K compliant. The Company anticipates that these replacements will be completed
by September 30, 1999.
The Company has incurred approximately $12,000 in expenses in connection
with making its computer systems and programs Y2K compliant. The Company expects
to incur additional Y2K costs of approximately $25,000 during fiscal 1999. The
Company is utilizing both internal and external sources to address Y2K Issues,
and the Company anticipates Y2K compliance by September 30, 1999. All historical
and future costs have been and will continue to be funded out of existing cash
and cash flow from operations.
The failure to successfully address a material Y2K Issue could result in
an interruption in, or failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Particularly because
of the uncertainty of the Y2K readiness of customers, suppliers and contractors,
the Company is unable to assess at this time whether the consequences of the Y2K
Issue will have a material impact on the Company's results of operations,
liquidity or financial condition. Notwithstanding the above, the most likely
impact would be a reduced level of activity in the latter part of the last
quarter of fiscal 1999 and the early part of the first quarter of fiscal 2000.
The Company currently has not developed a detailed contingency plan. The
Company assesses its Y2K status regularly and will begin to develop
comprehensive contingency plans if the Company believes it will not
-10-
<PAGE>
complete the Y2K project in a timely manner. If the Company's Y2K project is not
completed on a timely basis, or if its major customers or suppliers fail to
address all of the Y2K Issues, the Company believes it could have a material
adverse impact on the Company's operations.
The cost of Y2K compliance and the referenced completion dates are based
on management's best estimates and may be updated as additional information
becomes available. Reference is made to the first paragraph of Part I of this
report, which addresses forward-looking statements made by the Company.
-11-
<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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) On May 24, 1999, at the Company's annual meeting of shareholders,
the shareholders approved an amendment to the Company's Amended and
Restated Articles of Incorporation to increase the number of authorized
shares of Common Stock from 20,000,000 shares to 35,000,000 shares. Such
amendment was filed with the Texas Secretary of State on May 28, 1999. The
rights of the holders of Common Stock were not modified by the amendment.
However, the Company now has additional authorized shares for issuance
which, if it elects to issue in the future, could result in a decrease in
the percentage ownership of the Company by the current holders of the
Company's Common Stock.
(b) Pursuant to the Stock Purchase Agreement, MVII purchased 566,038
shares of Common Stock from the Company for $1.2 million on April 15,
1999, and purchased an additional 1,792,453 shares of Common Stock from
the Company for $3.8 million on June 1, 1999, resulting in MVII purchasing
an aggregate of 2,358,491 shares of Common Stock from the Company for $5
million. Also, pursuant to the Stock Purchase Agreement, on April 21,
1999, MVII commenced a tender offer for 1.6 million shares of the
outstanding Common Stock of the Company at $4.38 per share net to the
seller in cash. On May 26, 1999, MVII accepted for payment 1.6 million
shares validly tendered and not withdrawn in the Offer by the Company's
shareholders. MVII used funds from working capital obtained from capital
contributions by its members to consummate all of the transactions
contemplated by the Stock Purchase Agreement, including the Offer. The
proceeds received by the Company from the stock purchases made by MVII
under the Stock Purchase Agreement have been used by the Company for the
repayment of indebtedness and general operating expenses.
The Stock Purchase Agreement, including the stock sales by the
Company to MVII thereunder, constituted a privately negotiated transaction
between the Company and MVII. MVII was organized in connection with the
transactions contemplated by the Stock Purchase Agreement. The sales of
Common Stock to MVII pursuant to the Stock Purchase Agreement were made by
the Company in reliance on the exemption from registration set forth in
Section 4(2) of the Securities Act of 1933, as amended. The Company
believes the Section 4(2) exemption from registration was available based
upon the established criteria for effecting a private offering by virtue
of the following facts, among others: (i) MVII had access to the type of
information that would be included in a registration statement and
conducted a comprehensive due diligence review in connection with the
Stock Purchase Agreement and the transactions thereunder, (ii) MVII's
principals have adequate financial means to bear the risk of MVII's
investment in the Company and can be described as sophisticated, (iii)
MVII was the only offeree in the transaction, (iv) MVII made
representations that it acquired the Common Stock for investment and not
with a view toward distribution, (v) the Stock Purchase Agreement contains
restrictions on resale of the Common Stock sold by the Company to MVII,
and (vi) no underwriters were involved nor were any underwriters'
commissions paid in connection with the transactions.
-12-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on May 24, 1999. At
that meeting, the Shareholders were presented with proposals with respect to (i)
the election of directors whose three-year terms expire in 2002, (ii) the
approval and ratification of the Stock Purchase Agreement and the transactions
contemplated thereunder, (iii) the approval of the amendment to the Company's
Amended and Restated Articles of Incorporation authorizing an increase in the
number of authorized shares of Common Stock, (iv) the approval and ratification
of the appointment of four (4) directors nominated by MVII to fill vacancies on
the board as a result of the consummation of the transactions contemplated by
the Stock Purchase Agreement, and (v) the adoption and approval of a proposal to
amend the Company's Stock Option Plan to increase from 600,000 to 900,000 the
aggregate number of shares of the Company Stock reserved for issuance under the
Plan and related conforming changes. The results of the vote of the shareholders
at its annual meeting are set forth below with respect to each of the proposals
presented.
