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 MARCH 31, 2000
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 May 10, 2000, 9,066,365 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 March 31, 2000 and December 31, 1999 1
Consolidated Statement of Operations for the Three Months Ended
March 31, 2000 and April 30, 1999................................. 2
Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 2000 and April 30, 1999................................. 3
Consolidated Statement of Shareholders' Equity....................... 5
Notes to Consolidated Financial Statements........................... 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................ 8
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.................................................... 12
Item 2. CHANGE IN SECURITIES AND USE OF PROCEEDS ............................ 12
Item 5. OTHER INFORMATION.................................................... 12
Item 6. EXHIBITS AND REPORTS ON FORM 8-K..................................... 13
Signatures................................................................... 14
i
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DSI TOYS, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash ........................................ $ 276,146 $ 478,970
Restricted cash ............................. 150,000 150,000
Accounts receivable, net .................... 1,142,749 3,408,059
Inventories ................................. 5,583,351 5,695,240
Prepaid expenses ............................ 1,450,284 1,383,644
Deferred income taxes ....................... 1,032,347 314,000
------------ ------------
Total current assets ................... 9,634,877 11,429,913
Property and equipment, net .................... 2,732,243 2,000,215
Deferred income taxes .......................... 902,000 902,000
Other assets ................................... 895,337 695,237
Goodwill, net .................................. 10,135,514
------------ ------------
$ 24,299,971 $ 15,027,365
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities .... $ 4,896,338 $ 3,769,286
Current portion of long-term debt ........... 660,899 1,313,787
Current portion of long-term debt due to a
related party ............................. 1,174,485
Income taxes payable ........................ 335,088 428,727
------------ ------------
Total current liabilities .............. 7,066,810 5,511,800
Long-term debt ................................. 4,082,851 2,393,236
Long-term debt due to a related party .......... 5,515,515
Deferred income taxes .......................... 133,340 133,340
------------ ------------
Total liabilities ...................... 16,798,516 8,038,376
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000
shares authorized,none issued or outstanding
Common stock, $.01 par value, 35,000,000
shares authorized
9,066,365 and 8,719,000 shares issued;
9,066,365 and 8,533,157 shares authorized... 90,664 87,190
Additional paid-in capital .................. 5,173,465 4,934,919
Common stock warrants ....................... 102,500 102,500
Accumulated other comprehensive loss ........ (24,662) (12,626)
Retained earnings ........................... 2,159,488 3,436,401
------------ ------------
7,501,455 8,548,384
Less: Treasury stock, 185,843 shares,
at cost............................... (1,559,395)
------------ ------------
Total shareholders' equity ............. 7,501,455 6,988,989
------------ ------------
$ 24,299,971 $ 15,027,365
============ ============
See accompanying notes to consolidated financial statements.
1
<PAGE>
DSI TOYS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
------------------------------
MARCH 31, APRIL 30,
2000 1999
----------- -----------
Net sales ................................ $ 6,914,462 $ 3,927,695
Cost of goods sold ....................... 5,309,299 2,859,191
----------- -----------
Gross profit ............................. 1,605,163 1,068,504
Selling, general and
administrative expenses ................ 3,340,630 1,699,898
----------- -----------
Operating loss ........................... (1,735,467) (631,394)
Interest expense ......................... (269,983) (119,229)
Other income ............................. 10,191 9,377
----------- -----------
Loss before income taxes ................. (1,995,260) (741,246)
Benefit from income taxes ................ 718,347 242,961
----------- -----------
Net loss ................................. $(1,276,913) $ (498,285)
=========== ===========
BASIC EARNINGS PER SHARE
Loss per share ...................... $ (0.14) $ (0.08)
=========== ===========
Weighted average shares ............. 9,014,147 6,095,400
=========== ===========
DILUTED EARNINGS PER SHARE
Loss per share ...................... $ (0.14) $ (0.08)
=========== ===========
Weighted average shares
outstanding ....................... 9,014,147 6,095,400
=========== ===========
See accompanying notes to consolidated financial statements.
