SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) JANUARY 7, 2000
DSI TOYS, INC.
--------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
TEXAS 0-22545 74-1673513
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
1100 WEST SAM HOUSTON PARKWAY NORTH, HOUSTON, TEXAS 77043
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrants telephone number, including area code (713) 365-9900
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changes Since Last Report)
<PAGE>
This amendment is being filed to include the financial information that
was unavailable at the time of the original filing dated January 7, 2000. The
undersigned registrant hereby amends the following items:
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired
(1) Audited Financial Statements at and for the period ended December
31, 1998 and 1997
(2) Audited Financial Statements at and for the period ended September
30, 1999
(b) Pro Forma Financial Information
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 hereunto duly authorized.
DSI TOYS, INC.
Date: February 15, 2000 By: /s/ ROBERT L. WEISGARBER
Robert L. Weisgarber, Chief
Financial Officer
<PAGE>
DSI TOYS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditor's Report for the period ended
December 31, 1998 and 1997 ................................. F-2
Combined Balance Sheets ............................... F-3
Combined Statements of Operations ..................... F-4
Combined Statements of Stockholders' Deficit .......... F-5
Combined Statements of Cash Flows ..................... F-6
Notes to Combined Financial Statements ................ F-7 - F-12
Independent Auditor's Report for the period ended
September 30, 1999 ........................................ F-13
Consolidated Balance Sheet ........................... F-14
Consolidated Statement of Operations ................. F-15
Consolidated Statement of Stockholders' Deficit ...... F-16
Consolidated Statement of Cash Flows ................. F-17
Notes to Consolidated Financial Statements ........... F-18 - F-22
DSI Toys, Inc. Pro Forma Financial Statements ............. F-23
Pro Forma Combined Balance Sheet Nine Months 1999 .... F-24
Pro Forma Profit & Loss Statement 1999-(9 Months) .... F-25
Pro Forma Profit & Loss Statement .................... F-26
F-1
<PAGE>
Independent Auditors' Report
Board of Directors
Meritus Industries, Inc. and Subsidiary
and Affiliate
We have audited the accompanying combined balance sheets of Meritus
Industries, Inc. and Subsidiary and Affiliate as of December 31,
1998 and 1997, and the related combined statements of operations,
stockholders' deficit and cash flows for the years then ended. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Meritus,
Industries, Inc. and Subsidiary and Affiliate as of December 31,
1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted
accounting principles.
AMPER, POLITZINER & MATTIA P.A.
October 27, 1999
Edison, New Jersey
F-2
<PAGE>
MERITUS INDUSTRIES INC. AND SUBSIDIARY AND AFFILIATE
COMBINED BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash ............................................................ $ 605,383 $ 888,780
Accounts receivable, net of allowance of doubtful
accounts of approximately $75,000 and $-0- .................... 432,120 810,411
Inventory ....................................................... 20,895 21,148
Prepaid expenses ................................................ 571,297 388,025
----------- -----------
1,629,695 2,108,364
Artwork, models and molds, net ....................................... 907,407 985,733
Property and equipment, net of accumulated
depreciation and amortization ...................................... 88,243 53,234
Other assets ......................................................... 50,848 29,338
----------- -----------
$ 2,676,193 $ 3,176,669
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ................................................ $ 5,320,769 $ 5,346,676
Note payable .................................................... 119,355 162,581
Accrued expenses and other current liabilities .................. 858,914 970,227
Loan payable .................................................... -- 297,000
----------- -----------
6,299,038 6,776,484
----------- -----------
Long-term debt, net of current maturities ............................ -- 119,355
Stockholders' deficit:
Common stock .................................................... 186,325 186,325
Paid-in capital ................................................. 1,395,572 1,395,572
Accumulated deficit ............................................. (5,204,742) (5,301,067)
----------- -----------
Total stockholders' deficit ........................... (3,622,845) (3,719,170)
----------- -----------
$ 2,676,193 $ 3,176,669
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
MERITUS INDUSTRIES, INC. AND SUBSIDIARY AND AFFILIATE
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
1998 NET SALES 1997 NET SALES
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales ......................................... $ 21,497,445 100.0 $ 16,705,689 100.0
Cost of sales ..................................... 14,885,761 69.2 12,028,534 72.0
------------ ------------ ------------ ------------
Gross profit ...................................... 6,611,684 30.8 4,677,155 28.0
Operating expenses
Selling expenses ............................... 1,869,515 8.7 1,589,989 9.5
Royalties ...................................... 590,923 2.7 448,937 2.7
General and administrative expenses ............ 3,455,049 16.1 2,790,765 16.7
------------ ------------ ------------ ------------
5,915,487 27.5 4,829,691 28.9
------------ ------------ ------------ ------------
Earning (loss) from operations .................... 696,197 3.3 (152,536) (.9)
------------ ------------ ------------ ------------
Other income (expense)
Interest expense and bank charges .............. (683,106) (3.2) (464,993) (2.7)
Loss on patent litigation settlement ........... -- -- (50,000) (.3)
Other income ................................... 83,234 .4 4,742 --
------------ ------------ ------------ ------------