(i) Messrs. Jack R. Crosby and Barry B. Conrad were the nominees for the class
of directors whose three-year terms will expire in 2002. Shares of the
Company's Common Stock with respect to the election of such directors were
voted as follows: with respect to Mr. Crosby, the number of votes that
were cast for his election were 3,936,747 and the number of votes withheld
were 5,100; with respect to Mr. Conrad, the number of votes that were cast
for his election were 3,936,747 and the number of votes withheld were
5,100.
Messrs. Crosby and Conrad were elected for terms expiring on the date of
the annual meeting of shareholders in 2002. Messrs. Crosby and Conrad
subsequently resigned from their board positions on June 1, 1999. Messrs.
Matlock and Davis, current members of the Board, have terms expiring on
the date of the annual meeting of shareholders in 2000. As of the annual
meeting of shareholders held on May 24, 1999, Messrs. Neitz and Smith had
terms expiring in 2001. However, they resigned from their board positions
on June 1, 1999. See discussion in Item 5 regarding the Company's current
Board composition.
(ii) With respect to the proposal to approve and ratify the Stock Purchase
Agreement and the transactions contemplated thereunder, shares of the
Company's Common Stock were voted as follows: the number of votes cast for
such proposal was 3,887,747, the number of votes cast against such
proposal was 42,100, and the number of votes abstaining was 12,000.
(iii) With respect to the proposal to approve an amendment to the Company's
Amended and Restated Articles of Incorporation that would increase the
number of authorized shares of Common Stock of the Company from 20,000,000
shares to 35,000,000 shares, shares of the Company's Common Stock were
voted as follows: the number of votes cast for such proposal was
3,770,358, the number of votes cast against such proposal was 156,400, and
the number of votes abstaining was 15,089.
(iv) With respect to the proposal to approve and ratify the appointment of
Messrs. E. Thomas Martin, Robert L. Burke, Joseph S. Whitaker and John
McSorley as directors by the remaining directors to fill certain vacancies
on the Board in connection with the Stock Purchase Agreement, shares of
the Company's Common Stock were voted as follows: the number of votes cast
for such proposal was 3,880,031, the number of votes cast against such
proposal was 41,900, and the number of votes abstaining was 19,916.
(v) With respect to the proposal to adopt and approve a proposal to amend the
Company's Stock Option Plan (a) to increase from 600,000 to 900,000 the
aggregate number of shares of Common Stock of the Company reserved for
issuance under the Plan and (b) to make certain conforming changes, shares
of the Company's Common Stock were voted as follows: the number of votes
cast for such proposal was 3,754,131, the number of votes cast against was
168,600, and the number of votes abstaining was 19,116.
-13-
<PAGE>
ITEM 5. OTHER INFORMATION
Pursuant to the terms of the Stock Purchase Agreement, MVII purchased an
aggregate of 2,358,491 shares of Common Stock from the Company for an aggregate
purchase price of $5 million (at $2.12 per share). Such shares were purchased in
two transactions; the first transaction occurred on April 15, 1999, pursuant to
which MVII purchased 566,038 shares of Common Stock from the Company. The second
transaction occurred on June 1, 1999, pursuant to which MVII purchased 1,792,453
shares of Common Stock from the Company. Furthermore, pursuant to the terms of
the Stock Purchase Agreement, on April 21, 1999, MVII commenced a tender offer
for 1.6 million shares of Common Stock at $4.38 per share net to the seller in
cash from the Company's shareholders. On May 26, 1999, MVII accepted for
purchase 1.6 million shares of Common Stock that were validly tendered and not
withdrawn in the Offer by the Company's shareholders. MVII used working capital
obtained from capital contributions by its members to consummate the
transactions contemplated by the Stock Purchase Agreement, including the Offer.
In connection with the Stock Purchase Agreement, the Voting Agreement was
entered into by and among the Company, MVII, and each of Messrs. Davis, Conrad,
Matlock, Smith and Rust Capital, Ltd., a limited partnership controlled by Mr.
Crosby (each, a "Management Shareholder" and collectively, the "Management
Shareholders"). Pursuant to the terms of the Voting Agreement, MVII has the
right to nominate all but two of the directors constituting the board of
directors of the Company, with the Management Shareholders, as a group, having
the right to nominate the remaining two directors. The parties to the Voting
Agreement are contractually bound to vote all shares of Common Stock over which
they have dispositive power in favor of such nominees. Each of Messrs. Crosby,
Smith, Conrad and Neitz resigned from their board positions effective June 1,
1999, as contemplated by the Stock Purchase Agreement, and, pursuant to the
terms of the Voting Agreement, MVII's nominees, namely Messrs. E. Thomas Martin,
Robert L. Burke, Joseph S. Whitaker and John McSorley were appointed to fill
such vacancies, which appointments have been ratified by the Company's
shareholders.