2
<PAGE>
DSI TOYS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
--------------------------
MARCH 31, APRIL 30,
2000 1999
----------- -----------
Cash flows from operating activities:
Net loss .................................... $(1,276,913) $ (498,285)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization ........... 393,964 108,571
Amortization and write-off of
debt discount and issuance costs ..... 8,514 10,036
Amortization of goodwill ................ 127,813
Provision for doubtful accounts ......... 35,355 4,420
Gain on sale of equipment ............... -- (988)
Deferred income taxes ................... (718,347) (189,492)
Changes in assets and liabilities, net
of effects of acquisition:
Accounts receivable .................. 3,153,146 (1,462)
Inventories .......................... 149,658 234,498
Income taxes (payable) ............... (93,639) (44,916)
Prepaid expenses ..................... (217,197) (287,083)
Accounts payable and accrued
liabilities ........................ (6,348,120) (1,167,284)
----------- -----------
Net cash (used) by operating
activities ...................... (4,785,766) (1,831,985)
Cash flows from investing activities:
Cash used for acquisition of Meritus ....... (884,034) --
Capital expenditures ....................... (377,262) (242,614)
Proceeds from sale of equipment ............ -- 3,787
Increase in other assets ................... (215,453) (74,490)
----------- -----------
Net cash used in investing
activities ...................... (1,476,749) (313,317)
Cash flows from financing activities:
Net borrowing under revolving lines of .... 1,689,615 474,521
Net payments on long-term debt ............. (652,888) 24,368
Borrowings of long-term debt due to a
related party............................... 5,000,000 --
Net proceeds from issuance of common stock.. -- 1,200,000
Debt and stock issue refunds (costs) ....... 35,000 (85,433)
----------- -----------
Net cash provided by financing
activities ...................... 6,071,727 1,613,456
Effect of exchange rate changes on cash .......... (12,036) (2,275)
----------- -----------
Net decrease in cash ............................. (202,824) (534,121)
Cash and cash equivalents, beginning of period ... 478,970 554,197
----------- -----------
Cash and cash equivalents, end of period ......... $ 276,146 $ 20,076
=========== ===========
See accompanying notes to consolidated financial statements.
3
<PAGE>
DSI TOYS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED
----------------------------
MARCH 31, APRIL 30,
2000 1999
------------ ------------
Supplemental disclosure of cash flow
Acquisition of Meritus:
Property, plant and equipment acquired ........ $ (748,730)
Accounts receivable and other assets acquired.. (838,564)
Liabilities assumed ........................... 7,475,172
Note payable issued to the Reilings ........... 1,690,000
Common stock issued
(including treasury shares).................. 1,801,415
Goodwill resulting from Meritus acquisition ... (10,263,327)
------------
Net cash paid for Meritus acquisition ......... $ (884,034)
============
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
DSI TOYS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------ PAID-IN COMPREHENSIVE RETAINED TREASURY
SHARES AMOUNT CAPITAL WARRANTS INCOME EARNINGS STOCK TOTALS
--------- ------- ------------ -------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1999 8,719,000 $87,190 $ 21,162,568 $102,500 $ 14,296 $ 2,155,410 $(22,660,592) $ 861,372
Comprehensive income:
Net income........... 1,280,991 1,280,991
Foreign currency
translation adj
net of tax ........ -- -- -- -- (26,922) -- -- (26,922)
-----------
Comprehensive income: . -- -- -- -- -- -- -- 1,254,069
Issuance of 2,458,491
common shares from
the treasury ...... -- -- (15,479,229) -- -- -- 20,479,229 5,000,000
Options exercised ..... -- -- (518,189) -- -- -- 621,968 103,779
Stock issuance cost ... -- -- (230,231) -- -- -- -- (230,231)
--------- ------- ------------ -------- ------------- ----------- ------------ -----------
Balance, December 31, 1999 8,719,000 87,190 4,934,919 102,500 (12,626) 3,436,401 (1,559,395) 6,988,989
Comprehensive loss:
Net loss............. (1,276,913) -- (1,276,913)
Foreign currency
translation adj ...
net of tax ........ -- -- -- -- (12,036) -- -- (12,036)
-----------
Comprehensive loss .... -- -- -- -- -- -- -- (1,288,949)
Issuance of 347,365
common shares and
185,843 shares from
the treasury ...... 347,365 3,474 238,546 -- -- -- 1,559,395 1,801,415
--------- ------- ------------ -------- ------------- ----------- ------------ -----------
Balance, March 31, 2000 .. 9,066,365 $90,664 $ 5,173,465 $102,500 $ (24,662) $ 2,159,488 -- $ 7,501,455
========= ======= ============ ======== ============= =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<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 subsidiaries (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 for the fiscal year ended December 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.