599,872 (2.8) (510,251) (3.0)
------------ ------------ ------------ ------------
Net income (loss) ................................. $ 96,325 .5 $ (662,787) (3.9)
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
MERITUS INDUSTRIES, INC. AND SUBSIDIARY AND AFFILIATE
COMBINED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON PAID IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance - December 31, 1996 ............... $ 186,325 $ 848,306 $(4,625,377) $(3,590,746)
Distributions to stockholders ............. -- -- (12,903) (12,903)
Capital contributions ..................... -- 547,266 -- 547,266
Net Loss .................................. -- -- (662,787) (662,787)
----------- ----------- ----------- -----------
Balance - December 31, 1997 ............... 186,325 1,395,572 (5,301,067) (3,719,170)
Net Income ................................ -- -- 96,325 96,325
----------- ----------- ----------- -----------
Balance - December 31, 1998 ............... $ 186,325 $ 1,395,572 $(5,204,742) $(3,622,845)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
MERITUS INDUSTRIES, INC. AND SUBSIDIARY AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................... $ 96,325 $ (662,787)
----------- -----------
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Depreciation ................................................ 20,429 17,952
Amortization ................................................ 597,961 554,598
Loss from sale of equipment ................................. -- 5,061
Bad debt expense ............................................ 75,000 --
(Increase) decrease in
Accounts receivable ...................................... 303,291 (562,022)
Inventory ................................................ 253 (12,124)
Prepaid expenses ......................................... (183,272) (59,065)
Other assets ............................................. (21,510) (2,479)
Increase (decrease) in
Accounts payable ........................................ (25,907) 2,074,597
Accrued expenses and other current liabilities .......... (111,313) 108,687
----------- -----------
Total adjustments ................................... 654,932 2,125,205
----------- -----------
751,257 1,462,418
----------- -----------
Cash flows from investing activities:
Proceeds from sale of property and equipment ................... -- 14,000
Payments for purchase of property and equipment ................ (55,438) (29,724)
Payments for artworks, models and molds ........................ (519,635) (769,011)
----------- -----------
Net cash used in investing activities ................. (575,073) (784,735)
----------- -----------
Cash flows from financing activities:
Repayment of due to stockholder ................................ -- (106,395)
Repayment of loan payable ...................................... (297,000) (206,000)
Payments of note payable - bank ................................ (162,581) 111,680
Distributed to stockholder ..................................... -- (12,903)
----------- -----------
(459,581) (213,618)
----------- -----------
Net changes on cash .................................................. (283,397) 464,065
Cash, beginning ...................................................... 888,780 424,715
----------- -----------
Cash, ending ......................................................... $ 605,383 $ 888,780
=========== ===========
Supplemental disclosure of cash paid
Interest ........................................................ $ 588,000 $ 387,000
</TABLE>
Capital contribution
During 1997 a stockholder converted a $547,266 note payable to paid in
capital.
See accompanying notes to financial statements.
F-6
<PAGE>
MERITUS INDUSTRIES, INC. AND SUBSIDIARY AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LIQUIDITY
Meritus Industries, Inc. and Subsidiary and Affiliate (the
"Company") incurred significant losses in 1997 and as of December
31, 1998, had a significant working capital deficiency and a total
stockholders' deficit. The Company has reflected its financial
position, results of operations and cash flows on a going concern
basis which, under generally accepted accounting principles,
presumes that the realization of assets and settlement of
liabilities and commitments will occur in the ordinary course of
business. The Company's continued operations are dependent on its
ability to increase profitable operations and for the Company to
replace its existing financing subsequent to the pending sale of the
Company (see Note 11).
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of Meritus
Industries, Inc. ("Meritus") and its wholly-owned Hong Kong
subsidiary, Meritus Industries Limited ("Limited") and its Hong Kong
affiliate, RSP Products Limited ("RSP"). All significant
intercompany balances and transactions have been eliminated in the
combination.
OPERATIONS
The Company sells toys and grants credit (a large portion of which
is collateralized by letters of credit) to various retailers located
primarily in the United States and in Europe. Effective August 1999,
RSP was merged into Limited.
REVENUE RECOGNITION
Revenue and related expenses are recognized upon delivery of goods
to the customer, primarily F.O.B. Hong Kong, when legal
responsibility and title passes to the buyer.
CONCENTRATION OF CASH BALANCES
The Company may at times maintain cash bank accounts in excess of
the $100,000 amount insured by the Federal Deposit Insurance
Corporation (FDIC).
CONCENTRATION OF CREDIT RISK AND EXPORT SALES
The Company has its products manufactured through its Hong Kong
operations and delivered to its worldwide customers.
Concentrations of Credit Risk associated with trade receivables are
minimized by obtaining letters of credit to support customers
accounts receivable. Sales and trade receivables are denominated in
the United States ("U.S.") currency.
The majority of the Company's cash is maintained in Hong Kong bank
accounts.
INVENTORY
Inventory consisting of finished goods is stated at the lower of
cost (first-in, first-out basis) or market. All inventory is stored
in Hong Kong warehouses.