In connection with the Voting Agreement, each of the Management
Shareholders has executed an Irrevocable Proxy appointing MVII as proxy and
authorizing MVII to vote such Management Shareholder's shares of Common Stock
for the election of directors in accordance with the Voting Agreement, as well
as the right to vote on other matters subject to a shareholders' vote (subject
to certain exceptions). As an additional matter, the Voting Agreement grants the
parties thereto certain rights of first refusal in connection with the sale of
Common Stock by such parties and grants the Management Shareholders certain
co-sale rights in connection with sales of Common Stock made by MVII under
certain circumstances.
As a result of the share purchases made under the Stock Purchase
Agreement, including the Offer, and the shares subject to the Voting Agreement,
MVII currently beneficially owns 5,139,099 shares of Common Stock, representing
approximately 61% of the outstanding shares of Common Stock of the Company. As a
result of such transactions, MVII assumed effective control of the Company as of
June 1, 1999, and continues to control the Company through the present.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The information required by this Item 6(a) and by Item 7 of Form 8-K 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.
-14-
<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: December 13, 1999 /s/ MICHAEL J. LYDEN
------------------------------------------------
Michael J. Lyden
President and Chief Executive Officer
Dated: December 13, 1999 By: /s/ ROBERT L. WEISGARBER
------------------------------------------------
Robert L. Weisgarber
Chief Financial Officer
(Principal Financial and Accounting Officer)
-15-
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
------- -------
3.1 Amended and Restated Articles of Incorporation of the Company (filed as
Exhibit 3.1 to the Registration Statement on Form S-1, File No.
333-23961), incorporated herein by reference.
3.1.1 Amendment to Amended and Restated Articles of Incorporation of the
Company.
3.2 Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 to the
Registration Statement on Form S-1, File No. 333-23961), incorporated
herein by reference.
3.3 Amendment to Amended and Restated Bylaws of the Company (filed as Exhibit
3.3 to the Registration Statement on Form S-1, File No. 333-23961),
incorporated herein by reference.
10.30 Stock Purchase and Sale Agreement, dated April 15, 1999, between the
Company and MVII (filed as Exhibit 99.2 to the Schedule 14D-9 filed by the
Company on April 22, 1999), incorporated herein by reference.
10.31 Shareholders' and Voting Agreement dated April 15, 1999, by and among the
Company, MVII, certain management shareholders of the Company and a
limited partnership controlled by a management shareholder (filed as
Exhibit 99.4 to the Schedule 14D-9 filed by the Company on April 22,
1999), incorporated herein by reference.
10.32 Registration Rights Agreement dated April 15, 1999, by and among the
Company, MVII, certain management shareholders of the Company and a
limited partnership controlled by a management shareholder (filed as
Exhibit 99.5 to the Schedule 14D-9 filed by the Company on April 22,
1999), incorporated herein by reference.
10.33 Irrevocable Proxy dated April 15, 1999, between MVII and Conrad.
10.34 Irrevocable Proxy dated April 15, 1999, between MVII and Davis.
10.35 Irrevocable Proxy dated April 15, 1999, between MVII and Matlock.
10.36 Irrevocable Proxy dated April 15, 1999, between MVII and Rust Capital.
10.37 Irrevocable Proxy dated April 15, 1999, between MVII and Smith.
10.38 Consulting Agreement dated June 1, 1999, between the Company and Davis.
10.39 Amendment dated May 5, 1999, to Loan and Security Agreement, dated as of
February 2, 1999, by and between Sunrock Capital Corp. and the Company.
27 Financial Data Schedule
<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 three months ended April 30, 1999
and is qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> APR-30-1999
<CASH> 20,076
<SECURITIES> 0
<RECEIVABLES> 2,364,220
<ALLOWANCES> (1,297,455)
<INVENTORY> 3,973,206
<CURRENT-ASSETS> 7,802,100
<PP&E> 5,946,308
<DEPRECIATION> (4,172,391)
<TOTAL-ASSETS> 11,397,696
<CURRENT-LIABILITIES> 7,469,002
<BONDS> 0
0
0
<COMMON> 87,190
<OTHER-SE> 1,473,621
<TOTAL-LIABILITY-AND-EQUITY> 11,397,696
<SALES> 3,927,695
<TOTAL-REVENUES> 3,927,695
<CGS> 2,859,191
<TOTAL-COSTS> 1,699,898
<OTHER-EXPENSES> 9,377
<LOSS-PROVISION> 4,420
<INTEREST-EXPENSE> 119,229
<INCOME-PRETAX> (741,246)
<INCOME-TAX> (242,961)
<INCOME-CONTINUING> (498,285)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (498,285)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