Management also believes that the Statement of Operations' three month
comparison of the calendar quarter ending March 31, 2000 to its prior year
fiscal quarter ending April 30, 1999 is not misleading. Recasting of the prior
year information to the calendar quarter ending March 31, 1999 would not be cost
effective and would not produce any materially different comparative operating
results.
The results of operations for the three months ended March 31, 2000 are not
necessarily indicative of the results expected for the full year ending December
31, 2000.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
Trade receivables ............................. $ 3,352,068 $ 5,405,587
Provisions for:
Discounts and markdowns ..................... (921,430) (728,910)
Return of defective goods ................... (1,117,889) (1,082,408)
Doubtful accounts ........................... (170,000) (186,210)
----------- ------------
Accounts receivable, net ...................... $ 1,142,749 $ 3,408,059
=========== ============
3. SEGMENT INFORMATION
Financial information for the three months ended March 31, 2000 and April
30, 1999 is as follows:
UNITED STATES HONG KONG CONSOLIDATED
------------- ----------- ------------
Three months ended March 31, 2000:
Net sales ..................... $ 3,022,320 $ 3,892,142 $ 6,914,462
Operating loss ................ (1,684,636) (50,831) (1,735,467)
Total assets at March 31, 2000 20,546,958 3,753,013 24,299,971
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
6
<PAGE>
4. BUSINESS COMBINATION
On January 7, 2000, the Company acquired by way of a merger all of the
issued and outstanding stock of Meritus Industries, Inc. ("Meritus") in exchange
for (i) 600,000 unregistered shares of the Company's common stock, less 66,792
shares of the Company's common stock, which shares are currently held by the
Company and payable to Walter and Susan Reiling ("the Reilings") upon
satisfaction of certain post-closing conditions as set forth in the Closing and
Holdback Agreement between the parties; (ii) $884,034 in cash; and (iii) the
Company's Subordinated Secured Promissory Note for $1,690,000 paid to the
Reilings, who were the sole shareholders of Meritus. The market value of the
shares issued was $1,801,415 and was satisfied by the issuance of 347,365 shares
of new stock and 185,843 shares in treasury stock. The note, bearing interest at
10.0375% per annum, requires quarterly principal and interest payments beginning
April 1, 2000, and matures on January 7, 2005. Contemporaneously with the
merger, the Company satisfied approximately $4.4 million of Meritus' debt.
The acquisition was accounted for utilizing the purchase method; therefore
the Company recorded the acquired assets at their estimated fair market value.
Goodwill generated by the transaction is being amortized over 20 years using the
straight-line method.
To facilitate the merger, the Company borrowed $5,000,000 from MVII, LLC
evidenced by a promissory note dated January 7, 2000. The note bears interest at
a rate of prime plus 2%, matures on July 1, 2004, and is subordinated to senior
debt of the Company. The proceeds from the note were used primarily to
facilitate the Company's merger with Meritus, including payment of the Meritus
debt discussed above.
PRO FORMA RESULTS OF OPERATIONS
Presented below is a pro forma statement of operations for the fiscal
quarter ending April 30, 1999. The pro forma reflects the combined operations of
the Company and Meritus as if the merger of the Company and Meritus occurred on
February 1, 1999.
<TABLE>
<CAPTION>
DSI MERITUS COMBINED
(UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- -----------
<S> <C> <C> <C>
Net sales ............................. $ 3,927,695 $ 1,356,960 $ 5,284,655
Net income ............................ (498,285) (729,645) (1,227,930)
Basic loss per share
Loss per share ...................... (.08) (.18)
=========== ===========
Weighted average shares outstanding . 6,095,400 6,628,608
=========== ===========
Diluted loss per share
Loss per share ...................... (.08) (.18)
=========== ===========
Weighted average shares outstanding . 6,095,400 6,628,608
=========== ===========
</TABLE>
7
<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 FOR THE FISCAL YEAR ENDING DECEMBER 31,
1999.