F-7
<PAGE>
MERITUS INDUSTRIES, INC. AND SUBSIDIARY AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated
depreciation. Depreciation is provided over the estimated useful
lives of the assets as follows:
ESTIMATED
METHOD USEFUL LIFE
---------- ------------
Automobiles Straight -line 4 -5 years
Office Equipment Straight-line 5 -7 years
Furniture & fixtures Straight-line and declining
balance 5 years
Leasehold improvements Straight-line and declining
balance 5 years
ARTWORK, MODELS AND MOLDS
Artwork, models, and molds represent costs incurred in the
development and production of toys. Throughout the fiscal year, the
Company incurs substantial costs related to artwork and models to be
used in subsequent periods. These costs are generally amortized at
50% during the first year in which the product begins to ship and
25% for each of the next two years. Such amortization is included in
general and administrative expenses. Amortization expense for the
years ended December 31, 1998 and 1997, were approximately $598,000
and $555,000, respectively.
INCOME TAXES
Meritus has elected to be taxed as a S-Corporation for federal
income tax purposes. Under this election, substantially all of the
profits, losses, credits, and deductions of Meritus at the federal
level are passed through to the individual stockholders.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
FOREIGN CURRENCY TRANSACTIONS
Assets and liabilities of most foreign operations are translated at
year end rates of exchange, and the statements of operations are
translated at the average rates of exchange for the year. There was
no translation adjustment for the years ended December 31, 1998 and
1997, since the Hong Kong and U.S. exchange have remained constant.
Gains or losses resulting from foreign currency transactions
(transactions denominated in a currency other than that of the
entity's local currency) are generally included as a component of
net income.
F-8
<PAGE>
MERITUS INDUSTRIES, INC. AND SUBSIDIARY AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 2 - EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) Savings Plan. Employee contributions
are discretionary to a maximum of 6% of the compensation of
qualified employees. The Company matches up to 50% of the employee's
contribution, up to 3% of the employee's compensation. The terms of
the plan define qualified employees as those over 21 years of age
with at least 1,000 hours of service at the end of the Company's
fiscal year. The 401(k) expense for the years ended December 31,
1998 and 1997, was approximately $26,500 and $22,600, respectively.
Note 3 - PROPERTY AND EQUIPMENT
DECEMBER 31,
1998 1997
-------- --------
Office Equipment ........................ $ 79,720 $ 65,621
Furniture and fixtures .................. 81,857 40,517
Leasehold improvements .................. 34,856 45,230
-------- --------
196,433 151,368
Less accumulated depreciation ........... 108,190 98,134
-------- --------
$ 88,243 $ 52,234
======== ========
Depreciation expense was approximately $20,000 and $18,000 for the
years ended December 31, 1998 and 1997, respectively.
Note 4 - NOTE PAYABLE
DECEMBER 31,
1998 1997
-------- --------
Note payable in monthly installments
of $12,756 excluding interest
at 2.5% over prime (prime at
December 31, 1998, was 7.75%) and a
final payment of $10,840 The note is
collateralized by approximately $81,000
of cash in Hong Kong and the personal
guarantee of two stockholders ........... $119,355 $281,936
Less current maturities ................. 119,355 162,581
-------- --------
Long-term debt, net of current maturities $ -- $119,355
-------- --------
Note 5 - LOAN PAYABLE
During 1994, a stockholder of Meritus borrowed funds bearing
interest at 13.5% on behalf of Limited in order to finance the
operations of the Company. The Company subsequently assumed and
repaid the debt by December 31, 1998. Interest expense on this loan
was approximately $20,000 and $56,000 for the years ended December
31, 1998 and 1997, respectively.
F-9
<PAGE>
MERITUS INDUSTRIES, INC. AND SUBSIDIARY AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 6 - INCOME TAXES
Deferred state tax attributes resulting from differences between
financial accounting amounts and tax bases of assets and liabilities
at December 31, 1998 and 1997:
DECEMBER 31,
1998 1997
--------- --------
Current assets and liabilities
Inventory valuation reserve $18,000 $18,000
Inventory uniform capitalization 1,000 2,000
Accrued sales discounts and
allowances 47,000 60,000
66,000 80,000
Valuation allowance (66,000) (80,000)
$ - $ -
Noncurrent assets and liabilities
State net operating loss
carry forward $226,000 $245,000
Depreciation 1,000 1,000
227,000 246,000
Valuation allowance (227,000) (246,000)
$ - $ -
The provision for income taxes for the years ending December 31,
1998 and 1997, consists of the following:
DECEMBER 31,
1998 1997
--------- --------
Deferred tax expense (benefit) $ 33,000 $(33,000)
Net change in valuation allowance (33,000) 33,000
--------- --------
$ - $ -
========= ========
At December 31, 1998, the Company has New Jersey State net operating
loss carryforwards of approximately $2,512,000 which expire as
follows:
2002 $ 1,053,000
2004 1,459,000
-----------
$ 2,512,000
===========
F-10
<PAGE>
MERITUS INDUSTRIES, INC. AND SUBSIDIARY AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 7 - STOCKHOLDER'S DEFICIT
COMMON STOCK
December 31,
1998 1997
---- ----
Meritus Industries, Inc.