EXCEPT AS OTHERWISE INDICATED, REFERENCES TO THE "COMPANY" REFER TO DSI
TOYS, INC. AND ITS WHOLLY OWNED SUBSIDIARIES, DSI (HK) LIMITED, MERITUS
INDUSTRIES LIMITED, RSP PRODUCTS LIMITED, AND ELITE DOLLS LIMITED (COLLECTIVELY,
"DSI (HK)"). THE TERMS "FISCAL YEAR" AND "FISCAL" REFER TO THE COMPANY'S FISCAL
YEAR, WHICH IS THE YEAR ENDING DECEMBER 31 OF THE CALENDAR YEAR MENTIONED. THE
COMPANY CHANGED ITS FISCAL YEAR FROM A JANUARY 31 YEAR-END TO A DECEMBER 31
YEAR-END DURING 1999. THEREFORE, REFERENCES TO FISCAL YEARS 1998 AND PRIOR REFER
TO THE COMPANY'S FISCAL YEAR ENDED JANUARY 31 OF THE FOLLOWING CALENDAR YEAR
MENTIONED. ACCORDINGLY, A REFERENCE TO FISCAL 1998 IS A REFERENCE TO THE PERIOD
ENDING JANUARY 31, 1999. A REFERENCE TO FISCAL 1999 IS A REFERENCE TO THE ELEVEN
MONTH PERIOD ENDING DECEMBER 31, 1999.
GENERAL
The following discussion and analysis should be read in conjunction with
the financial statements and related notes contained elsewhere herein.
The Company designs, develops, markets and distributes toys and children's
consumer electronics. Core product categories are (i) juvenile audio products,
including walkie-talkies, pre-teen audio products and musical toys; (ii) girls'
toys, including dolls, play sets and accessories; and (iii) boys' toys,
including construction sets, radio control vehicles, and western and military
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 from the Company 566,038 shares of its Common
Stock for $1.2 million on April 15, 1999, and an additional 1,792,453 shares of
its Common Stock 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 Agreement and the transactions
contemplated thereby were approved by the Company's shareholders at the Annual
Meeting of Shareholders held on May 24, 1999.
On January 7, 2000, the Company acquired Meritus Industries, Inc.
("Meritus"), a privately held toy manufacturer. Pursuant to the terms of the
merger, the Company acquired all of the issued and outstanding stock of Meritus
in exchange for (i) 600,000 unregistered shares of the Company's common stock,
less 66,792 shares of the Company's common stock, which shares are currently
held by the Company and are payable to Walter and Susan Reiling ("the
Reilings"), upon satisfaction of certain post-closing conditions as set forth in
a Closing and Holdback Agreement between the parties; (ii) $884,034 in cash; and
(iii) the Company's Subordinated Secured Promissory Note for $1,690,000 paid to
the Reilings, who were the sole shareholders of Meritus. Contemporaneously with
the merger, the Company satisfied approximately $4.4 million of Meritus' debt.
In connection with the acquisition of Meritus, the Company borrowed
$5,000,000 from MVII, LLC evidenced by a promissory note dated January 7, 2000.
The note bears interest at a rate of prime plus 2%, matures on July 1, 2004, and
is subordinated to senior debt of the Company. The proceeds from the note were
used
8
<PAGE>
primarily to facilitate the Company's merger with Meritus, including the
satisfaction of the Meritus debt discussed above.
As a result of its merger with Meritus, the Company acquired three
wholly-owned Hong Kong subsidiaries, Meritus Industries Limited, RSP Products
Limited, and Elite Dolls Limited, which are engaged in the Company's doll
manufacturing operations. The Company is in the process of consolidating the
three newly-acquired subsidiaries with DSI (HK) Limited.
Finally, as a result of the transactions consummated in connection with
the Stock Purchase Agreement and the merger with Meritus, MVII became the
beneficial owner of approximately 61% of the Company's outstanding shares of
Common Stock.