1,000 shares authorized,
10 shares issued and
outstanding, no par value $ 186,324 $ 186,324
RSP Products Limited
10,000 shares authorized,
2 shares issued and
outstanding, no par value $ 1 $ 1
---------- ----------
$ 186,325 $ 186,325
========== ==========
Note 8 - OPERATING LEASES
The Company's leases showroom and warehouse facilities both in the
U.S. and Hong Kong. Monthly payments under these current leases
range from approximately $1,000 to $7,000 with the leases expiring
through April 2002. Future minimum lease commitments follow:
FOR THE YEARS ENDING
DECEMBER 31
-----------
1999 $ 197,000
2000 136,000
2001 83,000
2002 15,000
---------
$ 431,000
=========
Note 9 - MAJOR CUSTOMERS
The Company had three major customers whose sales totaled
approximately $7,913,000 or 37% of net sales for the year ended
December 31, 1998, and $9,541,000 or 57% of net sales for the year
ended December 31, 1997. Major customers are considered to be those
who accounted for more than 10% of total sales.
Note 10 - AGENCY AGREEMENT
The Company has an agency agreement that expires in January 2000
with a Hong Kong company, which is the Company's exclusive buying
agent for the purchase of toys and games in the Far East and Asia.
The Company pays the agent 11% of the cost of the manufactured goods
as a commission, with a minimum annual commission of $200,000.
F-11
<PAGE>
MERITUS INDUSTRIES, INC. AND SUBSIDIARY AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 10 - AGENCY AGREEMENT - (continued)
As part of this agreement, the Company purchases merchandise, and
finances research and development from the agent under a revolving
credit facility of approximately $1,807,000 payable on demand. As
part of the agreement, the Company must repay all borrowings under
the revolving credit facility by October 31 of each year. The total
outstanding balance due to this agent as of December 31, 1998 and
1997, was approximately $129,000 and $368,000, respectively and is
included in accounts payable. The balance bears interest at the
prime rate plus 3%. If the Company fails to make payments under the
agreement, the interest rate increases to prime plus 8%.
Note 11 - SUBSEQUENT EVENTS
Subsequent to December 31, 1998, the stockholders of the Company
entered into an agreement to sell all their stock to an unrelated
company. As part of the sale, the acquiring company will repay the
amounts borrowed under the revolving credit facility (see Note 10).
When the closing takes place in January 2000, the Company will have
to replace this existing credit facility and enter into new
agreements with certain companies that manufacture its products.
Note 12 - YEAR 2000
What is commonly known as the "Year 2000 Issue" arises because many
computer hardware and software systems use only two digits to
represent the year. As a result, these systems may not calculate
dates beyond 1999, which may cause adverse effects to company's
operations and/or financial conditions.
The Company has resolved its Year 2000 compliance issues through
normal replacement and upgrades in its computer hardware and
software. However, there can be no assurance that there will be no
interruption of operations caused by an unforeseen internal or
external noncompliance with the Year 2000 Issue.
Furthermore, the Company has documentation from its Hong Kong agent
(see Note 10) stating that it is Y2K compliant but further states
that its ability to comply is interdependent with other companies,
especially suppliers and other service providers, which may or may
not be compliant. However, the Hong Kong agent has set up
contingency plans to minimize such risks.
Note 13 - CONTINGENCIES
The Company is subject to legal proceedings and claims arising in
the ordinary course of business. It is management's opinion that all
legal proceedings and claims having a material effect on the
financial statements have been adequately recorded.
F-12
<PAGE>
Independent Auditors' Report
Board of Directors
Meritus Industries, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Meritus
Industries, Inc. and Subsidiaries as of September 30, 1999, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the nine months then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Meritus Industries, Inc. and
Subsidiaries as of September 30, 1999, and the results of its operations and its
cash flows for the nine months then ended in conformity with generally accepted
accounting principles.
/s/ AMPER, POLITZINER & MATTIA P.A.
Amper, Politziner & Mattia P.A.
November 29, 1999, except for Note 10 as to which the date is January 7, 2000
Edison, New Jersey
F-13
<PAGE>
MERITUS INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
September 30, 1999
Assets
Current assets
Cash ....................................................... $ 1,033,327
Accounts receivable, net of allowance of doubtful
accounts of $123,000 ...................................... 1,663,150
Inventory .................................................. 45,333
Prepaid expenses and other current assets .................. 486,592
-----------
3,228,402
Artwork, models and molds, net of accumulated amortization .... 773,907
Property and equipment, net of accumulated depreciation ....... 114,083
Other assets .................................................. 39,605
-----------
$ 4,155,997
===========
Liabilities and Stockholders' Deficit
Current liabilities
Accounts payable ........................................... $ 7,825,939
Accrued expenses and other current liabilities ............. 601,243
-----------
8,427,182
-----------
Stockholders' deficit
Common stock - 1,000 shares authorized, no par value,
10 shares issued and outstanding .......................... 186,325
Paid in capital ............................................ 1,395,572
Accumulated deficit ........................................ (5,853,082)
-----------
Total stockholders' deficit ............................... (4,271,185)
-----------
$ 4,155,997
===========
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
MERITUS INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
For the Nine Months Ended September 30, 1999
PERCENTAGE
OF NET
SALES
----------
Net sales ................................... $ 14,217,859 100.0
Cost of sales ............................... 9,645,288 67.8
------------ -----
Gross profit ................................ 4,572,571 32.2
------------ -----
Operating expenses
Selling expenses ......................... 1,164,313 8.2
Royalties ................................ 504,884 3.5
General and administrative expenses ...... 3,242,823 23.0
------------ -----
4,912,020 34.7
------------ -----
Loss from operations ........................ (339,449) (2.5)
Interest expense and bank charges ........... (308,891) (2.1)
------------ -----
Net loss .................................... $ (648,340) (4.6)
============ =====
See accompanying notes to consolidated financial statements.