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
-----------------------
MARCH 31, APRIL 30,
2000 1999
--------- ---------
Net sales .......................................... 100.0% 100.0%
Costs of goods sold ................................ 76.8 72.8
--------- ---------
Gross profit ....................................... 23.2 27.2
Selling, general and administrative
expenses ......................................... 48.3 43.3
--------- ---------
Operating loss ..................................... (25.1) (16.1)
Interest expense ................................... (3.9) (3.0)
Other income ....................................... .1 .2
--------- ---------
Loss before income taxes ........................... (28.9) (18.9)
Benefit from income taxes .......................... (10.4) (6.2)
--------- ---------
Net loss ........................................... (18.5)% (12.7)%
========= =========
THREE MONTHS ENDED MARCH 31, 2000, COMPARED TO THE THREE MONTHS ENDED APRIL 30,
1999
NET SALES. Net sales for the three months ended March 31, 2000 increased
$3.0 million, or 76%, to $6.9 million, from $3.9 million in the first quarter of
1999. This increase included $1.9 million in sales of Meritus items. Excluding
these Meritus items, net sales increased $1.1 million, or 28%, from the first
quarter of 1999. The total increase was due to increased sales of girls' toys,
offset by decreases in other categories.
Net sales of juvenile audio products during the first quarter ended March
31, 2000 decreased $300,000, or 13.1%, to $1.8 million, from $2.1 million
compared to the first quarter of 1999. This decrease was due primarily to a
reduction in sales of children's cassette players.
Net sales of girls' toys increased $3.3 million, or 885%, to $3.7 million
during the first quarter ended March 31, 2000 from $377,000 in the first quarter
in 1999. Meritus items contributed $1.9 million of this increase. Excluding
these Meritus items, net sales of girls toys in the first quarter of 2000 were
$1.8 million, a 377% increase from the first quarter of 1999. The increased
sales for the first quarter were also driven by sales of the SWEET FAITH(TM) and
HUSH LI'L BABY(TM) dolls.
Net sales of boys' toys decreased $105,000, or 10.3%, to $913,000 in the
first quarter ended March 31, 2000, from $1.0 million in the first quarter of
1999. The decrease was primarily due to a decrease in sales of the remote
control gyrocycle from the first quarter of 1999.
9
<PAGE>
Net sales of products in other categories during the first quarter ended
March 31, 2000 increased $31,000, or 7.4%, to $449,000 during the first quarter
ended March 31, 2000 from $418,000 in the first quarter of 1999. The increase
was due primarily to increased sales of the TALKING DOORBELL(R) in the first
quarter of 2000 as compared to the first quarter of 1999.
International net sales for the three months ended March 31, 2000
increased $295,000, or 37.3%, to $1.08 million, from $787,000 in the first
quarter of 1999. The increase was due primarily to increased sales to the United
Kingdom.
GROSS PROFIT. Gross profit increased $500,000, or 50%, to $1.6 million for
the first quarter ended March 31, 2000, from $1.1 million in the first quarter
of 1999. Gross profit as a percentage of net sales decreased to 23.2% in the
first quarter ended March 31, 2000 from 27.2% in the first quarter of fiscal
1999. The gross profit dollar increase reflects the increased sales volume for
the quarter. The decrease in gross profit as a percentage of sales reflects
increased tooling cost associated with the emphasis on proprietary products and
the sales of some closeout products in the first quarter of 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $3.3 million in the first quarter ended
March 31, 2000 compared with $1.7 million for the first quarter 1999, an
increase of $1.6 million. The increase was primarily due to additional expenses,
including those associated with the Meritus merger, such as salaries,
professional fees and goodwill amortization, as well as increased marketing and
travel expenses for toy line promotions.
INTEREST EXPENSE. Interest expense during the first quarter ended March
31, 2000, increased to $270,000 from $119,000 in the first quarter of 1999 due
to borrowings associated with the Meritus merger.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company 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 used net cash of $4.8 million during
the first three months of fiscal year 2000, consisting primarily of decreases in
accounts receivable, partially offset by the decrease in accounts payable. Net
cash used in investing activities was $1.5 million and was primarily the result
of capital expenditures and the acquisition of Meritus. Net cash provided in
financing activities was $6.1 million including net borrowings under revolving
lines of credit and net borrowings of long term debt of $4.3 million. The
Company's working capital at March 31, 2000 was $3.0 million and unrestricted
cash was $276,000, and the Company's working capital at April 30, 1999 was $5.9
million and unrestricted cash was $479,000. 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 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 April 30, 2000 the Company had additional eligible
borrowing capacity of $391,000 in the aggregate under the Revolver and the Hong
Kong Credit Facility.
The Company has projected approximately $900,000 for capital expenditures,
consisting primarily of purchases of tools and molds for fiscal 2000 .