F-15
<PAGE>
MERITUS INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Deficit
For the Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
COMMON PAID IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance - December 31, 1998 .... $ 186,325 $ 1,395,572 $(5,204,742) $(3,622,845)
Net loss ....................... -- -- (648,340) (648,340)
----------- ----------- ----------- -----------
Balance - September 30, 1999 ... $ 186,325 $ 1,395,572 $(5,853,082) $(4,271,185)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE>
MERITUS INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the Nine Months Ended September 30, 1999
Cash flows from operating activities
Net loss ................................................ $ (648,340)
-----------
Adjustments to reconcile net loss
to net cash from operating activities
Depreciation ........................................... 26,891
Amortization ........................................... 569,598
Bad debt expense ....................................... 50,338
(Increase) decrease in
Accounts receivable .................................. (1,281,368)
Inventory ............................................ (24,438)
Prepaid expenses and other current assets ............ 84,705
Other assets ......................................... 11,243
Increase (decrease) in
Accounts payable ..................................... 2,505,170
Accrued expenses and other current liabilities ....... (257,671)
-----------
Total adjustments ................................... 1,684,468
-----------
1,036,128
-----------
Cash flows from investing activities
Payments for purchase of property and equipment ......... (52,731)
Payments for artworks, models and molds ................. (436,098)
-----------
(488,829)
-----------
Cash flows from financing activities
Payments of note payable - bank ......................... (119,355)
-----------
Net change in cash ......................................... 427,944
Cash - beginning ........................................... 605,383
-----------
Cash - ending .............................................. $ 1,033,327
===========
Supplemental disclosure of cash paid
Interest ................................................ $ 255,000
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
MERITUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Meritus
Industries, Inc. ("Meritus") and its wholly-owned Hong Kong
subsidiaries, Meritus Industries Limited ("Limited"), RSP Products
Limited ("RSP") and Elite Dolls Limited ("Elite"). All significant
intercompany balances and transactions have been eliminated in the
consolidation.
OPERATIONS
The Company sells toys and grants credit (a large portion of which is
collateralized by letters of credit) to various retailers located
primarily in the United States and in Europe. Effective August 1999,
RSP and Elite were merged into Limited. The consolidated financial
statements give effect to the merger as of January 1, 1999, and is
treated in a manner similar to a pooling of interest.
REVENUE RECOGNITION
Revenue and related expenses are recognized upon delivery of goods to
the customer, primarily F.O.B. Hong Kong, when legal responsibility and
title passes to the buyer.
The Company accrues for estimated returns of defective products and
customer allowances based on a historic percentage of gross sales and
is included in accrued expenses.
CONCENTRATION OF CREDIT RISK AND EXPORT SALES
The Company has its products manufactured through its Hong Kong
operations and delivered to its worldwide customers.
Concentrations of Credit Risk associated with trade receivables are
minimized by obtaining letters of credit to support customers accounts
receivable. Sales and trade receivables are denominated in United
States ("U.S.") currency.
The majority of the Company's cash is maintained in Hong Kong bank
accounts.
CONCENTRATION OF CASH BALANCES
The Company may at times maintain cash bank accounts in excess of the
$100,000 amount insured by the Federal Deposit Insurance Corporation
(FDIC).
INVENTORY
Inventory consisting of finished goods is stated at the lower of cost
(first-in, first-out basis) or market. All inventory is stored in Hong
Kong warehouses.
F-18
<PAGE>
MERITUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated
depreciation. Depreciation is provided over the estimated useful lives
of the assets as follows:
ESTIMATED
METHOD USEFUL LIFE
----------------- -----------
Office equipment Straight-line 5 - 7 years
Furniture and fixtures Straight-line and
declining balance 5 years
Leasehold improvements Straight-line 10 years
ARTWORK, MODELS AND MOLDS
Artwork, models and molds represent costs incurred in the development
and production of toys. Throughout the fiscal year, the Company incurs
substantial costs related to artwork and models to be used in
subsequent periods. These costs are generally amortized at 50% during
the first year in which the product begins to ship and 25% for each of
the next two years. Such amortization is included in general and
administrative expenses. Amortization expense for the nine months ended
September 30, 1999, was approximately $569,000.