On January 7, 2000, the Company acquired all of the issued and outstanding
stock of Meritus in exchange for (i) 600,000 unregistered shares of the
Company's common stock, less 66,792 shares of the Company's common stock, which
shares are currently held by the Company and are payable to the Reilings upon
satisfaction of certain post closing conditions as set forth in a Closing and
Holdback Agreement between the parties; (ii) $884,034 in cash; and (iii) the
Company's Subordinated Secured Promissory Note for $1,690,000 paid to the
Reilings, who were the sole shareholders of Meritus. The note, bearing interest
at 10.0375% per annum, requires quarterly principal and interest payments
beginning April 1, 2000. Contemporaneously with the merger, the Company
satisfied approximately $4.4 million of Meritus' debt.
10
<PAGE>
In connection with the acquisition of Meritus, the Company borrowed $5
million from MVII. The debt is evidenced by a promissory note dated January 7,
2000. The note bears interest at a rate of prime plus 2%, matures on July 1,
2004 and is subordinate to the Revolver. The proceeds from the note were used
primarily to facilitate the merger, including the payment of Meritus' debt,
described above.
In addition, the Company is obligated to make future minimum royalty
payments under certain of its license agreements. As of March 31, 2001, the
Company was required to pay guaranteed royalties under these licenses of
$295,000, $257,000 and $150,000 per year from 2000 through 2002, respectively.
As part of the Company's strategy, the Company will continue to evaluate
potential acquisitions of other toy businesses or product lines that the Company
believes would complement its existing business.
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 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 1999, 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.
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.
On January 7, 2000 the Company acquired Meritus, a privately held toy
manufacturer, by merger. The Company paid the Meritus shareholders approximately
$2.6 million in cash and a note and at the closing of the merger issued 503,226
shares of the Company's Common Stock (with an obligation to issue an additional
96,774 shares of Common Stock upon satisfaction of certain post closing
conditions and covenants, 29,982 shares of which were issued by the Company on
February 10, 2000) in exchange for all of the issued and outstanding stock of
Meritus. The merger of Meritus into the Company, including the issuance of
Common Stock to the Meritus shareholders, constituted a privately negotiated
transaction between the Company and Meritus and its shareholders. The issuance
of Common Stock to the Meritus shareholders was made 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) the Meritus
shareholders 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 merger; (ii) the Meritus shareholders have adequate
financial means to bear the risk of their investment in the Company and can be
described as sophisticated; (iii) Meritus had only two shareholders; accordingly
there were only two offerees in the transaction; (iv) the Meritus shareholders
made representations that they acquired the Common Stock for investment and not
with a view toward distribution; (v) the Common Stock issued by the Company to
the Meritus shareholders contains restrictions on its resale; and (vi) no
underwriters were involved nor were any underwriters' commissions paid in
connection with the transaction.
ITEM 5. OTHER INFORMATION
Effective as of March 31, 2000, the Company entered into a Settlement and
Release Agreement (the "Agreement") with the Tommy and JoBeth Moss Joint Life
Insurance Trusts, (the "Trusts") and other related parties, which terminates the
obligations of the Company to pay insurance premiums for certain life insurance
policies owned by the Trusts. The Trusts paid the Company $66,250. The Trusts
are entitled to retain the policies and all parties were completely released.
12
<PAGE>
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.
The Company filed a Form 8-K on January 21, 2000, for the purpose of
reporting the acquisition of all of the issued and outstanding shares of common
stock of Meritus Industries, Inc.
The Company filed a Form 8-K/A on February 15, 2000, for the purpose of
reporting certain financial statements and financial information in connection
with the acquisition of all of the issued and outstanding shares of common stock
of Meritus Industries, Inc., which financial statements and financial
information was unavailable at the time of the original filing of the Form 8-K
referenced hereinabove.
13
<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: May 15, 2000 /s/ MICHAEL J. LYDEN
-------------------------------------------------
Michael J. Lyden
President and Chief Executive Officer
Dated: May 15, 2000 By: /s/ ROBERT L. WEISGARBER
-------------------------------------------------
Robert L. Weisgarber
Chief Financial Officer
(Principal Financial and Accounting Officer)
14
<PAGE>
INDEX TO EXHIBITS
2.1 Articles/Certificate of Merger of Meritus Industries, Inc. into the
Company, dated January 7, 2000 (filed as Exhibit 2.2 to the Company's Form
8-K dated January 7, 2000), incorporated herein by reference.