INCOME TAXES
Meritus has elected to be taxed as a S-Corporation for federal income
tax purposes. Under this election, substantially all of the profits,
losses, credits, and deductions of Meritus at the federal level are
passed through to the individual stockholders.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
FOREIGN CURRENCY TRANSACTIONS
Assets and liabilities of foreign operations are translated at year end
rates of exchange, and the statements of operations are translated at
the average rates of exchange for the year. There was no translation
adjustment as of and for the nine months ended September 30, 1999.
Gains or losses resulting from foreign currency transactions
(transactions denominated in a currency other than that of the entity's
local currency) are generally included as a component of net income.
F-19
<PAGE>
MERITUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
ADVERTISING COSTS
Advertising costs are expensed as incurred. Such expense for the nine
months ended September 30, 1999, was approximately $146,000.
Note 2 - EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) Savings Plan. Employee contributions are
discretionary to a maximum of 6% of the compensation of qualified
employees. The Company matches up to 50% of the employee's
contribution, or up to 3% of the employee's compensation. The terms of
the plan define qualified employees as those over 21 years of age with
at least 1,000 hours of service at the end of the Company's fiscal
year. The 401(k) expense for the nine months ended September 30, 1999,
was approximately $21,600.
Note 3 - PROPERTY AND EQUIPMENT
Office equipment $ 85,214
Furniture and fixtures 90,358
Leasehold improvements 73,591
---------
249,163
Less accumulated depreciation (135,080)
---------
$ 114,083
=========
Depreciation expense was approximately $27,000 for the nine months
ended September 30, 1999.
Note 4 - INCOME TAXES
Deferred state tax attributes resulting from differences between
financial accounting amounts and tax bases of assets and liabilities at
September 30, 1999:
Current assets and liabilities
Inventory uniform capitalization $ 1,000
Accrued sales discounts and allowances 32,000
--------
33,000
Valuation allowance (33,000)
--------
$ -
========
Noncurrent assets and liabilities
State net operating loss carryforward $302,000
Depreciation 1,000
--------
303,000
Valuation Allowance (303,000)
--------
$ -
========
F-20
<PAGE>
MERITUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - INCOME TAXES - (continued)
The provision for income taxes for the nine months ended September 30,
1999, consists of the following:
Deferred tax expense (benefit) $ (44,000)
Net change in valuation allowance 44,000
---------
$ -
=========
At September 30, 1999, the Company has New Jersey State net operating
loss carryforwards of approximately $3,354,000 which expire as follows:
2002 $ 1,053,000
2004 1,459,000
2007 842,000
-----------
$ 3,354,000
===========
Note 5 - OPERATING LEASES
The Company's leases showroom and warehouse facilities both in the
United States and Hong Kong. Monthly payments under these current
leases range from approximately $1,000 to $7,000 with the leases
expiring through April 2002. Future minimum lease commitments follow:
FOR THE FISCAL YEARS ENDING
DECEMBER 31,
1999 (Remaining three months) $ 50,000
2000 136,000
2001 83,000
2002 15,000
---------
$ 284,000
=========
Rent expense amounted to $144,000 for the nine months ended September
30, 1999.
Note 6 - MAJOR CUSTOMERS
The Company had three major customers whose sales totaled approximately
$9,343,000 or 66% of net sales for the nine months ended September 30,
1999. Major customers are considered to be those who accounted for more
than 10% of total sales.
Note 7 - AGENCY AGREEMENT
The Company has an agency agreement that expires in January 2000, with
a Hong Kong company, which is the Company's exclusive buying agent for
the purchase of toys and games in the Far East and Asia. The Company
pays the agent 11% of the cost of the manufactured goods as a
commission, with a minimum annual commission of $200,000.
F-21
<PAGE>
MERITUS INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - AGENCY AGREEMENT - (continued)
As part of this agreement, the Company purchases merchandise, and
finances research and development from the agent under a revolving
credit facility of approximately $1,807,000 payable on demand. As part
of the agreement, the Company must repay all borrowings under the
revolving credit facility by October 31 of each year. The total
outstanding balance due to this agent as of September 30, 1999, was
approximately $968,000 and is included in accounts payable. The
balance bears interest at the prime rate plus 3%. If the Company fails
to make payments under the agreement, the interest rate increases to
prime plus 8%.
Note 8 - COMMITMENTS AND CONTINGENCIES
LETTERS OF CREDIT
As of September 30, 1999, the Company was contingently liable for
approximately $291,000 discounted letters of credit which are
personally guaranteed by the stockholders.
OTHER
The Company is subject to legal proceedings and claims arising in the
ordinary course of business. It is management's opinion that all legal
proceedings and claims having a material effect on the financial
statements have been adequately recorded.
Note 9 - YEAR 2000
What is commonly known as the "Year 2000 Issue" arises because many
computer hardware and software systems use only two digits to
represent the year. As a result, these systems may not calculate dates
beyond 1999, which may cause adverse effects to company's operations
and/or financial condition.
The Company has resolved its Year 2000 compliance issues through
normal replacement and upgrades in its computer hardware and software.
However, there can be no assurance that there will be no interruption
of operations caused by an unforseen internal or external
noncompliance with the Year 2000 Issue.
Furthermore, the Company has documentation from its Hong Kong agent
(see Note 7) stating that it is Y2K compliant but further states that
its ability to comply is interdependent with other companies,
especially suppliers and other service providers, which may or may not
be compliant. However, the Hong Kong agent has set up contingency
plans to minimize such risks.
Note 10 - SUBSEQUENT EVENTS
Effective January 7, 2000, the stockholders of the Company sold all
their stock to an unrelated company. As part of the sale, the
acquiring company repaid the amounts borrowed under the Company's
Agency Agreement and terminated such agreement (see Note 7).
Concurrent with the closing, the Company was merged into the acquiring
company.
F-22
<PAGE>
DSI TOYS, INC.
PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma financial statements give effect to the merger
of DSI Toys, Inc. ("DSI") and Meritus Industries, Inc. ("Meritus") in a
transaction to be accounted for as a purchase. The unaudited pro forma balance
sheet is based on the individual balance sheets of DSI and Meritus (appearing
elsewhere in this filing), and has been prepared to reflect the acquisition by
DSI of Meritus as of October 31, 1999. The unaudited pro forma statement of
income is based on the individual statements of income of DSI and Meritus
(appearing elsewhere in this filing), and combines the results of operations of
DSI and Meritus (acquired by DSI, as of January 7, 2000) for the nine months
ended October 31, 1999 and the twelve months ended January 31, 1999. These
unaudited pro forma financial statements should be read in conjunction with the
historical financial statements and notes thereto of DSI and Meritus (included
elsewhere in this filing).
F-23
<PAGE>
DSI TOYS, INC.
PRO FORMA COMBINED BALANCE SHEET
NINE MONTHS 1999
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------
ACQUISITION
DSI MERITUS ADJUSTMENTS
10/31/99 9/30/99 (NOTE 1) COMBINED
---------- ---------- ---------- ----------
ASSETS
<S> <C> <C> <C> <C>
Current Assets:
Cash ........................................ 258,123 1,033,327 625,911 (a) 1,033,327
(884,034)(a)
Restricted cash ............................. 150,000 150,000
Accounts Receivable, net .................... 6,465,405 1,663,150 8,128,555
Inventories ................................. 7,825,763 45,333 7,871,096
Prepaid expenses ............................ 1,584,821 486,592 (181,326)(d) 1,890,087
Deferred income taxes ....................... 801,000 801,000
---------- ---------- ---------- ----------
Total current assets .................... 17,085,112 3,228,402 (439,449) 19,874,065
Property and equipment, net ..................... 1,841,937 887,990 2,729,927
Deferred income taxes ........................... 760,060 760,060
Other assets .................................... 473,688 39,605 513,293
Goodwill ........................................ 8,276,657(e) 8,276,657
---------- ---------- ---------- ----------
20,160,797 4,155,997 7,837,208 32,154,002
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Accounts payable and accrued liabilities .... 7,760,795 8,427,182 (5,000,000)(b) 11,806,727
618,750 (d)
Current portion of long-term debt ........... 2,363,518 700,000 (b) 3,063,518
Income taxes payable ........................ 824,604 824,604
---------- ---------- ---------- ----------
Total current liabilities .............. 10,948,917 8,427,182 (3,681,250) 15,694,849
Long-term Debt .................................. 1,948,466 625,911 (a) 4,264,377
1,690,000 (a)
4,300,000 (b) 4,300,000
Deferred income taxes ........................... 113,789 113,789
---------- ---------- ---------- ----------
Total liabilities ...................... 13,011,172 8,427,182 2,934,661 24,373,015
Shareholder's 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 9,133,157
issued and outstanding ................. 87,190 186,325 4,142 (a) 91,332
(186,325)(c)
Additional paid-in capital .................. 4,973,108 1,395,572 (932,175)(a) 4,040,933
(1,395,572)(c)
Common stock warrants ....................... 102,500 102,500
Accumulated other comprehensive income/(loss) (12,528) (12,528)
Retained earnings (Accumulated Deficit) ..... 3,558,750 (5,853,082) 5,853,082 (c) 3,558,750
---------- ---------- ---------- ----------
8,709,020 (4,271,185) 3,343,152 7,780,987
Less: treasury stock,0 shares at cost ...... (1,559,395) 1,559,395 (a)
---------- ---------- ---------- ----------
Total shareholder's equity ........ 7,149,625 (4,271,185) 4,902,547 7,780,987
---------- ---------- ---------- ----------
20,160,797 4,155,997 7,837,208 32,154,002
========== ========== ========== ==========
</TABLE>
NOTE 1 - The above statement gives effect to the following pro forma
adjustments necessary to reflect the merger of DSI, Toys, Inc. and Meritus
Industries, Inc. for $ 2,574,000 ($884,000 cash and N/P of $1,690,000) and
600,000 shares of DSI stock ($3.35 per share), plus the payment of
$5,000,000 in third party debt. Pro forma adjustments are made to reflect:
(a) The issuance of 600,000 common shares (414,157 newly issued shares and
185,843 treasury shares), a note payable of $1,690,000, bearing interest
at 10.0375%, maturing on January 5, 2005 and payment of $884,034 in cash
($258,123 from available funds and $625,911 in borrowings from current
debt sources) to complete the purchase acquistion.