3.1 Amended and Restated Articles of Incorporation of the Company. (1)
3.1.1 Amendment to Amended and Restated Articles of Incorporation of the Company
(filed as Exhibit 3.1.1 to the Company's Form 10-Q for the quarterly
period ended April 30, 1999), incorporated herein by reference.
3.2 Amended and Restated Bylaws of the Company. (1)
3.3 Amendment to Amended and Restated Bylaws of the Company. (1)
10.1 Agreement and Plan of Merger between Meritus Industries, Inc. et al. and
the Company, dated October 7, 1999 (filed as Exhibit 10.45 to the
Company's Form 10-Q for the quarterly period ended October 31, 1999),
incorporated herein by reference.
10.2 Closing and Holdback Agreement dated January 7, 2000, by and between the
Company and Meritus Industries, Inc., et al. (filed as Exhibit 2.3 to the
Company's Form 8-K dated January 7, 2000), incorporated herein by
reference.
10.3 Shareholders' and Voting Agreement dated January 7, 2000, by and among the
Company, MVII, LLC and Walter S. and Susan Reiling (filed as Exhibit 10.1
to the Company's Form 8-K dated January 7, 2000), incorporated herein by
reference.
10.4 Limited Irrevocable Proxy dated January 7, 2000, between MVII, LLC and
Walter S. and Susan Reiling (filed as Exhibit 10.2 to the Company's Form
8-K dated January 7, 2000), incorporated herein by reference.
10.5 Registration Rights Agreement dated January 7, 2000, by and between the
Company and Walter S. and Susan Reiling (filed as Exhibit 10.3 to the
Company's Form 8-K dated January 7, 2000), incorporated herein by
reference.
10.6 Subordinated Secured Promissory Note dated January 7, 2000, from the
Company to Walter S. and Susan Reiling (filed as Exhibit 10.4 to the
Company's Form 8-K dated January 7, 2000), incorporated herein by
reference.
10.7 Promissory Note dated January 7, 2000, from the Company to MVII, LLC
(filed as Exhibit 10.5 to the Company's Form 8-K dated January 7, 2000),
incorporated herein by reference.
10.8 Amendment No. 2 dated January 7, 2000, to Loan and Security Agreement, by
and between Sunrock Capital Corp. and the Company (filed as Exhibit 10.6
to the Company's Form 8-K dated January 7, 2000), incorporated herein by
reference.
10.9 Employment Agreement dated January 7, 2000, by and between the Company and
Beth Reiling (filed as Exhibit 10.7 to the Company's Form 8-K dated
January 7, 2000), incorporated herein by reference.
10.10 Employment Agreement dated January 7, 2000, by and between the Company and
Joseph Reiling (filed as Exhibit 10.8 to the Company's Form 8-K dated
January 7, 2000), incorporated herein by reference.
27 Financial Data Schedule. *
(1) Filed as a part of the Registrant's Registration Statement on Form S-1
(No. 333-23961) and incorporated herein by reference.
* Filed herewith
<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 MARCH 31, 2000
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 276,146
<SECURITIES> 0
<RECEIVABLES> 3,352,068
<ALLOWANCES> (2,204,319)
<INVENTORY> 5,583,351
<CURRENT-ASSETS> 9,634,877
<PP&E> 7,923,234
<DEPRECIATION> (5,190,991)
<TOTAL-ASSETS> 24,299,971
<CURRENT-LIABILITIES> 7,066,810
<BONDS> 0
0
0
<COMMON> 90,664
<OTHER-SE> 7,410,791
<TOTAL-LIABILITY-AND-EQUITY> 24,299,971
<SALES> 6,914,462
<TOTAL-REVENUES> 6,914,462
<CGS> 5,309,299
<TOTAL-COSTS> 3,340,630
<OTHER-EXPENSES> (10,191)
<LOSS-PROVISION> (35,354)
<INTEREST-EXPENSE> 269,983
<INCOME-PRETAX> (2,005,451)
<INCOME-TAX> (718,347)
<INCOME-CONTINUING> (1,276,913)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,276,913)
<EPS-BASIC> (.14)
<EPS-DILUTED> (.14)
</TABLE>