(b) The issuance of a 5,000,000 note payable to the major shareholder and
payment of acquired short-term debt to a third party. The debt bears
interest at substantially the same rate.
( c) The elimination of the common shareholder's equity accounts of
Meritus.
(d) The net assets of Meritus at estimated fair value at the acquisition
date
(e) The excess of acquistion cost over the fair value of net assets
acquired (goodwill).
F-24
<PAGE>
DSI TOYS, INC.
PRO FORMA PROFIT & LOSS STATEMENT
1999 - (9 Months)
<TABLE>
<CAPTION>
PRO FORMA
----------------------------
ACQUISITION
DSI MERITUS ADJUSTMENTS
10/31/99 9/30/99 (NOTE 1) COMBINED
---------- ---------- ----------- ----------
<S> <C> <C> <C>
Net Sales .................................. 41,040,770 14,217,859 55,258,629
Cost of Sales .............................. 29,687,767 9,645,288 39,333,055
---------- --------- ----------
Gross Profit ............................... 11,353,003 4,572,571 15,925,574
Selling, general and administrative expenses 8,644,167 4,912,020 13,556,187
---------- --------- ----------
Operating Income (Loss) .................... 2,708,836 (339,449) 2,369,387
Interest expense and bank charges ....... (486,228) (308,891) (127,225)(a) (922,344)
Amortization expense .................... -- (427,006)(b) (427,006)
Other income ............................ 82,082 -- 82,082
---------- --------- ----------
Income (loss) before income taxes and
extraordinary item .................... 2,304,690 (648,340) 1,102,119
Provision for (benefit from) income taxes .. 901,350 303,309(c) 598,041
---------- --------- ----------
Income (loss) before extraordinary item .... 1,403,340 (648,340) 504,078
Extraordinary item (net of tax) ............ -- --
---------- --------- ----------
Net Income (Loss) .......................... 1,403,340 (648,340) 504,078
========== ========= =========
Basic earnings per share
Earnings per share ...................... 0.06
Weighted average shares outstanding ..... 9,133,000
Diluted earnings per share
Earnings per share ...................... 0.05
Weighted average shares outstanding ..... 9,303,569
</TABLE>
NOTE 1 - The above statement gives effect to the following pro forma
adjustments necessary to reflect the merger of DSI, Toys, Inc. and Meritus
Industries, Inc. as outlined in Note 1 to the pro forma balance sheet.
(a) Additional annual interest charges on the $1,690,000 of 10.0375% note
payable issued in connection with the acquisition maturing on January 5,
2005.
(b) Amortization of goodwill on a straight-line basis over 15 years.
(c) Reduction in tax provision
F-25
<PAGE>
DSI TOYS, INC.
PRO FORMA PROFIT & LOSS STATEMENT
1998
<TABLE>
<CAPTION>
PRO FORMA
----------------------------
ACQUISITION
DSI MERITUS ADJUSTMENTS
1/31/99 12/31/98 (NOTE 1) COMBINED
---------- --------- ----------- ----------
<S> <C> <C> <C>
Net Sales .................................. 52,722,517 21,497,445 74,219,962
Cost of Sales .............................. 42,058,919 14,885,761 56,944,680
---------- --------- ----------
Gross Profit ............................... 10,663,598 6,611,684 17,275,282
Selling, general and administrative expenses 11,232,414 5,915,487 17,147,901
---------- --------- ----------
Operating Income (Loss) .................... (568,816) 696,197 127,381
Interest expense and bank charges ....... (874,907) (683,106) (169,634)(a) (1,727,647)
Goodwill Amortization ................... -- (569,341)(b) (569,341)
Other income ............................ 106,881 83,234 190,115
---------- --------- ----------
Income (loss) before income taxes and
extraordinary item .................... (1,336,842) 96,325 (1,979,492)
(Provision for) benefit from income taxes .. 333,000 -- 333,000
---------- --------- ----------
Income (loss) before extraordinary item .... (1,003,842) 96,325 (1,646,492)
Extraordinary item (net of tax) ............ -- --
---------- --------- ----------
Net Income (Loss) .......................... (1,003,842) 96,325 (1,646,492)
========== ========= ==========
Basic earnings per share
Earnings per share ...................... (0.25)
Weighted average shares outstanding ..... 6,600,000
Diluted earnings per share
Earnings per share ...................... (0.25)
Weighted average shares outstanding ..... 6,600,000
</TABLE>
NOTE 1 - The above statement gives effect to the following pro forma
adjustments necessary to reflect the merger of DSI, Toys, Inc. and Meritus
Industries, Inc. as outlined in Note 1 to the pro forma balance sheet.
(a) Additional annual interest charges on the $1,690,000 of 10.0375% note
payable issued in connection with the acquisition maturing on January 5,
2005.
(b) Amortization of goodwill on a straight-line basis over 15 years.
F-26
